Investment funds: meeting the automation challenge

While the investment funds industry is the bedrock of the securities business, few would dispute that the funds distribution process needs fixing. Yet efforts to tackle inefficiency are now complicated by a harsh economic climate. Financial services firms are spending escalating amounts of time and money trying to attract new customers to their distribution channels rather than in enhancing operational efficiencies.

Adam Lessing is Head of European Business Development, Morley Fund Management

This is a tough economic environment. How is it impacting the funds industry specifically?
There are several challenges. One is a frustration in actually getting products to market. We have at the moment a very difficult situation in the equity markets with significant market corrections. Such market corrections have traditionally led, in the first place, to investor uncertainty and then withdrawal. These movements are more severe than normal in the present environment. By any historical measure, there are significant outflows. The credit crunch is also bringing challenges on the fixed income W Adam Lessing is Head of European Business Development, Morley Fund Management Interview side, where unusually both equities and fixed income are under pressure.

Global funds distribution is still a costly and inefficient business. Does the current economic climate make firms more or less inclined to address operational and service issues?
Operational efficiency is not a luxury and the industry as a whole needs to work on service. The task is complicated by the fact that significant amounts of money now flow through platforms. This means that we, the fund management companies, are typically at one or two removes from our clients, making it harder for us to interact with them and ensure that they are comfortable with the propositions we are putting to them. We have to work with the intermediaries to get our message through to the clients. At the end of the day, there’s nothing magic about this; we have to make sure we have the right systems in place and timely access to the data we need. We have to make sure we adapt to a changing environment.

How can technology help?
Much of our understanding of what clients in general are doing is a question of data analysis. Ultimately it’s a question of controlling the data, agreeing with our distribution partners on how to interpret it and on what to put in place as a result.

From a business perspective, what do you see as the role of SWIFT in helping you address these challenges?
SWIFT is at the core of the messaging industry in financial services. Messages are essentially information flow. Our industry depends on being able to capture as much information as possible in a format we can analyse, especially when that information is multi-layered. SWIFT’s ability to deliver a faster flow of structured information is increasingly valuable to our industry.

Finally, you mentioned in June at the SWIFT Funds Conference in London you saw a ‘disconnect’ between what clients want and what the funds industry delivers. How serious is that disconnect?

It is more a question of the current environment than the products our industry is producing. Fund managers still have a problem getting to grips with client needs in times of high volatility. Risk appetites change, for example. But it doesn’t mean we don’t have the products for that. The problem is one of communication: we need to do a better job of explaining what it is reasonable to expect from a product.

Back-office outsourcing What does it mean for investment managers on SWIFT? Teresa Nolan, Head of Asset Management, Custody & Fund Administration, EMEA, SWIFT In common with several other investment management firms, Morley has outsourced its back office. In a bid to focus on their core competencies, many buy side firms have opted to divest themselves of some of their back-office functions in order to capitalise on the expertise and scale of specialist providers. Notwithstanding some teething problems with early deals, the trend towards outsourcing looks set to continue. But does SWIFT lose its relevance to investment managers when they outsource? “Absolutely not,” says Teresa Nolan, Head of Asset Management, Custody & Fund Administration, EMEA, SWIFT. “Many investment managers that have outsourced the processing of their vanilla equities and fixed income businesses to a service provider retain their SWIFT capability.” The reason for this, Nolan continues, is that investment managers still have to perform numerous activities in which SWIFT can support them in their domestic and global businesses. One important area in which SWIFT is supporting investment managers is in processing of over-the-counter (OTC) derivatives – an asset class in which traditional long-only managers as well as hedge funds are investing at an ever-growing rate. The processes around these often complex (and unfamiliar) instruments continue to be fragmented and manual – meaning high cost and risk for the buy side. SWIFT’s Derivatives solution, enabling electronic communication of OTC derivatives notifications between investment managers and custodians in Financial Products Mark-up Language (FpML) over SWIFTNet, went live in August, and is helping the group of early adopter customers to cut costs and risks as well as kickstart standardisation of critical processes. Post-outsourcing, investment managers continue to perform middle office functions – such as electronic trade confirmation (ETC) – inhouse, and this too can be carried out over SWIFT, Nolan points out, and SWIFT also offers solutions in the areas of collateral management and securities financing. “We have a range of other solutions, including Funds, which are focused on helping investment managers to gather and service assets on a standardised scale,” she says. The extension of SWIFT’s Funds solution into the pension and fund of hedge funds areas increases the value of the SWIFT offering further still as investment managers continue to diversify both their client bases and investment strategies, she adds. “SWIFT continues to be highly relevant for investment managers even if they have outsourced some processing to specialist providers, with our solutions which aim to provide both scale and best practices for investment managers in their core business of gathering and servicing assets,” Nolan concludes.