An asset servicing company was traditionally brought on board by investment managers to handle labour-intensive administrative tasks such as net asset value calculation and fund accounting. By outsourcing such tasks, investment managers also benefited indirectly by being freed from internal infrastructure burdens associated with recruitment of qualified staff and IT-related matters such as system maintenance and upgrading, back-up plans and adoption of standards associated with automation initiatives.
However, the services proposed by the asset servicing industry have greatly evolved since the more humble beginnings, today encompassing more complex matters such as cross-border distribution support, risk management and performance measurement as well as more sensitive areas of the investment manager’s business, with the advent of outsourcing of functions typically associated with manager’s middle office. These services not only permit the manager to concentrate on the core business of asset management, but, combined with comprehensive online reporting tools, answer increasing calls from investors for trans-parency in many aspects of the manager’s business.
In the current marketplace, the service provider has developed from an anonymous outsourcing company to a more visible extension of the investment manager’s firm. Indeed, the security and peace of mind provided by the engagement of a third-party administrator (TPA) has seen end investors now actively seek information on the administrator as part of their internal due diligence process. The presence of a strong administrator that carries out constant market and regulatory monitoring can prove to be another indirect benefit. Managers have realised this, and there is a growing trend among those using the services of an independent administrator and custodian to use the service provider as one of the selling points for their fund.
The rising importance of the administrator in terms of investment transparency legitimacy and protection concerns was demonstrated by Swiss fund-of-fund administrator, UBP, which took the decision to accept only those sub-funds serviced by a TPA.
However, the indirect benefits of engaging an administrator go beyond answering the transparency concerns of the investor. During the recent financial crisis, asset servicing companies were able to demonstrate their commitment to a partnership approach by working in very close collaboration with manager clients, to find practicable solutions to arising problems. For instance, as administrators’ compliance departments constantly monitor counterparty risk, they could notify investment managers the instant counterparty risk issues were detected at Lehman Brothers, and by being at the source of data, were able to identify impacted portfolios, enabling managers to rapidly reduce their exposure prior to the group’s failure. Also, close relationships with many prime brokers permitted the administrator to assist manager clients using Lehman’s prime broker services to identify a suitable replacement.
However, it was during the alternative liquidity crisis that clients with a financially strong administrator and affiliated custodian benefited most. Many were able to leverage their administrator’s considerable financial resources to assist them in negotiating the wave of withdrawals by investors, so that they could remain liquid and more importantly, in business.
