Asia funds industry still lagging global peers in automation ______

/ 07 Feb 2022

Leo Chen, Managing Director - Head of Asia, Calastone

Leo Chen, Managing Director and Head of Asia, Calastone, analyses the state of automation in Asia’s fund administration.

Growth in Asia’s investment funds is outpacing every other region of the world. By 2025, the industry will manage an estimated US$30 trillion[1]  in assets, looking after the savings of ordinary retail investors alongside institutions such as pension schemes, sovereign wealth funds and insurance companies.

But how well does our industry serve the region’s investors?

The asset management ecosystem across Asia is highly diverse, with different and often conflicting regulations, varying distribution channels and levels of maturity across markets. The ecosystem is also still highly fragmented in some markets. Outdated technologies remain prevalent and reliance on manual processes persists, even in more developed markets such as Singapore,.

Efforts to stimulate better automation in areas such as fund distribution are increasing – particularly since the start of the pandemic – but fund admin continues to lag. Fund administrators are crucial cogs in the asset management machine, supporting investment firms with their NAV [net asset value] calculations, investor and regulatory reporting, transfer agency, and distribution services. These are essential in enabling the industry to provide an efficient and effective investment experience.

Given the important role this part of our industry plays, we surveyed fund administrators in five major markets to understand levels of automation and identify key challenges. For the Asia market, we focused on Singapore, among the region’s top five markets for local and overseas fund assets,[2] where several key themes emerged.

Covid triggered a rethink on automation

Despite digital transformation now becoming a top priority for Asian asset managers, our survey found that automation in fund admin appears to be lagging. A large proportion of service providers in Singapore, for example, conceded that certain activities – namely compliance support; distribution support; KYC, AML and sanctions screening; client onboarding; and reporting – are still either mostly manual or only partially automated.

Automation has been the dominant theme in Asia’s asset-management tech circles for years but while straight-through processing has become well-established in Europe and the US, manual systems have remained more prevalent in Asia than elsewhere. Distribution support, for instance, is reasonably well automated in Australia, but much less so in Singapore.

In Asia, resistance to automation has been based on several factors. Across the region, the fund distribution landscape is varied, and this has influenced rates of automation in the processing chain. Fund managers have their products distributed by entities of varying size, and the smaller ones have tended to be late to automation, arguing that their volume of orders doesn’t justify the investment.

Industry stakeholders have also long maintained that because manpower is cheap and manual processes largely error-free, implementing new technology has been difficult to justify. A corollary of that argument has been that automation will reduce employment.

The landscape is beginning to change. In major regional markets like Hong Kong and Singapore, labour costs have gone up, regulatory penalties for operational errors have risen, manual data entry is increasingly seen as outmoded, and technology costs have fallen. There is also a growing realisation in markets that are implementing automation, such as Taiwan, that it doesn’t necessarily reduce headcount and can actually benefit staff by reallocating them to more valuable roles.

Covid has also proved to be a catalyst for change and a call to action for distributors and transfer agents. The wholesale move to remote work prompted surging interest in automation, especially in markets such as Taiwan, Malaysia, Indonesia, and Thailand, which lag behind Hong Kong and Singapore. But whereas the initial stages of the crisis triggered a scramble to implement immediate solutions to the emergency, the focus is now moving towards sustainable systems that will make operations more efficient and robust for the long term.

The crisis has prompted significant steps forward towards digitalising the region’s fund management industry, but there is clearly still a huge amount of work to be done. The question remains: is the will there to automate, and where might the world of fund admin be heading?

Maximising the potential of fund administration and transfer agency

Many banks and asset managers – especially in tough macro environments – have not historically taken products like fund servicing as seriously as they should, viewing them as being low-margin, resource-intensive and high-cost. In many instances, these negative perceptions have translated into an insufficient focus on fund administration services, at least relative to certain front office or client-facing activities.

Take transfer agency, for example. Our survey found just 8% of Singapore providers said TA accounted for the majority of the investment they made in their fund administration businesses. And yet TA is one of the most challenged areas of fund admin in terms of cost and inefficiency. We saw this during the pandemic, where many TA systems were found wanting.

A well automated transfer agency could bring significant opportunity for industry growth, and it will come not just from ironing out issues that exist today through automation and cost-reduction, but about using the skills and market placement that TAs have and using those to support completely new ways of investing. If, as in the case of Singapore, TA is seen by a significant percentage of firms as “necessary but unexciting”, then the industry in Asia risks missing that opportunity.

Meeting the needs of new asset types

A key area we explored in our survey was tokenised assets, which has started to enter mainstream thinking for many asset managers.

These types of investments could be an excellent opportunity for fund administrators. According to a recent study by Fidelity Digital Assets, Asian investors are “by far the most accepting of digital assets”, with more than 70% saying they are currently invested[1]. The emergence of digital or tokenised assets could, therefore, have a transformative impact on the functioning of both Asia’s capital markets and the wider funds ecosystem.

Despite this, a large proportion of fund administrators in Asia feel that these changes can be managed using transfer agency’s existing technology and expertise. I feel, however, that for TA to support new ways of investing such as tokenisation, a fully digital infrastructure would be needed that could enable the real-time flow of information. We recently covered this topic extensively in our white paper ‘The Future of Fund Administration’, where we discuss the infrastructure changes that would be required to support tokenisation.

If asset servicers successfully prepare for this incoming digital revolution, then they will be able to seamlessly support fund manager clients in launching tokenised products and other new financial instruments. Through automation, reduced costs and a new way of managing TA functions, fund administrators could play an integral role in driving the digital asset revolution, safeguarding their role in the investment ecosystem of tomorrow.

Automation is key to survival

Our research has illustrated that while fund administrators face some significant challenges for their future, there are excellent opportunities available that could help them reinvent their businesses.

If Asia’s fund administrators are to remain relevant, most will need to make some swift changes to their business models. While we have seen that some markets are at a more advanced stage than others in terms of their automation levels, it is crucial that those that have fallen behind embrace digitalisation so they can compete in the future. Whether that be through an advancement of the way investing operates today, or entirely new ways of investing, such as tokenised assets.

 

[1] Fidelity

[1] PWC

[2] Deloitte

Leo Chen, Head of Asia

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