Opportunity from strife

Campbell Fleming, Head of UK business, J.P. Morgan Asset Management, spoke to Investment Managers on SWIFT about the impact of the financial crisis both on the industry and on the firm itself.

Campbell Fleming, Head of UK business for J.P. Morgan Asset

This article was originally published in Issue 5 of Investment Managers on SWIFT

What has been the impact of the global financial crisis on your business, the environment in which you operate, and your attitude towards operational efficiency?

The crisis has presented a unique opportunity to the asset management industry - especially to those firms that have already been actively adjusting their global operating and business models inresponse to client needs.

The J.P. Morgan Asset Management business is thriving across all regions - thanks to the strength of our brand and the quality of our products and services. We've enjoyed the evident ‘flight to quality' that has occurred during the past 12 months, and we have benefited from our ability to continue to invest and improve our products and services.

Notwithstanding this, the basic problems faced by investors seeking to build a better long-term future still persist. The demographic problems of the western world and the growth of developing and emerging markets are creating even more demand for ‘better than cash' returns to provide for longer-term well-being.

The good news is that the mutual fund structure is still the vehicle of choice for long-term savings. It has been proven to work, with a few notable exceptions, and enables investors to achieve diversification at a reasonable cost. As the UCITS framework continues to evolve, I don't think we will see other structures supplanting the mutual fund.

That said, the industry as a whole has gone through and is still experiencing an unprecedented amount of turbulence - the impact of which has ranged from systemic breakdown through to enormous customer losses.

In order to regain the trust of our customers as well as ensure financial strength, the asset management industry is hard at work to adapt the way business is done, driven by the need to forge and maintain business models that will respond to the pain our customers have gone through, but more importantly convince investors of our industry's integrity and that we can serve them well as they invest for the coming years.

Against this backdrop, and as markets recover, the requirement for successful asset management companies to excel across the entire value chain has never been greater.

For J.P. Morgan Asset Management, our excellent businesses, operating globally on secure platforms with regional instances in the US, Asia and Europe, give us the scale and durability of which some of our competitors are envious. Our infrastructure allows us to rapidly settle and invest inflows and outflows - effectively, efficiently and safely.

At the heart of this infrastructure, the SWIFT network and community, together with standards and best practices, ensure we can do this.

Has the crisis changed your view of how SWIFT should be dealing with the investment management community?

There is a significant strategic opportunity presenting itself to SWIFT right now. As an incumbent that has done what it said on the tin, and survived these enormously difficult and turbulent times, SWIFT benefits from a ‘survivor bias'.

This is coupled with the fact that there is no appetite to work with poorly capitalised, poorly understood counterparties and providers after these problems, at least in the short to medium term.

As the industry reshapes itself, reducing costs and adapting its core business and operating models, SWIFT should now take advantage of what it is - it's big, it's safe, it's inclusive and it's been here for a long time, and has an excellent track record.

How do these core strengths of SWIFT's map to the requirements of investment managers in the current climate?

Globally, in both the institutional and retail communities, there is an increased focus on security - do I know who I am doing business with? - and financial and professional integrity - am I working with service providers that can give me access to top quality products and advice?

These trends will lead to significant changes in the way in which we expect to do business with one another in both our home markets and overseas: securely, efficiently, transparently and cost effectively, and with trusted counterparties, advisers and providers.

In the UK domestic funds market, for example, the Retail Distribution Review will have a profound impact on the way business is done. This review, coupled with a general shift towards aggregation on platforms, mean that the wider use of electronic messaging, which SWIFT has been part of the industry effort to effect, should enable intermediaries and clients to make speedier investment and asset allocation decisions. The net result will be a reduction of the time it takes to get money in and out of accounts linked to UK fund investments down from weeks to days.

The global financial crisis, with its well-publicised failures and ongoing problems, continues to have a profound effect on the asset management industry in a number of ways, including loss of investor trust and poor product transparency.

As a result there has been a ‘back to the future' review of counterparty risks, settlement risks and transaction risks. The ability to distribute, confirm and settle in real time on a global, secure and transparent platform is hugely helpful in mitigating these risks during these uncertain times.

SWIFT's role is predominantly in addressing transaction and settlement risks, but counterparty elements are important too: there are requirements, including adoption of ISO standards and agreed market practices, that all SWIFT users must satisfy, and this goes some way to addressing counterparty risk management requirements.

What does SWIFT need to do better to more effectively meet the requirements of investment managers in the future?

SWIFT would benefit greatly right now by spending more time sharing with its customers and potential customers at all levels on the buy-side just how the SWIFT offering can be used to improve efficiency and security, as well as deliver product globally.

UCITS III and IV changes have broadened the range of financial instruments accessible to a larger pool of global investors. While SWIFT has done a good job to extend its franchise into the global mutual funds arena, it now needs to more speedily and vertically focus ‘over the horizon'.

The SWIFT platform has to be ready to respond to the growing market opportunities that the UCITS regulatory change represents. Reach is one important element of this, and SWIFT should focus on extending its offering into mainstream retail intermediated transactions.

Product diversification is another important element, as industry players strive to achieve the same efficiencies and global economies of scale that exist in the equities and fixed income businesses in the exchange-traded and OTC derivatives businesses.

To support this effort, SWIFT needs to transform itself into a business much more in tune with the needs of its varied stakeholders on the buy-side.