Small to medium-sized Australian funds managers have thought of outsourcing most functions, but not typically their finance department – until the recent market downturn put some in danger of breaching their licence, thinks John Williams, the managing director of accounting firm Lumina. Williams’ Sydney-based team runs the accounting and finance areas for several local funds managers, most notably fixed interest shop PIMCO and hedge fund-of-funds Everest Babcock & Brown.
Firms like PIMCO with more than $1-2 billion under management have no need to worry about falling below the $50,000 of surplus liquid funds stipulated for funds managers under conditions of the Australian Financial Services Licence. However start-up and smaller managers can take a big hit to the value of their FUM when markets fall dramatically, with the effect of lower securities prices compounded by outflows and lower performance fees. “In absolute terms, the bigger the manager the bigger the hit to fund valuations they will take. However, their size alone often acts as a ‘natural hedge’ for managers with over $1-2 billion FUM,” Williams says.
He points out that larger manager are able to reduce their costs as the scale of their operations increase, but smaller managers’ fixed cost bases can come under pressure as performance fees, on which they rely heavily, dry up in a market downturn. “In extreme cases, there is a real risk that other fund managers go the same way as Absolute Capital, which appointed administrators last year in the wake of the U.S. sub-prime mortgage crisis.” Williams says.
Allowing the amount of money spent on the finance function to be dialled up or down depending on their income could benefit smaller funds managers. “Whether your headcount is five or 20,000, you still need a CFO, an accountant and a bookkeeper, but you may not need all of them full-time five days a week if the business is going through tough times,” Williams says.
He estimates a headcount of 100 needs to be reached before an internal finance and accounting function makes sense for a funds manager.