The asset management industry has undoubtedly entered a period of unprecedented change over the past few years, which has resulted in creating an environment that has been challenging for fund managers. 2015 saw competition rapidly increase as the number of managers in the industry continued to escalate. At Apex alone we saw a 48% increase in new launches during the last three months of 2015 compared with that same period in 2014. At a time of year during which we usually see seasonal slow down, this is significant. So what is different? How are funds continuing to be successful in this new environment, and what will 2016 bring?
Diversification is Key
As the fund industry turns a corner into 2016, we continue to see new and creative investment strategies being brought to market. A noticeable change in fund behaviour, evident across all classes, is that structures and strategies are no longer fixed – lines are blurring. The prevailing market environment hugely affects managers across all asset classes and inevitably shapes their investment strategies. Funds no longer fit snugly within one asset class or bracket; their strategies have had to become far more diverse in order to survive. Institutional Investors are pressuring managers to deliver results within a well run firm. Our conversations with managers are expanding to be just as much around their infrastructure, capital raising and their business management, as around their traditional accounting needs. Investors have shown that their appetite is increasingly moving toward non correlated returns providing the investment strategy is clear, explainable and supported by a strong operational environment.
*Source, Preqin Investor Outlook: Alternative Assets H2 2015 – Read Full Article
Agility is not only necessary for Managers to succeed but has also proven to be a key attribute for Apex, as an administrator, to meet this increase in demand. It has been essential that we were able to quickly adapt and evolve various aspects of our service delivery model in order to remain valuable as a provider to a changing client model. As we notice a marked increase in private equity and real estate fund launches, for instance, we have subsequently evolved our private equity service provision solution by accumulating specialist private equity teams and accounting software’s – both of which now operate within Apex private equity “centres of excellence” in several key jurisdictions around the world.
Investors are driving this sense of change permeating the industry as they begin to defiantly change their opinion on what makes a stable portfolio for a successful fund to stand out. For example, allocators now look to source managers satisfying a need for both liquid and illiquid investment portfolios. This demand goes as far as to transcend the traditional differentiators between private equity and hedge fund structures and has seen credit and real estate products become the ‘go to’ diversification strategies for managers looking to add value to their portfolios.
Competition and Consolidation
The already intense competition in asset management is further amplified as augmented investor scrutiny starts to expose potential pitfalls in traditional strategies. More diversity in portfolio is both required and expected, leaving a distinct trend toward consolidation and the merging of private equity and hedge fund asset classes. As a fund administrator we have also noticed an increase in the assets of fund of funds amongst our client base, a fact that seems to echo the need to include diversification through alternatives in the portfolios of small to medium size institutions. A growth in pension fund investments echoes this requirement for diversification and a new surge toward investing in retail markets as longer term investments become more desirable. In short, institutional investors are seeking a diversifier to their equity portfolios and displaying an aspiration to commit to longer term investments. With pension funds on the rise, the already increasing interest in US investments could grow even more; the 2015 Towers Watson ‘Global Pensions Asset Study’ confirmed the US as holding 61% of the total global pensions market. Funds need to work toward customising their portfolios based on the future, not on the past.
Reinforcing the trends we are seeing internally at Apex, the PwC 2020 report stated that “New entrants to the assert management industry from other sectors could disrupt a structure that has existed largely, unchanged, for several decades…asset managers will enjoy ample opportunities over the coming years, but these opportunities will also be sought by a growing and diverse set of competitors”.
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Customisation for Success
Anticipation of change is essential and alternative managers with foresight will be increasingly sought out by investors looking for more customisation, diversification and long term sustainable investment plans. Toward the end of 2015 managers were increasingly looking for new value and more alpha for their clients, blurring the lines of distribution and traditional investment management categories.
These changes in market behaviour strongly impact service providers. We have certainly seen an increased demand for more detailed information from our clients. Data management has become a critical component for managers as they strive to meet regulatory reporting requirements, as well as the transparency requirements of their investors. Managers are turning to their service partners for comprehensive services delivered through a turn-key environment.
The themes in activity we are seeing from new launches and existing managers show they are both looking for a more customised model by leaving big bank fund administrators for more flexible, yet still global, providers with more comprehensive service offerings. Managers are now want to ensure appropriate controls are in place across the entire value chain, both internally and with their prime brokers and administrator. The deluge of new regulations entering the industry over the past year has demanded resilience to stringent tests on reporting capabilities. Demonstrating a robust infrastructure, enhanced risk management plus strong compliance and reporting controls are now elements that can not only benefit managers by improving internal functions but also strengthen investor relations and ultimately their asset raising ability. Satisfying investors means customising the fund’s infrastructure and producing regular control reports as part of a funds marketing strategy. Fund managers are no longer seen as simple money managers – they are expected to evolve into true businesses. In order to instil confidence in their investors and compete effectively in todays market, managers require mature processes and service providers that are able to evolve along with them.
The Rise of the Independent Provider
Our service scope as an administrator expands constantly. Middle and back office functions continue to be thrust into the spotlight as managers aim to systematically implement robust control procedures to mitigate operational risk. The services we deliver are a key part of a fund manager’s infrastructure and as such, facilitating their changing requirements and constantly evaluating and improving solutions is essential to our own success. The responsibility for delivering robust operational procedures appears to be placed squarely on the shoulder of the service partners and therefore our role as a fund administrator now extends far beyond the traditional functions of transfer agency, portfolio accounting and Net Asset Value calculation. Daily reporting, intensified regulatory data demands, global geographic capabilities and complex structure solutions are just some of the issues that a manager has come to expect to be solved by their service providers. In order to truly add value to our clients it is essential that we are proactive, decision making is dexterous, and that we are able to continually upgrade and enhance our internal infrastructure.
We have recorded a marked increase in requests from managers for superior data management as a response to various reporting regulations i.e. CRS, UCITS and AIFMD. These regulatory pressures on markets mean that managers are looking to develop new capital and reach new consumer bases. In turn, they want administrators to provide extra support through improved technology in the middle office area. There is certainly a greater need for expertise in more niche areas. As a result of directives like FATCA, complex tax requirements and the subsequent reporting they necessitate mean either employing this resource in-house (which would be costly) or relying on an outsource provider. The tax function now almost needs to become a part of a firms risk management function and is just one example of where outsourcing to an independent expert dedicated to fund administration can be of benefit to a manager.
The asset management sector has realised that the development of internal controls and infrastructures to meet the increasingly sophisticated expectations of investors, is essential for success and future growth. This is a defining period in the evolution of both fund managers and their key service providers; prime brokers and administrators. Those with the flexibility to continually improve and adapt to the changing environment will reap the rewards, whilst those unable to evolve will struggle to remain competitive.
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