Asset owners revamping operating models

Institutional investors' moves to run more portfolios in-house are also forcing service providers to adjust.
Asset owners revamping operating models

A growing number of pensions and sovereign funds in Asia are looking to overhaul their operational set-ups to cope with accelerating portfolio diversification and plans to manage more assets in-house, say fund-servicing executives. In turn, fund houses and other service providers are being forced to review how they deal with institutional clients.

The trend for institutions to insource investment functions is forcing them to assess whether their operating model are the right fit, said Kevin Wong, Asia-Pacific head of sector solutions at State Street.

“In almost every single conversation I’ve had with both existing and prospective clients, middle-office has been a very prominent part of the discussion,” he told AsianInvestor. “For many institutions, this is the main driver for their moves to revamp their operating model.

"They need better ways to deal with the current environment to reflect both different allocations and the fact that they might want to do more in-house,” added Hong Kong-based Wong.

Hunger for data

Peter Jordan, Asia-Pacific head of global fund services at Northern Trust, summed up the situation succinctly: “Asset service providers are starting to treat asset owners more like asset managers.”

“Demand is growing among asset owners for middle-office outsourcing, data aggregation, book of record-type activity – the kind of services that are traditionally provided in the asset manager space,” he added. “This is a rising trend globally.”

Asset owners have in the past commonly requested fund-valuation data for boards and trustees on a weekly or monthly basis, Jordan (pictured left) told AsianInvestor. They are now often looking for performance attribution and related data analytics on a daily basis, like asset managers, he noted.

In addition, said Jordan, many asset owners are building out their own data warehouse solutions, and service providers are having to interface with and feed data into those modules.

This is a particularly major trend in both Australia and Japan, noted service providers.

“A lot of the large [Australian] super funds are now pushing boundaries in terms of their operating models,” noted Jordan, who is based in Melbourne. “They are all looking at how to consume data from different sources; they are looking more at data analytics, data warehousing – tech is becoming more and more critical in their suite of capabilities.”

More asset owners are dealing directly with custody and fund admin providers, agreed CP Yap, Asia head of fund services at Citi. Institutions are increasingly awarding custody mandates independently of fund houses, he told AsianInvestor

“In the past, the custody decision would have been made between the asset owner and their external investment manager," noted Yap (pictured right). "Now increasingly it’s being decided by the asset owner alone.”

Indeed, more asset owners in Asia Pacific are creating oversight functions, requiring custodians to provide more data than in the past, he said. Unitholders of pension funds, for example, want to ensure they are getting competitive FX and execution rates from external managers.

Changing relationships

As a result of these shifts in the institutional segment, the relationship between asset owners and fund managers will change fairly dramatically, argued State Street’s Wong.

Both pension funds and asset management firms are looking at how their operating models work and whether they need to revamp them, he noted. His firm has recently received several big mandates for back- and middle-office servicing, said Wong, and more are to come in the next few months. 

Victorian Funds Management Corporation, an agency of the government of the state of Victoria in Australia, agreed to outsource a range of middle- and back-office functions to State Street in 2015. More recently, the custodian entered into a similar agreement with Japanese asset manager Sumitomo Mitsui in June this year.

Fund houses have traditionally taken an off-the-shelf approach, on the assumption that a product that worked well for one pension fund will suit another, noted Wong. “But more bespoke and strategic conversations will take place now if asset managers are to stay in the business of servicing asset owners.”

In turn, fund firms need to ensure their operating model is well suited to building more long-term, strategic relationships with asset owners, he said – if not, they may have to change their approach.

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