The move by Harvest Global Investments (HGI) to outsource middle-office investment operations to State Street is rare in China where data confidentiality is highly prized.
In a deal unveiled last week, State Street will provide services including trade management, record-keeping, investment accounting, pricing and corporate actions, reconciliation, information delivery and customised client reporting by fund.
It is State Street’s first direct service relationship of this kind with any Chinese fund manager. HGI is a wholly owned subsidiary of Harvest Fund Management.
The mandate is a coup for State Street given that fund management companies (FMCs) in China have been disinclined to outsource middle-office operations. “The reason is simple; there’s a lot of data which is confidential,” says a source at a Shenzhen-based FMC.
John Campbell, State Street’s senior managing director of investment manager services for Europe and Asia-Pacific, explains that data integrity is ensured because the firm provides one database to each fund manager.
State Street is pledging to reduce HGI’s operating costs and eliminate manual processes. The company provides middle-office services for clients with $7.3 trillion in assets under management globally. It has more than 2,100 staff in 17 locations across 21 countries.
Purchasing and maintaining the latest technological equipment often comes at a high price. Outsourcing converts fixed operating costs to a variable cost model. Further, the cost of buying software and hiring operational staff can also be reduced.
“HGI is a relatively new business, so rather than invest a large amount setting up technology platforms and back-office operations, it required a cost-saving solution which we were able to provide,” says Campbell.
He notes that, by outsourcing middle-office operations, HGI can focus on its core competencies in asset management and trade execution.
State Street has been active in China’s financial landscape since 1997 and has had a close relationship with Harvest for 10 years. Its technology centre in Hangzhou employs about 800 information technology and financial asset servicing professionals who support the company’s global business.
Campbell adds that the firm is geared to expand its business with Chinese asset management companies, FMCs and proprietary institutions.
HGI, China’s largest joint-venture asset management company in which Deutsche Asset Management (Asia) has a 30% stake, is one of six Chinese firms approved by the China Securities and Regulatory Commission to form offshore asset management operations.
Last year, HGI entered into an agreement with DeAM in which the latter sub-delegated management of DWS mutual funds and transferred a number of senior managers and a sales team to HGI.