Asset managers are flocking to Asia and Citi's new high-profile hire, Chris Ryan, is warning them of the perils of setting up their operations from scratch. The former Fidelity Asia chief says up to 20 new players are either establishing a presence in the region for the first time or returning after the recent downturn, and Citi has hired him to help it win outsourcing business.
Asia asset managers are not as efficient as they could be, says Ryan. "Some asset managers are holding onto internal operations for control reasons. However, with a few exceptions, I really don't buy that," he tells AsianInvestor. "From a shareholder perspective, asset managers need to look at outsourcing the back and middle office to help drive results, enhance processing efficiency and control expenses."
Ryan started work officially as part of Citi's securities and funds services division last month, after departing Fidelity in December. He surprised many with his move from the buy side to securities services, but is adamant this sector is growing faster than ever before and is becoming more vital as the investment market in Asia evolves.
Ryan, who has lived in Asia for nearly two decades and is based in Hong Kong, says he has seen businesses shut up shop many times, unable to maintain high rents or staff in economic downturns.
Operational risk and its implications, in light of the fact that companies have more liability nowadays than in the past, is not well understood.
Outsourcing can mean giving up a level of flexibility, but it offers an in-built insurance. "Some money lost by fund managers over the past few years has been due to issues like pricing errors, which can be very costly and damaging to reputation," he says.
Although pricing errors can still happen if selected functions are outsourced, adds Ryan, asset managers are no longer liable for the operational errors that cause these pricing errors to occur.
He says there are several key aspects driving a move to greater outsourcing of back- and middle-office aspects of asset management.
Regulatory restrictions have been removed in several Asian countries, such as Korea, thanks to the Capital Market Integration Act, and Taiwan. Only now do some places allow outsourcing. "Ten years ago, it was very difficult to outsource even locally," says Ryan. "You had to keep everything inside certain companies."
Also, as the industry has developed, many long-term managers find themselves with complex businesses that are tricky to service operationally. Twenty years ago, such companies may just have offered domestic equity or bond funds, but now they may run derivatives funds, which are harder to manage.
These established companies often have legacy issues that push costs up. They may be carrying some funds that, individually, are not profitable, says Ryan. For example, several funds could represent 20% of AUM, but account for 40% of costs.
Additionally, increasing regulatory requirements for funds have made them more complex to manage. Higher levels of reporting and transparency equate to added work, which clearly plays to the strengths of experienced securities services providers, says Ryan.
Whereas in the 1980s some funds were priced once a month, many funds are now priced daily. Ten years ago, the tolerance of overdrawing a fund or having it geared when it shouldn't be geared was higher, because the technology wasn't there to be able to monitor it, Ryan says. "The technology is there now, but fund managers have to own it or outsource it."
Meanwhile, the pensions market is growing, with new universal pension systems being implemented in markets such as Korea and with existing funds becoming more region-focused in their underlying investments.
This industry is experiencing tremendous change, Ryan says. "Regulatory pressure is adding to distribution costs and commissions are coming down [in places like] Australia and India, and there are more complex selling processes in Hong Kong and Singapore."
He argues that the industry in Asia's emerging investment markets is evolving just as it did in the 1980s in Australia. Then, he says, every asset management firm did their own custody and there was a big push to outsource custody to independents. At the time, there were safes in offices and people thought they were giving up independence if they outsourced, but now nobody thinks twice about it, Ryan says.