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In the 1980s, the European Commission envisioned a single-market model for fund services across Europe, much like the one in the United States. The goals were simple: reduce inefficiencies, and broaden and improve investment choices by allowing fund managers to sell their funds across national boundaries. The result: the Undertakings for Collective Investments in Transferable Securities (UCITS) framework, a fund “passport” that harmonized retail fund markets across Europe, guaranteeing uniform standards and broadened investment choices. |
Today, the demand for UCITS has surpassed the Commission’s original vision. Recent research projects that by 2012, investments in UCITS funds could reach EUR 9,000 billion, a 40% increase from 2007.1 Additionally, the UCITS brand is no longer confined to Europe, as demand has exploded among investors in Asia and the Middle East. While the robust demand is a boon for fund managers, the growth comes with challenges. Competition has intensified, propelling fund managers to focus even more intently on their core competencies. At the same time, the complexity and magnitude of regulatory and tax requirements have exceeded most fund managers’ fund administration, accounting and reporting capabilities. It’s no surprise, then, that the traditional vertical organizational model has withered, as fund managers adopt a horizontal structure wherein noncore activities are outsourced to distributors and third-party administrators (TPAs).
As a result, TPAs have become critical to the success of UCITS funds, supporting not only back-office fund activities but also middle-office functions, such as risk analysis, simulation models and trade reconciliation.
“Today, UCITS fund managers look to TPAs as partners in enabling cross-border
marketing, distribution, compliance and reporting—to take a leadership
role in providing expertise across a much broader range of activities than in
the past,” says Marcel Guibout, Head of Fund
Accounting Product Management for J.P. Morgan in EMEA. “TPAs are no longer
mere administrators and custodians to the UCITS market.”
Accordingly, TPAs feel the pressure of their new roles. “TPAs have had to become more forward looking,” says Guibout. “In the past, TPAs would call on clients for direction. Today, the client looks to the TPA for direction in navigating the product delivery, as the expert.” All of this has made technology perhaps the most important differentiator among TPAs.
Technology:
The Competitive Differentiator
Despite the uniform UCITS brand, EU countries continue to impose their own tax
and regulatory requirements, making state-of-the-art technology platforms a
must for a TPA’s survival.
Germany serves as a case in point, where complex investor-level tax-reporting requirements are imposed on any fund registered and sold in Germany. “Germany is an attractive market, with a population of over 80 million, and supporting German tax reporting requirements for UCITS has become almost a subindustry of fund administration,” says Guibout. |
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The right network can make or break a fund’s success in a given market |
J.P. Morgan’s Fund Accounting centre in Luxembourg includes more than
20 professionals focused solely on German tax reporting for over 2,500 share
classes. “Distributing in Germany,
Guibout notes, “requires superior technology that can accommodate the
specific complexities and frequently changing reporting requirements.”
Then, there is distribution itself, which—like tax and regulatory compliance—arguably lies beyond a fund manager’s core competency. “Fund managers need to rely on a TPA with access, familiarity and fluency around the right distribution network for a fund in each new market,” says Guibout. The right network can make or break a fund’s success in a given market, and that, too, requires TPA connectivity.
Valuation:
A Complex Undertaking
The cost of constructing and maintaining a technology platform that enables
accurate valuation in multiple markets and asset classes is beyond the resources
of the average fund manager or promoter.
Here again, it’s a question of scale. A superior TPA will have the benefit of a broad and powerful infrastructure to support global time zone coverage and pricing for multiple clients, and at a competitive price, due to economies of scale. J.P. Morgan is currently implementing a “follow-the-sun” model, through which the firm can validate and release security prices into funds globally, as markets trade throughout a 24-hour period. “The complexity of funds today doesn’t allow for anything less than automated price routines; you can’t calculate valuations on spreadsheets like in days past,” Guibout says.
As once-exotic fund strategies, such as derivatives, become more common, valuation again makes technology a competitive battleground. “Clients need a TPA that is well versed in alternative investment strategies so that pricing is reliable,” says Guibout.
Administrators linked to a global investment bank enjoy a decidedly enviable
advantage. For example, “The fact that J.P. Morgan has built up a derivatives
centre of expertise, with many experts drawn from our investment bank, adds
tremendous value to our offering,” he explains.
“Smaller providers cannot offer this in-depth expertise, nor can they
afford the enormous technological infrastructure necessary to compete.”
The demand for independent pricing is also on the rise, particularly among
pension funds. TPAs often take prices from fund managers or counterparties—the
very party that executed a given trade. This is an obvious conflict of interest,
and regulations have been tightened up recently to help ensure independent pricing.
J.P. Morgan, however, offers its clients access to an independent over-the-counter
(OTC) pricing service that calculates prices for more than
15,000 derivatives, a trend Guibout says symbolizes the new role of the UCITS
TPA.
Communication:
Inextricably Linked to Technology
The communication requirements of a functional, global model for fund administrators
demand a superior, integrated technology infrastructure.
The importance of technology in supporting a UCITS fund structure is clear when
one considers the deliverables themselves. “Think of the end of the distribution
process—clients want immediate access to fund prices, fund data and fund
performance data, and distributors and end unit holders want to know how that
trade they executed today was priced,” Guibout explains. “To the
end user, this seems fairly simple, but in reality, it requires monumental effort
to bring all the different parts together, process the data and then ensure
efficient delivery downstream.”
Take into account heightened pressures surrounding compliance, corporate governance and accuracy, and the task becomes more daunting. “The right TPA can deliver scalable solutions to the UCITS market—but that’s only possible through an investment in technology.” Guibout says. “The standard is excellence, and the model is global—it’s a new playing field that makes it impossible for TPAs to differentiate themselves without a focus on developing and using the best technology.”
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