Move over, regulation. The priority for mutual fund and ETF managers in 2014 will be operations and technology.
Admittedly, it's hard to imagine a fund industry where regulation isn't taking up all the bandwidth, as it has since 2008. But now that the outlines (if not all the details) of the post-credit crisis regulatory regime are in place, the industry can focus again on generating growth.
And, this time around, it won't just be product development and marketing getting all the air time. Instead, operations and technology will share the spotlight. That's because, in an increasingly competitive industry, efficiency behind the scenes is essential to an effective front office-and will be a key contributor to industry profitability overall.
Here are 5 ops and tech issues that will be high on fund managers' priority lists over the next 12 months:
1. Money market funds. Nothing better exemplifies the expected transition in focus in 2014 than money market funds. Since the credit crisis, the fate of these funds has been vigorously debated in the regulatory arena. However, once the SEC issues new rules, which it is expected to do early this year, it will fall to ops and tech to implement them.
Assuming that the revised regulations call for a floating net asset value for money market funds for institutional investors, fund managers will need to separate retail and institutional funds and then develop processes to direct investors to the appropriate funds in future. In addition, firms will must adopt daily valuation processes to conform to the new requirements.
2. Big Data. Everybody's talking about it, but what exactly does Big Data really mean for the fund industry? Asset managers have long used data analytics for quantitative investment approaches, but other aspects of the business have remained stubbornly low tech.
That's likely to change in 2014. Marketing groups are already starting to mine data to identify the most receptive audience for their funds, both among end investors and intermediaries. Armed with these insights, they can more precisely target ad campaigns and better guide wholesaler efforts.
3. Retail alternatives. On its face, the interest in retail alternatives would appear to be the province of the product development department, but, perhaps more than any other product category, these funds require extensive support from operations and technology.
Investment techniques used by these hedge fund-like vehicles place heavier demands on investment operations and compliance. Extensive use of derivatives, short sales and leverage requires sophisticated approaches to collateral management, while holdings of less liquid securities, swaps or options pose valuation challenges. At the same time, monitoring these complex strategies is more difficult from a compliance standpoint.
In addition, fund managers will need to respond to growing regulatory concern about "suitability" in the sale of these funds. For example, Europe is expected to impose new rules requiring that some retail UCITS funds be labeled as "complex"-meaning that these funds are appropriate only for more sophisticated investors. And the European concerns are being echoed in the United States and Asia. To adapt, asset managers will develop monitoring systems that confirm that sales comply with all regulatory requirements.
4. Global integration. The concern about fund complexity illustrates another consequence of the credit crisis-which is the globalization of regulation. In a form of parallel play, initiatives in one regulatory jurisdiction-whether about complexity, derivatives, hedge fund oversight or fiduciary duty-often get picked up in other jurisdictions, leading to similar, if slightly different, regulations.
Yet while regulation is increasingly global, fund manager operations are generally regionalized, even in firms with a worldwide presence. Divisions in, say, the United States and Europe often act very independently, addressing local needs as they arise.
However, many firms are recognizing that they can operate more efficiently by integrating globally. For example, some asset managers running hedge funds on both sides of the Atlantic are centralizing production of hedge fund reporting, for both Form PC for the SEC and reports for European authorities required under the Alternative Investment Fund Managers Directive. Note that these efforts involve true cross-border integration, not just outsourcing of specific functions to an offshore location.
5. Service provider oversight. This globally integrated world is a complicated web of cross-border integration and outsourcing relationships-and making sure that it operates smoothly will be require constant monitoring.
Fund managers are paying more and more attention to how they build and maintain those monitoring systems. In the United States, service provider oversight in omnibus recordkeeping arrangements has become a high priority issue for many asset managers and fund boards of directors. The Financial Conduct Authority has raised the topic broadly in the United Kingdom just this November, in a report questioning whether asset managers were prepared for the failure of major service providers and whether there were consistent standards of oversight in the industry.
Many organizations in the industry, including NICSA, are working to develop guidelines. Expect to hear more on this topic in 2014.
Theresa Hamacher is president of NICSA and author of "The Fund Industry: How Your Money is Managed."