Building for growth on solid foundations

By Daniel Eriksson, Senior Director of Solutions Management, Advent Software EMEA

The worst of the financial crisis may be behind us, but the lessons being drawn will shape the investment management industry for years to come.

Inevitably, the global economic slump has put investment managers' operational efficiency more under the spotlight. The link between assets under management and firms' revenues streams meant many were hard hit by the client redemptions and tumbling asset values seen during the financial crisis. Therefore cost control, by cutting waste and implementing more streamlined and efficient processes, has taken on a new urgency.

Meanwhile, investors - especially sophisticated institutional and high net worth clients - are implementing increasingly rigorous due diligence processes in the wake of the crisis. As a result, they are seeking asset managers that have the requisite systems and procedures in place that allow them to mitigate the various forms of trading and operational risks, combat fraudulent activities, and provide risk-adjusted positive performance.

For instance, pre- and post-trade compliance tools have become increasingly important, since they allow firms to control what trades are made and the position exposures they face, and thereby satisfy their investment mandates. In addition, high quality internal, client and regulatory reporting capabilities have become evermore essential, in order that management has access to the up-to-date information it needs to manage the business effectively, clients are provided with the level of service quality they desire, and regulatory demands are satisfied.

Likewise, deficiencies in risk calculation methodologies and risk management processes and procedures have come to the fore. Governments and regulators across the globe, therefore, are putting pressure on investment managers to ensure they have effective control mechanisms in place to monitor and manage their investments.

In light of such changes, the requirements investment managers in the Middle East now face have become more onerous. But opportunities abound too. In its annual review, released in February, Standard & Poor's Fund Services found that most Middle Eastern fund managers are positive about the prospects for the Middle East and North Africa (MENA) region. The outlook for Qatar was said to be particularly upbeat, with Saudi Arabia and Kuwait also doing well on the back of reasonably high oil prices.

Likewise, in October, ahead of Fund Forum Middle East 2009, Bahrain-based wholesale bank Securities & Investment Company (SICO) said it believed the regional asset management industry has strong growth potential. It pointed to a largely untapped pool of funds estimated at US$2.4 trillion, noting a significant proportion of that is invested offshore, but that potentially it could flow back into regional markets.

To attract this pool of funds though, investment managers need the ability to provide a sufficiently broad and high-quality offering. Many investors have had their faith in the conventional stock market rocked by the financial crisis, with the corrosion in wealth it brought, and are now hesitant about the degree to which they invest in equities. Instead, they are seeking more asset class diversification. But to meet this client demand requires cross-asset class expertise, and sophisticated systems able to support a range of instrument types.

At the same time, the progressive opening up of markets across the Middle East, and the investment opportunities they present, mean many international banks and asset managers have launched - or aim to launch - local, MENA-focused funds. Such institutions are often keen to utilise the local experience of investment managers in the region to manage those funds. Once again though the due diligence requirements are strict, since such international institutions have high service standards.

Of course, manager skill - a proven ability to generate investment ideas and deliver consistent outperformance - will be critical in meeting local and international clients' expectations. But increasingly there is an additional emphasis on technology, a need for investment managers to operate on a framework of robust systems able to support multiple asset classes, and provide sophisticated trading, risk management, portfolio accounting and reporting functionality.

To date that has been far from the norm. Historically, many investment banks in the region have relied on a core banking or treasury system, and used spreadsheets for their investment management and client reporting activities. However, in Saudi Arabia, for instance, there is now a mandated requirement for asset managers to have a dedicated investment management system, with the regulator cancelling their licenses if they don't implement such capabilities. Other countries may well follow suit.

More generally, there is a growing awareness among investment management companies in the region that Excel spreadsheets offer neither the functional richness, robustness nor scalability they want and need to meet today's business challenges and opportunities.

From an internal operating perspective, a sophisticated, front-to-back technology infrastructure provides an array of efficiency gains that will save money and provide firms with the scalability to grow their business without ramping up costs. Common benefits include the production of more accurate and timely net asset value (NAV) calculations, the ability to automate reconciliation and corporate action processes, and shorter report generation times.

Crucially, a professional IT architecture also provides enhanced insights into, and control over, an investment manager's business, and its subsequent performance. For instance, automated compliance systems help guard against accidental or malicious breaches of internal investment policies and restrictions, and ensure firms meet the slew of country-specific legal and regulatory requirements they face.

Meanwhile, a portfolio management, accounting and reporting platform that supports the gamut of financial instruments, and features cross-asset class risk tracking and reporting capabilities, will provide portfolio managers with an aggregated view of client holdings and positions, enabling them to break down the sources of risk in a portfolio and make better informed asset allocation decisions.

In addition, a reporting engine able to generate comprehensive and customisable client reports is an evermore essential part of the framework if investment managers are to meet the service expectations of today's sophisticated private and institutional investors.

In short, a best-of-breed IT platform offers investment managers a ready-made way to cut costs, automate compliance tasks, improve performance, provide better client servicing and position them for future growth. Such technology, therefore, is no longer an optional extra, but a business necessity.