Milestone Group
As Asian unlisted fund assets swell, custodians are thinking hard about balancing low costs with top-notch service. Phil Cook of Milestone Group gives AST the lowdown
Why has there been a swell in Asian unlisted fund assets?
The upward trend that we’re seeing at the moment is primarily the result of the changing demographic in the region. The figures tell the story: Asia’s middle class has increased by 25 percent in the last 20 years, and that’s been matched by rapid growth in GDP. Property has historically been a popular choice for those seeking a secure long-term investment, but now people are starting to look elsewhere.
What’s particularly interesting in Asia is the value attached to brand. There are now a number of globally recognised names offering portable fund products (UCITS funds, for example) in the region, which are proving attractive to many.
Why are custodians so concerned about this rising volume?
The challenge (and by definition the opportunity) comes in managing these rising volumes in a way that allows custodians to maintain high levels of client service, while keeping headcount, and therefore costs, under control.
We should remember that large volumes are not a new phenomenon: a lot of custodians will remember pre-global financial crisis levels, which were higher than the levels we’re seeing today. What’s different now is that the cost of the labour that is required to complete these manually intensive processes is firmly on the up. This means that firms need to establish different models to achieve genuine scalability: the ability to reduce unit cost as the volume increases. Chasing low-cost labour is increasingly recognised as a quick fix, not a long-term solution.
What are the key factors in reducing operational risk in processing unlisted fund assets?
Complexity is a major risk factor. The challenge is that it is also a key characteristic of the current marketplace. From the different mechanisms that might be employed to place an order, to issues such as the different subscription periods that come into play with alternative and private equity pools, and the very different process and supervisory management requirements inherent in the mix of asset types. This complexity dominates the full fund lifecycle.
Where errors do occur, the ramifications can be considerable—reputational damage can be far-reaching.
Automation is the enemy of risk. Where functions can be automated, you eliminate the potential for human error. Given that offshoring is common in Asia, automated controls allowing clear visibility of remote operations have an even more important role to play.
It’s also important to look to simplicity in your operating model. For example, operational risk is reduced when handling all fund transactions in a common set of processes, irrespective of fund type, placement mechanism and timezone.
It’s the difference between focusing on optimising individual pieces of the puzzle versus bringing an operational perspective to bear.
What particular solutions does Milestone Group use for unlisted assets?
We have a number of products that support the end-to-end fund accounting processes for unlisted or unitised funds, all of which are delivered as part of our platform, pControl. This is specifically designed to overcome the challenges presented by the increasingly complex structure of fund products. This reduces both operational cost and risk, with inbuilt scalability.
Diving into some of the specific functionality, perhaps the best-known module is unitised order management. At the simplest level, this allows users from global custodians as well as smaller fund distributors to manage the routing of any fund order through the whole lifecycle. Whether it is a mutual fund, fund of fund, hedge fund or private equity, and irrespective of the placement and settlement mechanisms, it works in the same way.
We also have products that sit alongside that, such as fee calculation and rebate management, and tools for fund income processing and fund reconciliations.
What this means to Asian retail banks and private wealth managers is that they can have all back-office fund distribution activities on a single platform operating across multiple countries.
Why is Asia seemingly more reluctant to take up full automation?
Significant change typically requires a catalyst to start the process. As much as anything else, I think it’s simply been the case that there has been no ‘big bang’ incentive to move away from the status quo of manual order processing in this instance. While it’s true that volumes are rising, it’s steady, but not explosive growth, and in many parts of Asia the cost of labour is not yet sufficiently high to necessitate a change of approach.
However, things are starting to change. That change is being driven by both domestic and international factors. The cost of labour is rising, and adding people to the payroll is not the path to sustainable and scalable growth.
Which country is making the greatest leaps in automation, and what can be done to encourage the regions that are being left behind?
It’s very difficult to make a statement on a country-by-country basis. What we are seeing, though, is a trend towards a more centralised approach as firms recognise the efficiencies that this brings.
The growth of private wealth activity in Singapore means that in many cases this is becoming a natural location for a centralised order management hub. As a result, a lot of the automation is currently focused here, and is being rolled out across other countries.
What does this mean for custodian product offerings?
It provides a great opportunity for custodians that wish to differentiate themselves by offering highly transparent order management services to their clients. Particularly, for asset owners that invest in alternative funds, the complexity of the transaction demands higher levels of client service.
The challenge for custodians is to deliver this in a highly scalable manner given the current level of manual processing for the more complex fund products.
Having said that, fund distributors such as life companies and regional banks also have the same opportunity to differentiate themselves. Should they choose to retain their fund distribution functions in-house, this can also bring cost savings as well as time-to-market advantages, without losing the ability to handle the more complex fund products.
Some fund distributors would consider this to be an important competitive advantage.
Is it really possible to completely eliminate faxes?
Wind back 25 years, and people were asking whether it was really possible to eliminate telex, so we’ve certainly moved on! Every year there is a reduction in fax traffic, so there is progress, but it’s not drying up that quickly.
Where we are looking at simple transactions, there is a lot that can be automated, but there are equally many placement mechanisms that need to be managed. That takes us back to my point before on operational risk: operational risk is reduced when handling all fund transactions in a common set of processes, irrespective of fund type, placement mechanism and timezone.
However, there’s an ongoing demand in the market for more complex fund products, and this is where we get to the sticking point. These more complex order flows typically require a substantial amount of physically signed documentation. That does have to be delivered somehow, but it doesn’t have to be via fax.
To automate this, we need to focus on managing the flow of documentation and paperwork in a more effective manner—not just replacing the fax.
What are the implications for clients of custodians such as retail banks, private wealth and life companies?
There will be the benefits that they can see, which will be felt in areas such as quality of service, reporting and the flexibility and responsiveness of their suppliers. Just as important, though, are the ‘under the bonnet’ benefits, such as the reduction in risk.
Where are the value added services?
Let’s start from a point where we assume that automation of all aspects relating to the fund transaction is in place. At that point, firms can start to turn their attention to value-added services in areas such as revenue capture and the calculation of fees and rebates. Accurate daily revenue reporting for fund distributors should be a priority.
Looking to the market, it’s clear that there’s an increasing desire for real-time information—for example, clients might want to be able to see the status of orders at any given time. For custodians that have highly automated order management systems in place, this should be an opportunity.
