With more than EUR 5 trillion assets under management, Luxembourg stands out as the global leader for cross-border distribution. Accelerated digital transformation, Brexit, the search for more sustainable investments as well as changes in investor behaviours are all elements expected to continue to reshape the fund industry landscape in the coming years. Interview.
What is considered as “core business” for your institutional clients?
Linda Lamri: From our perspective, the most fundamental tasks of an Asset Manager are two-fold: deploying the right strategy – product, distribution, services – to attract significant inflow on the one hand, and executing this strategy with a focus on value creation, risk mitigation and full compliance on the other. There is no one-size-fits-all strategy or magical formula when it comes to qualifying what’s core and what is not, particularly in a fast-evolving world. What’s core today might not be tomorrow. Regulatory evolution and new trends such as ESG can influence the asset management decision-making process to assess what’s core and what is peripheral. The outsourcing strategy of an Asset Manager working in a universal bank will have little in common with that of a mid-tier independent Asset Management firm. Whilst both will aim for decreased fees and increased operational efficiency!
The delegation of the implementation of this strategy to a third party provider is a strong alternative to be assessed – Jérôme Bernodat
Once “core business” is defined, how are additional activities handled?
Linda Lamri: Fierce competition, profitability challenges and growing regulatory constraints have accelerated the outsourcing trend in the past years, both for UCITS and Alternative funds. From our perspective, the secret of a successful relationship between a provider and an asset manager starts, as ever, with trust. The old “client-provider” model is outdated: building strong business partnerships and offering first class client experience as well as state-of-the-art reporting is the new way to proceed. Selecting a provider with scalability capabilities, a solid commitment to the market and a strong investment roadmap can help Asset Managers move from fixed to variable costs. Additionally, bundling Back and MiddleOffice services with a single provider generally results in enhanced and streamlined operational flows: our Asset Manager/Clients can benefit from a faster delivery of service and data as well as a simplified governance.
Building strong business partnerships and offering first class client experience as well as state-of-the-art reporting is the new way to go – Linda Lamri
And… what about Front Office (FO)?
Jérôme Bernodat: Historically, the two main pillars of FO – decision making and order execution – have been managed directly by Asset Managers (AM). Today, we can see an evolution in the order execution. Depending on size, volumes, types of assets and geographic footprint, delegation can become an alternative to help transform fixed costs into variable costs while meeting all regulatory obligations. A similar evolution is happening to lending activities where a growing number of Asset Managers are appointing an agent. More specifically, in the context of international investments where underlying investments are linked to FX components, currency management is a topic for discussion. This is why outsourced automated FX solutions are used extensively today. Another element to consider is the FX risk generated by such investments: the FX hedging strategy is part of the Asset Manager core business, but the delegation of the implementation of this strategy to a third party provider is a strong alternative, to be assessed. Similarly, in cash management, the strategy is fully driven by the Asset Managers, whilst the implementation can be entrusted to their bank. Producing accurate and timely regulatory reporting for Clients is of paramount importance to relieve them from the increasing regulatory duties they are facing. Additionally, given the oversight responsibility remains with the Board of Directors, strong monitoring tools and KPIs need to be available to allow efficient control of outsourced activities. It’s not about sending data, it’s about sending meaningful information to help and support Clients. To conclude, in a fast-evolving world, what’s core today might not be tomorrow!”