Friday Highlight  

Outsourcers can help fund managers out of their current mess

Outsourcers can help fund managers out of their current mess

Mark Twain once laconically quipped: "The reports of my death are greatly exaggerated".

A layman reading the media in recent months might conclude the same for Britain’s fund management industry. It has been buffeted by burgeoning regulation, the switch from active to passive investing, a squeeze on fees and lacklustre investment returns.

Then we had the Woodford scandal.

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Yes, the fund management industry is unequivocally Darwinian. We know that investment businesses are born, grow, merge, shrink and fall by the wayside all the time.

Encouraging then, to read the latest report from the CFA Society of the UK, which represents 12,000 professionals in the industry.

It shows over a thousand new investment companies were launched between 2014 and 2018, and of these only 7 per cent had folded.

The report also tells us that new funds often struggled to scale up, bring in clients and reach profitability.

It is easy to see what is attracting new entrants into the market.

Pension freedoms are prodding savers to plan for their own retirement, helped along by a government eager to boost the UK’s meagre savings rate. We have seen an explosion of boutique, independent fund managers.

Changing investment priorities, especially for younger savers, have boosted demand for esoteric products such as ESG funds.

This revolution in investment would never have happened without the unsung heroes of this blossoming industry - the third-party outsourcing service providers.

They provide fund administration, custody, compliance, governance, accounting, reporting and even legal services for investment start-ups.

By using outsourcers, new firms can keep the lid on their costs and avoid hiring costly compliance officers, accountants and lawyers prior to achieving critical scale.

Instead, they can focus on the most important thing: putting their clever investment ideas into practice.

They also benefit from the collective wisdom and experience from a provider working with dozens of other clients with the access to best practices and relevant expertise.

They must continue to do so. The fund management outsourcing industry has all the attributes of a ‘cluster’ of skills, and resource, so beloved by regulators and customers alike.

Today, there are approximately 120k+ regulated open-ended funds worldwide, with US$30tr+ of assets under management.

The growth and diversification of the fund industry is important if we are to have a variety of opinion, structure and approach and avoid the herd mentality which is so dangerous in investment. Healthy competition also keeps a lid on fees.

Today only about 30 per cent of fund managers have either outsourced their back or middle office operations.

We expect this to increase as the outsourcing trend continues. The fund industry’s regulatory burden is still growing.

The FRC recently published a revised Stewardship Code under which UK fund managers will be held more accountable, and must for the first time consider ESG or environmental, social, and governance factors including climate change.