Friday HighlightNov 22 2019

Outsourcers can help fund managers out of their current mess

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Outsourcers can help fund managers out of their current mess
ByJohn Sun

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.

Investment firms continue to grapple with implementing existing regulation, such as the European Market Infrastructure Regulation (‘EMIR’) which was brought in to boost transparency in the derivatives market.

At the same time, the pressure to invest in technology and IT is remorseless. Clients that are used to the seamless digital experience offered by tech behemoths such as Facebook and Amazon expect a similarly smooth service.

But perhaps a bigger driver is growing investor demand for better transparency and third-party oversight.

If you have bought an actively managed ESG fund, for example, how can you be sure as a retail investor that the manager is adhering to the prescribed investment strategy, and not investing in, say, coal companies or tobacco brands.

Outsourcing this auditing process to an external specialist provides investors with the reassurance they need and makes it easier for the funds to market themselves.

Of course, all these cost and regulatory pressures that fund managers are seeking to offload must be borne by the outsourcing providers themselves.

Theirs is a fragmented and competitive market, and these firms must continuously invest to improve their service offering.

Consolidation will strengthen the industry and ensure it can continue to invest and evolve in order to serve and sustain fund managers.

John Sun is a managing director in Baird’s European investment banking team.