Prompted by a shift toward defined contribution plans and regulatory changes, European fund managers and their asset servicing providers will increase their spending on portfolio management and accounting systems to $787 million by 2012, from about $646 million in 2009, according to a report released by Aite Group.
“The growth in spending for portfolio systems reflects a tighter regulatory environment making greater demands on firms for automation, reporting and risk analysis, greater availability of options such as software-as-a-service which lower implementation costs and replacement of antiquated technology that has not kept up in areas such as derivatives, client reporting and work flow management,” wrote Denise Valentine, a senior analyst for the Boston-based research firm.
Aite Group said that the largest 100 investment managers in Europe handled over $19.8 trillion in assets in 2008 - with Switzerland, Germany, France and the U.K. being home to the largest global managers. Portfolio management and accounting systems help fund managers – pension plans, institutional funds, hedge funds, insurance companies – and the third-party operations firms supporting them maintain accurate books and records on client accounts.
Aite Group cited eight firms – Tradar, Sophis, Igefi, ERI Bancaire, SimCorp, SS&C, Linedata, and SunGard Data Systems – as providing services to European pension plans and other fund management firms. For these firms, more than 50% of their clients are in Europe and, of those, more than half are investment firms.
Among the enhancements the software vendors are implementing are improvements to their user interfaces and reporting capabilities as well as handling of derivatives and post-trade messages sent through the global network operated by the Society for Worldwide Interbank Financial Telecommunications in La Hulpe, Brussels.
As Europe switches its focus from defined benefit to defined contribution plans as a way of funding the retirement needs of changing populations, pension plan managers will need to keep better tabs on how assets are allocated and risks managed.
The European Parliament is also expected to vote in September on new regulations affecting alternative investment funds, and in July 2011 will adopt the latest iteration of the Collective Investment in Transferable Securities Directive (UCITS IV) which will make it easier for fund managers – including hedge funds – to market their funds across borders.
The new Alternative Investment Fund Management Directive will require alternative firms which must register – those with more than $125.6 million under management to provide regulators with detailed information on the principal markets and instruments in which they trade, principal exposures, performance data and concentrations of risk. Fund assets must also be independently valued and segregated by a bank.
The UCITS IV directive allows fund manages to create feeder funds in multiple European markets which must invest at least 85 percent of their net asset value in a master fund – typically located in either Dublin or Luxembourg. Such a scenario will require increased coordination of trading strategies – a.k.a. exchange of data and net asset valuations – between the master and the feeder funds. The UCITS IV legislation will also attract hedge funds because it allows them to use some leverage in their strategies, including over-the-counter derivatives. However, it also requires more frequent and detailed reporting of risk metrics.