In late November, investment administration advisors Morse Consulting facilitated a roundtable workshop with senior operations managers from large fund managers. They discussed the impact of the global financial crisis on the operating models supporting their respective businesses.
Morse’s BRUCE RUSSELL summarises the main themes of the private discussion, and the views put forward by attendees, highlighting some of their more telling quotes.
CHALLENGES TO THE BUSINESS MODEL
“There is a shift in mentality from growth to survival”
“The business case for trading complex instruments will need to be demonstrated”
Participants believed that the credit crisis had resulted in a shift in emphasis for many organisations. Whereas a prior focus on growth and product differentiation had been the norm, the change in markets had forced many organisations to shift emphasis towards cost and risk management.
Specifically, the bear market has highlighted the cost of administering complex instruments. Such costs are driven by the inherent complexity of valuing and settling these securities, coupled with the need to ensure adequate controls to manage market and counterparty risk exposures.
This cost, associated with a perceived lack of transparency by investors, has some thinking that there will be a short to medium term return to simpler investment structures. Furthermore, as the full ‘cost’ of administering these investments was now being understood, executives would demand that the business case for continuing to invest in exotic or alternative instruments be properly justified.
Consistent with past experiences, however, the change will likely be temporary and participants believed that organisations would again be likely to pursue complex investment strategies when the good times returned.
THE RISE OF RISK
“We developed a capability in risk reporting. Only now are the benefits of this being understood by the business”
“The enhancements we made to unit pricing policies some years ago have been an invaluable investment”
The current environment has highlighted the need for enterprise level risk management. Responsibility for market and operational risk used to be assigned to CIOs and COOs respectively. Organisations are now recognising the need to review risk holistically and at an enterprise level. In response, COO’s are increasing their level of oversight over enterprise wide market and counterparty risks with some deploying specialist risk applications to assist with reporting and analysis.
With respect to unit pricing, attendees noted the recent focus on this issue by the regulators and the subsequent investment made by many organisations in the development of a pricing policy framework. There was a view that this investment had enabled organisations to proactively address issues such as the valuation of illiquid instruments and management of liquidity through their policies. This in turn had prevented the occurrence of unit pricing issues that may have otherwise arisen as a result of the market volatility.
Issues such as the valuation of thinly traded market securities continue to be challenging but the role of IFSA in identifying and responding to these matters via the Unit Pricing Focus Group was positively acknowledged by participants.
THE WORLD GOES ON
“A drop in FUM does not mean we do less from an operations perspective”
“In good times organisations differentiate by investment performance. In bad times it is by risk and control”
Whilst attendees recognised the obvious financial impact of the credit crisis on the profitability of organisations they did not believe this should translate into further significant operational headcount reductions.
Recent events had highlighted the importance of maintaining effective risk management and control processes and this is dependent on the retention of adequate headcount within operational support areas.
In addition, attendees noted that whilst investment performance and product development are key points of differentiation between organisations, the need for investment managers to demonstrate well controlled and transparent processes was gaining increased prominence. Organisations that have the capability to demonstrate effective and transparent risk management and control processes were likely to be more successful in retaining or rebuilding investor confidence.
WITH EVERY CLOUD…..
“The change in the market has brought headcount stability to my business”
“The tables have been turned somewhat on generation Y”
In terms of opportunities, attendees noted that a decrease in turnover would have direct benefits to the business both in terms of securing capable resources and minimising the costs of staff recruitment.
Whereas the recent boom had resulted in significant challenges to organisations in both recruiting and retaining employees, changes in market conditions now mean organisations are able to secure talented employees for longer periods and are thus better placed to build and leverage upon the resident knowledge within the organisation.
The change in the balance of power between the employer and employee also enables managers to select from a wider range of available candidates, many with greater experience than what was previously available. The return of ex-pats from markets such as London and the US would further contribute to this available resource pool.
Conversely, attendees observed that some employee groups, notably those from generation Y, had not previously experienced bear market conditions and would likely find the going tough over the next few months. The bear market has introduced new competiveness to the labour market and individuals who are used to being ‘sold’ a position by a prospective employer may struggle when forced to compete against their more experienced peers.
NO STRONG CASE FOR ADDITIONAL OUTSOURCING
“Service providers will need to prove they have the capability to do the simple stuff before we give them the hard stuff”
Attendees agreed the current climate may support a financial argument to outsource more activities. However, there was a consensus that service providers first had to demonstrate they had the capability to properly deliver existing services before they are given the opportunity to pitch for higher value administrative services such as performance reporting and mandate monitoring.
Morse Consulting will facilitate further operational roundtable discussions in 2009. Should you be interested in attending please contact Philip Hope on (02) 9006 1263 or Bruce Russell on (03) 9225 5059.