Highlighting a growing trend among fund managers, Allianz Global Investors will outsource its middle office as part of a move to establish a common back-office platform for RCM, the Allianz group’s institutional asset-management arm.
AllianzGI is currently finalising the deal, which will cover its operations in Asia-Pacific, and expects to start outsourcing functions later this year. It declined to reveal the service provider; Citi and State Street are two of the biggest players in this business.
One upshot of the move is that the firm will no longer use its Asia-Pacific fund-accounting solution, DST Global Solutions’ HiPortfolio.
AllianzGI is happy to outsource fund accounting and some middle-office functions, because there’s now a mature market in Asia for outsourcing such services, says George McKay, Hong Kong-based chief operating officer for Asia-Pacific.
In addition, doing so means more financial flexibility, he tells AsianInvestor: If AUM falls, the cost of using a fund-accounting service provider drops, but firms can’t reduce the cost of doing it in-house if AUM takes a hit by, for example, cutting staff.
“Your choice of outsourcing should not be based on the fact that you have a problem with executing a certain function in-house, but because you will get other benefits,” says McKay. “Maybe the outsourcing provider can invest in better technology or get better cost efficiencies because they’re dealing with a multitude of clients and therefore have greater scale.”
But while good fund-accounting services are available in Asia, that’s not the case for all functions that an asset manager may wish to contract out.
McKay notes that service providers such as BNY Mellon – where he ran non-US operations before he joined AllianzGI – provide end-to-end services in Europe and the US, including fund accounting, middle office, transfer agency and custody.
“Can asset-servicing firms provide those capabilities yet in Asia?” asks McKay. “Many would say they can, but I wouldn’t feel comfortable enough using them yet for everything.” That said, they probably do provide a sufficient end-to-end service for the very small players, he says.
(The Allianz group manages €106 billion of third-party assets in Asia-Pacific, out of a global total of €1.1 trillion of third-party assets and €1.4 trillion of total assets.)
Even in Europe, it’s only fairly recently that service providers have been merging the systems they have obtained through takeovers of asset management back-offices or asset-servicing firms, he adds.
“In Europe, middle-office maturity has only come in the past few years,” says McKay. “They didn't have state-of-the-art middle-office platforms before that – those rested with the asset managers. But that’s changing now, because [asset servicers] have enough clients that they’re developing their own systems.”
The trend to outsource the middle office is certainly gaining pace, Jay Hooley, global chief executive at State Street Corporation in Boston, told AsianInvestor in an interview in August.
“Why are we seeing more demand there?” he asks. “One obvious factor is that fund managers in many parts of the world have been struggling to generate good returns, so there’s pressure on their costs.
“Another factor is that – whether due to new regulation or product design – fund managers are investing in their infrastructure,” adds Hooley, “and they want to invest in the front office, not the middle office. As demands for higher levels of risk management and compliance are being imposed on fund managers, the last thing they want to do is make investments in the middle office."
* See the February 2011 issue of AsianInvestor for a more detailed interview with George McKay on AllianzGI's Asia-Pacific operations.