Funds Europe talks to Calastone’s Simon Keefe about asset managers’ digital transformation journeys and how their service providers can support them.
Digital transformation has long been on asset managers’ agenda but it has become a much more urgent item in the last 12 months. While the industry has proved largely resilient to the pandemic and its disruption, the mass move to working from home did expose some operational fragility, says Simon Keefe, global head of product, Calastone.
For one, it showed that many asset managers are not set up to react quickly to macro events and struggle with data capture. “Data was an obvious gap and many asset managers were left scrambling to get the quality and timeliness of data they needed,” says Keefe.
Calastone’s fund flow index showed that the move from active funds to passive funds increased over the last 12 months, putting further pressure on managers’ margins. Meanwhile investors are demanding more digital features and tailored investment products.
Consequently, managers have sought to accelerate their digital transformation plans. To date, digital transformation budgets have been heavily skewed towards the front-office functions such as portfolio management and fund distribution, says Keefe.
It is not unusual for the front office to be at the head of the queue when it comes to budgets. However, the last 12 months have shown that digital tools are needed at all stages of the funds transaction lifecycle, says Keefe. “This includes not just funds distribution but portfolio management, fund accounting and administration.
“This is especially important if fund managers are to provide their investors with the products they want at a price they can afford,” says Keefe.
For example, ESG funds are in great demand, as is impact investment or indexes devoted to new and topical themes. But these new products require access to timely data if they are to meet the growing reporting burden and to stand out in what has become an increasingly crowded market by providing a sense of personalisation to the investor, he adds.
“The last 12 months have shown that it is often not possible for asset managers to do this using the technology that they have. There are simply too many operational overheads.”
All of these factors have helped to give impetus to asset managers’ digital transformation plans, says Keefe. “Many firms are now saying that the time for waiting is over. It is not even to attract new customers but just to retain their current book of business. This competitive pressure is happening across all jurisdictions, all asset classes and not just millennials. Every investor is tech-savvy and demanding change.”
This, he says, is where the likes of transfer agents and other service providers should be able to step in and help. While there are some asset managers looking to connect directly with consumers and rely on their internal technology resources, there are others looking to build a digital ecosystem of sorts and to work with a series of partners to reach new investors.
“There are a number of firms out there that do not want to do everything themselves,” says Keefe.
This dynamic is especially evident in the Asian market where challenger banks and e-commerce firms such as Ant Financial have made significant inroads into the mutual funds market via platforms such as Yu’e Bao. And now we are seeing global fund managers like Vanguard teaming up with Ant Financial in order to access the mainland Chinese investment market rather than trying to do this through its own wholly owned venture.
Another digital development that has shown the benefit of an ecosystem approach has been tokenisation, says Keefe. In the past 12 months, tokenisation has moved beyond proof-of-concepts to real use cases.
Calastone is working with a number of parties on tokenisation services and projects. The potential benefits are significant and wide-ranging, says Keefe. Furthermore, they apply to all participants in the funds industry, from trustees, investors and asset managers to administrators, depositaries and distributors. “Tokenisation can massively scale up the new model and the new products at a lower price point, take out many of the costs of traditional asset manager models,” he adds.
Tokenisation also highlights the important role that service providers play in asset managers’ digital transformation journeys. “The last year has shown that, despite all the advancements in new investment models, there is always going to be a role for administrators in the funds industry,” says Keefe.
Customers’ changing needs
The transfer agency market is changing quickly and the ability to be agile and react quickly to customers’ changing needs is more important than ever, he says. They also need to be able to share data and market insights with their clients.
Like asset managers, asset servicers and transfer agents are under their own pressure when it comes to digital transformation. Asset managers are looking to consolidate the number of service providers that they use and are reviewing their arrangements more regularly (every two years, say, instead of every five).
There is also the possibility that the availability of technology will lead some large asset managers to take their administration back in-house, thereby reversing the outsourcing trends of the last ten years and more.
Consequently, the TAs realise that they have to be proactive when it comes to digital infrastructure because if they don’t, asset managers may simply end up doing much of this without them.
This is where the ecosystem approach involving multiple partners makes sense for TAs, says Keefe, as opposed to trying to create a digital framework all on their own. “A lot of TAs are looking at running new technology in-house but it is not an easy thing to do – for example, do you have the right scalable cloud infrastructure or the most suitable DLT framework and do you have the internal expertise or even desire to manage this internally?”
Service providers have to look at a long-term horizon, beyond the next five years, says Keefe. This means being plugged into a digital ecosystem with access to the right information and the right distribution links, he adds.
“We are working with TAs to help make sure they have the right systems, and are connected to all their counterparties – the distributors, fund accountants, depositaries, asset managers and trustees – and they are in a position to offer their clients more timely market insights.”
(First published in Funds Europe June 2021: https://www.funds-europe.com/june-2021/driving-a-digital-transformation)