Outsourcing, closures and consolidation to continue

Bob Kneip is founder and chief executive officer of KNEIP. KNEIP was launched in 1993 and supports its clients in cross-border fund distribution with regulatory and corporate reporting. It has a global client base of over 280 fund management companies, representing over 12,000 funds and £1.2 trillion under management.

Q: How does KNEIP help the fund management industry?

A: KNEIP helps asset managers manage and store information, and supply it wherever it needs to go. This covers both historic and dynamic information, including corporate actions and regulatory listings, prospectuses, fund listings and factsheets, and financial reports. While KNEIP supplies data to information sources on behalf of fund managers, it is not a data vendor. It receives a fee from the fund manager.

We started by helping fund managers provide regulatory information to the relevant listings agencies and press, and grew from there.

Q: A year after the start of the financial crisis, what major changes have you seen in the fund management industry?

A: I think the biggest change has been significant consolidation within fund management: of funds, of back office operations and of asset management groups themselves.

The number of funds and sub-funds dramatically reduced. Managers may have had funds sitting in their fund range for 10 years without strong cumulative performance, but have realised that it makes sense to close them.

And where a fund manager has had two similar funds investing in the same concepts, they have pooled those assets into a single fund to increase efficiency and reduce costs.
We have seen major asset management mergers, such as that of Crédit Agricole Asset Management and Société Générale Asset Management. And companies that had merged some time ago, for example, Julius Baer and GAM UK, have now suddenly moved to merge their fund ranges.

Finally, I have seen very strong operational consolidation in the back office. Fund managers are becoming increasingly centralised, pooling competencies, knowledge and technology. For example, instead of having separate marketing offices in Italy, Paris, Luxembourg and London, they are creating a single group marketing function based in their head office.

Q: How has the use of outsourcing in the fund management industry changed over the last year?

A: The industry has seen a massive increase in outsourcing, including the outsourcing of functions that a year or two years ago asset managers would not even consider giving up.

This is a huge change in mindset. I think it is driven by fund managers becoming increasingly determined to focus on their core business in order to better serve their investors. They are asking themselves: “Am I making the most of my investors’ money?”

The fund management industry is under huge cost pressure. In a growing market cost is relatively less important. But in today’s market, cost is critical, and fund managers are looking closely at where this is generated. Fund management companies are now trying to understand what is their core business, what is a revenue driver and what is simply a cost factor.

A year ago many fund managers would never have outsourced the management of fund factsheets or financial statements. But now they are beginning to question how efficient it is to have the same data in up to ten different places across the organisation.

Q: Will industry consolidation continue throughout 2010?

A: Absolutely. I do not think anyone has any choice to do otherwise. In Europe, the fund management industry will have to become more efficient. An increasing number of funds will be managed in one country, domiciled in a second country and run from a group based in a third country. We will see greater standardisation across countries in order to make this easier.

Q: Will we see more fund closures over the next year?

A: There will definitely be more fund closures. But we will not see a dramatic net reduction in the number of funds. Closures will be balanced by a series of new types of funds. For example, there will be a huge influx of new Ucits IV funds once this regulation is passed. However, I think we will continue to see pooling of assets, either funds or sub-funds, on an international level.

Q: What impact will forthcoming regulation have on the asset management industry?

A: The biggest impact will come from Ucits IV and the Alternative Investments Directive (AID). The AID will create a framework for unregulated entities. It will bring greater structure, reporting controls and transparency. The Ucits IV principles are very good, but I think we still have to see how it will work in practice. Allowing funds to operate across a number of European markets could present a huge reporting challenge, not least linguistically.

Q: Do you think regulation will continue to increase?

A: In both Europe and globally, the biggest challenge is not that regulation will increase, but that existing regulation will continue to change. For example, in Germany, the information requested by the tax authorities changes every year. This is one of the biggest obstacles that we face.

Q: What are the biggest concerns facing fund managers at present?

A: The uncertainty of the last 18 months has led fund managers to look far more closely at revenue, in terms of both fund performance and net new fund inflow. Fund management groups have become much more aware of the origins of their fund inflow. For example, outflows in Europe and America have been balanced by new net inflows from Asia.

Fund managers are becoming increasingly keen to understand where their money is coming from, and therefore increasingly customer conscious. They are focusing on building better client relationships and delivering better service to their clients.

On the performance side, investors are becoming more concerned about absolute performance. They do not want to discuss their funds in technical industry terms like alphas and betas. They want to know that their investments are making money.

Q: Do you think confidence is returning to the retail investment market?

A: I think retail investors’ demands need to change. Increasing demand for short-term returns has led to the creation of market bubbles such as the dot.com boom or, more recently, the real estate bubble. Now fund managers need to be able to focus on mid- and long-term value creation, not on monthly performance, and investors need to understand this.

Q: What are your views on the prospects for market recovery?

A: I think recovery is still some way off. As the Governor of the Central Bank of Luxembourg said last week, “How can you pretend the markets are recovering when the financial system is still held up by state support?”