How to Gain a Competitive Advantage

The asset management industry undoubtedly entered a period of rapid change following the global economic collapse and subsequent series of regional crises in the last two years..

As increased caution from investors and an enhanced focus on service providers transcends borders (affecting funds in all jurisdictions globally), regulatory bodies across the world have created an environment perceived by some factions as prohibitive to fund success.

Institutional investors and asset allocators have reacted to the sweeping changes in regulation by enhancing their due diligence procedures on service providers, with particular focus on their cross-border service capabilities.

AsianInvestor talks to Srikumar T.E., managing director for Asia Pacific at Apex Fund Services, to find out why fund administrators have had to evolve their services from historical accounting, investor services and net-asset-value calculations, to service managers in a new world of increased investment caution.

Q How is investor behaviour changing and why does this have an impact on managers and the service providers they select?

A One of the more significant changes we have seen from investors is the way in which they approach their due diligence on asset managers, the scope of which now extends beyond the internal infrastructure for managing investment strategies to include an extensive investigation of the service providers.

We have found there is now a particular focus on reviewing the chosen fund administrator – a development that has actually been positive for larger independent administrators (such as Apex) which already possess the required expertise and internal controls to respond to such scrutiny. At Apex we always evidence our competence for investors by being verified by SSAE 16 reviews on software infrastructure, reporting language capability and compliance.

Fund administrators are no longer simply providing off-the-shelf accounting services. They have been thrust to the forefront and now have the ability to assist managers actively in adapting and responding to new demands arising outside of portfolio management.

The impact this new investor interest has on service provision is that fund administrators now have the opportunity to help clients gain a competitive advantage in the market. Administrators can add weight to a fund’s perceived stability by providing solid backing as a competent and capable service provider.

At Apex we have found that being an independent provider is a major advantage to an administrator in a market like this. Independence gives us the ability to demonstrate both to our clients and their investors how nimbly we can react to new requirements while being fully cognisant of the regulatory and compliance requirements.

We have been able to design and evolve our service solutions and products specifically to respond to local market conditions on a global basis. As a result we have felt a notable shift in increased manager interest (across all jurisdictions) as they begin to make their administrator choice based on enhanced investor criteria and more thorough investigation.

Q What trends are you seeing with clients in terms of investor influence on service-provider selection and how are these trends manifested in the market?

A We are hearing more and more from our clients that investors are placing significant weight in favour of managers who can provide evidence that they are actually undertaking a thorough due diligence process when selecting counterparties. From a fund administration perspective we have clear visibility of this increasing trend as the investors are now directly engaging with us as part of the process.

In reviewing an administrator, institutional-investor due diligence now independently seeks to examine their internal controls infrastructure, financial stability and ownership structure, crossborder capabilities and flexibility to customise investor transparency reports (among other things). There is a hands-on approach to the review which spans from customised due diligence questionnaires to meetings and teleconferences in order to evaluate the true quality of expertise of resource and service capability.

Interestingly, our experience has been that it is with the larger or “pedigree” launches that investors, in fact, play an important role in influencing and selecting key service providers (such as the prime broker and administrator). These decisions now have a more direct bearing on investor appetite for allocating to certain funds. It is really important for managers to consider the subsequent impact on investor interest if they do not carry out broad due diligence in the set-up process and subsequently ensure they select an administrator capable of responding well to the new responsibilities as a provider.

Q In what ways are fund administrators responding and taking on new responsibilities?

A Fund administration now extends far beyond the traditional functions of transfer agency, portfolio accounting and net-asset-value calculation – in order to add value to a manager it is essential the services provided by administrators are proactive and that decision-making is dexterous.

We are seeing market evidence of this through the increasing amount of independent administrators taking on responsibilities traditionally executed and controlled by the banks providing fund administration as a bundled service. It seems this shift is a direct result of the plethora of regulations implemented over the past few years – not only through global regulators such as G20, but often more aggressively (with bigger impact for managers) via regional and local regulators.

The European Union is a good example of a region where new regulations have been prolific over the past few years. In order to address the critical compliance requirements of AIFMD, Ucits 5, CRD4, Fatca and MiFID 2, administrators have had to upgrade and enhance their infrastructure to maintain their relevance and add value. It is imperative that we, as administrators, are able to lessen the burden for managers of understanding the operational implications and time spent on becoming compliant.

AIFMD provides us with a good example of regulation that has been responded to well by fund administrators; many of the larger, independent and non-bank administrators offer either full depository or depository-lite and Annex IV reporting services to their clients.

In order to navigate these increasingly complex regulatory requirements for marketing across different jurisdictions, it is becoming ever more important that managers work with administrators who can demonstrate seamless worldwide coverage and direct access to local expertise across all global financial hubs.

The cost of compliance can become a burden for fund managers and can even be detrimental to their track record. It is our job as an administrator to provide services that make global access and compliance as painless and cost-effective as possible.

Q In light of these regulations, what are the implications of crossjurisdictional marketing on managers based in Asia Pacific?

A Although there have been recent regulatory updates in individual Asia-Pacific jurisdictions, the timeline for implementation and impact of these regulations can differ from country to country. While regulations vary regionally, national directives still impact extra-territorial managers.

The EU directives aforementioned do impact managers situated in Asia Pacific with regards to their on-boarding and reporting capabilities, which is why it is not uncommon for regulatory barriers to result in funds choosing not to invest in certain jurisdictions. Again, it is increasingly becoming the responsibility of the fund administrator to assist in compliance with these regulations to take the brunt of the work, resource required and time spent away from the investment manager.

The surge of foreign regulations impacting funds combined with intensified investor due diligence investigations has proven to be a challenge for managers seeking to satisfy allocators across multiple regions. While managers are able to consider the cost versus benefits of compliance for most of the national, regional or global regulations, they are left with little choice regarding compliance with some more critical regulations such a Fatca or AIFMD.

Q What should managers look for in a fund administrator? 

A Fund administrators are required to facilitate execution support to the fund manager’s compliance team as well as assist the marketing team in their pitch to institutional investors.

Choosing an administrator based on a low price point or on check-box approach may not serve managers well in the long term. It is imperative that fund managers consider the investor’s level of comfort, the administrator’s cross-jurisdictional capabilities and ability to integrate into the funds compliance and marketing process, when appointing a capable partner.

We feel it is now essential as an administrator to exhibit a robust, multifaceted service capability while seamlessly continuing to perform more traditional independent fund administration functions.

You can download this article as a pdf by clicking here.