An Investment Magazine roundtable sponsored by Northern Trust
Leading institutional investors are re-evaluating what the optimum operating model looks like. A growing number of funds are adopting a hybrid – with a combination of insourcing and outsourcing – across their investment management and investment operations functions.
Many asset owners are finding that even as they increase their internal investment capabilities, it makes sense to outsource parts of their middle-office operations. This is being driven by a focus on cost control and a desire to harness benefits of scale and gain more insights from their data.
How different funds are approaching middle-office outsourcing decisions was the focus of discussion at a recent Investment Magazine roundtable, sponsored by Northern Trust.
AustralianSuper senior manager, investment platforms, Sean Ryan, is part of the team responsible for ensuring the hybrid operating model at the $130 billion super fund is evolving appropriately in response to its increased scale and complexity.
“We’ve been on a journey for the last five years internalising investment management, which we completed last month,” Ryan said. “About a year-and-a-half ago, we started on a successor program of work to uplift that capability.”
This project to review AustralianSuper’s investment operations has proven much more substantial than the preceding project to in-source more investment management, Ryan said. Key issues that the fund is looking into include data warehousing, plus new portfolio and treasury management systems.
“It’s huge; it dwarfs what we’ve done in the last five years. We’re looking at this as just another evolution,” he said.
AustralianSuper has been collaborating with peer funds globally and domestically to gain insights into how they have strengthened their operating models.
“We’re looking for the opportunity to learn from everyone else’s mistakes,” Ryan said, adding that ensuring the
fund retained access to, and control over, the right data was a perennial issue.
“As we’re bringing data in-house, we’re looking at whether we over-engineered control processes slightly,” he explained. “So, we’re taking the opportunity to look at some of those things and whether they’re actually needed.”
Peter Jordan is head of global fund services, Asia-Pacific, for Northern Trust, which has US$9.7 trillion ($12.1 trillion) in assets under custody and administration across the globe, and works with some of the world’s leading pension and sovereign funds. He said long-term thinking is important, as operating models are evolving and everybody has their own view of what’s best for their organisation.
“Not everybody is connected with a long-term strategy,” Jordan said. “Sometimes, decisions are just about fixing a problem…so businesses will install something, not really being sure whether it’s fit-for-purpose longer term.”
He said that as the trend of asset owners insourcing asset management continues, it is critical that funds ensure they are able to aggregate their data and maintain a clear view of their total portfolio and operations.
This is why Northern Trust continues to invest heavily in its middle-office technology platform, which provides its clients with integrated services for middle-office, portfolio management and administration, he said. Lazard Asset Management is a US$213 billion ($265.9 billion) funds management firm running money for some of the world’s top pension funds.
Like many other leading global asset managers, Lazard has long outsourced its middle-office operations, allowing the business to focus on its core competencies.
The firm’s local chief executive, head of Asia-Pacific Rob Prugue, said that when thinking about middle-office data requirements it was important to recognise “the difference between knowledge and wisdom”.
Prugue explained that the international regulatory environment ensured a high level of data transparency but that funds didn’t always have the capability to leverage it for their commercial benefit.
Target operating models
Five years ago, New Zealand Super general manager of operations, David Sara, led the NZ$43.2 billion ($39.4 billion) sovereign wealth fund through the process of developing a target operating model − a blueprint for how its operations might ideally function in the future. The fund uses a combination of insourcing and outsourcing across both its investment management and operations functions.
Reflecting on how the vision for a hybrid operating model NZ Super developed five years ago compares with today’s reality, Sara noted that he “probably underestimated” the impact of the shift to direct investments and the need for data.
“Direct investing has definitely had a big impact on the organisation; both in the due diligence around making investments and the ongoing management of them,” he said. “And four or five years ago we didn’t really have a lot of conversations around data.”
Improvements in technology, particularly automation and machine learning technologies, are having a huge impact on the systems and processes funds need to support their operating models.
“The pace of technology change means the ability to hook onto, and unhook from, new systems has become important because something that’s fit for purpose now may not be in five years,” Sara said. “Increasingly, our implementations are integrations; we’re sending data out and bringing it back.”
Brisbane-based $47.5 billion super fund Sunsuper began reviewing its operations three years ago, as it appointed Lounarda David chief investment operations officer.
“We have redesigned the model to be fit-for-purpose and suitable to support the organisation’s overall long-term strategy,” David said. Today, she describes the fund’s approach as a segregated hybrid model, with a combination of insourcing and outsourcing.
“One of the first changes we made was to the governance model, to make sure we gave enough authority to the business to be able to push things along,” she said. She noted that this process has coincided with an important growth period for the fund, as Sunsuper has bedded down mergers and expanded its national footprint.
David said the new operating model allowed for a more “business-led” approach to technology and data.
A hybrid approach
New South Wales Treasury Corporation (TCorp) is another example of a major institutional investor that has embraced a hybrid operating model through a period of growth. In recent years, TCorp has led the amalgamation of a number of NSW State Government funds, causing its funds under management to swell from $25 billion to $90 billion.
“We’re looking at our operating model from an end-to-end perspective,” TCorp general manager, investment implementation and operations, Jonathan Green, said. TCorp runs by a “hub-and-spoke model” that incorporates a core, consistent repository of data and additional features that can be plugged into the system as needed.
“We tailor our operations to be able to deliver to our clients,” Green said.
TCorp has a diverse set of NSW Government clients, including super, insurance, managed funds and councils.
Green’s advice to other funds reviewing their underlying operating model is to spend time initially assessing the capabilities of all the participants in the value chain.
“That way, you can have a much more considered approach,” he said. “I’m talking about going back to things like the time brokers deliver statements. That’s at the beginning of the chain and all else follows from there. You have to go right back to the execution level to…identify all the key dependencies.”
He said the ultimate aim was to go beyond deciding what data is important, and move to a more sophisticated analysis of it: “We’ve moved past the data. We want information, knowledge and wisdom.”
Focus on data
Northern Trust’s head of hedge fund services for Asia-Pacific, Ali Sheikh, said data management is a key focus for his team and its clients, which increasingly include asset owners looking to apply the middle-office outsourcing model long prevalent at hedge funds.
“The first step is normalising data from disparate sources into one useful dataset, and connecting different brokers and systems to give our clients a holistic view of their portfolio,” Sheikh said. “The second step is how you use that data for various value-add functions for the portfolio or to optimise your cash from a balance sheet perspective. Having one system tends to be where our clients are moving towards as they gain efficiencies from leveraging one source of data and limiting the number of reconciliations and manual intervention by operations teams.”
Middle-office outsourcing is also attractive for many small to medium-sized funds, as it enables them to harness technologies and economies of scale otherwise unavailable to them.
Legalsuper, a $3.4 billion industry fund for the legal sector, harnesses benefits of scale for its members through a range of outsourcing partnerships.
“Our operating model is a function of the size of our fund and the way we invest,” legalsuper chief executive Andrew Proebstl said. “Our investments are with third-party managers. Insourcing isn’t on our radar. Separate governance and investment management is an important part of what we do.”
Vision Super, which has $9 billion in assets, is a mid-sized fund that is rethinking its operating model in response to growth.
“Three-and-a-half years ago, we brought in a chief investment officer, who made changes and gave additional delegations to the investment team,” Vision Super head of investment operations Emma Robertson said.
The need to access accurate, timely investment data is one of the dynamics driving changes to the operating model.
“The challenge for us has been to understand what’s going on with our assets,” Robertson explained. “A big thing is being able to get easily accessible, regularly updated data in a format we can analyse, and developing proper analysis to understand some of the more complex assets. Once we identified our controls, we prioritised the ones we thought were the most important and ones we needed to change. That meant getting different data from our custodian, getting flat files rather than formatted reports so we could reduce data entry.”
A collaborative approach
The big challenge, roundtable participants agreed, is ensuring decisions made now about data gathering and analysis make sense down the track. Even for large funds, superior benefits of scale can typically be achieved by adopting an outsourced, or partially outsourced, operating model.
Northern Trust’s Sheikh encouraged fund executives to keep the lines of communication open with all their service providers, including their custodian, to ensure they can leverage their knowledge and expertise.
“If you’re going through something that you may not have the answer to, touch base with your service provider and those middle-office teams to ask how they’ve seen it done elsewhere,” he said. “We may have an out-of-the-box solution, or we may have seen someone else solve a similar problem.”
