Insights

Positioning APAC Asset Owners for Growth: Technology, Services and Operational Transformation

Asia-Pacific asset owners are increasingly looking to build scale, either through mergers, expanding into new geographies and asset classes, or delivering low fee returns and flexible investment options for their members.

Lucy Chen
Head of Services Delivery, Asia Pacific, State Street Alpha^SM

Peter Sherriff
Director of Product Strategy, Asia Pacific, Charles River® Development

Clayton Issitt
Head of Client Solutions, Asia Pacific, State Street Alpha^SM

July 2022

The focus on outcomes is forcing a rethink of the technology and services required to make better informed and timelier investment and allocation decisions. Lucy Chen, our head of Alpha Services Delivery in APAC, moderated a discussion with Peter Sherriff, director of Product Strategy at Charles River® Development in APAC, and Clayton Issitt, head of Client Solutions, Asia Pacific, State Street Alpha^SM, on the changing landscape for asset owners in the region and how they are looking to improve and scale their operating models.

Lucy: The APAC Asset Owner landscape is very dynamic, with participants experiencing growth organically as well inorganically through M&A. What are some of the operational implications of this growth?

Lucy: You have touched there on the timing implications of employing external managers and the operational challenges associated with this. How does this play out in the day-to-day investment process?

Lucy: Closing the timing gap would seem to require sourcing, aggregating and managing large volumes of data which would understandably be a significant challenge for many APAC asset owners today. How can service providers help clients adapt their operating model to help address this?

Clayton: On the service model side, utilising a co-sourced model with a shared Investment Book of Record (IBOR) can provide complete visibility at every step of the process. This includes acquiring and ingesting data from each manager, building positions from the transactions, applying corporate actions and pricing, reconciling the data, and performing post-trade investment compliance to generate the whole of fund view.

Clients gain a full, auditable view of what is being done, without the burden of doing it themselves, along with operational scale that only the very largest asset owners and managers can achieve. It’s a marriage between IBOR technology and human services. Robust technology enables this capability set for the asset owners in a way that requires less overhead than current middle and back-office systems.

This does require human expertise, especially for data governance and corporate actions processing. On the low end of the complexity spectrum, superannuation funds with internal investment capabilities investing solely in Australian assets need only process domestic corporate actions, and the events are fairly spread out across time. In Japan by comparison, there tend to be semi-annual peaks of activity due to market conventions for dividends resulting in workload spikes. It’s unfeasible to scale up a corporate actions team that can validate and process data fast enough to enable portfolio managers to make timely dividend reinvestment decisions.

Peter: Another benefit of outsourcing is that custodians and fund administrators already have relationships in place with the majority of asset managers and systems to receive that information and process it efficiently. Leveraging that flow to feed a new process is relatively straightforward and doesn’t require a costly new technology stack to onboard additional asset owners. This enables a delivery mechanism that is scalable, repeatable and cost effective, and reduces the 2 to 5 day time lag. To Clayton’s point, because IBOR is on a shared platform, everything completed on a client’s behalf is transparent, visible and real-time. There’s no delay or additional integration incurred from moving data around between different data silos and systems.

Lucy: From an investment teams perspective, having this up-to-date view of exposures across the whole of fund seems to offer a number of benefits. Can you briefly highlight some of these, particularly with regards to the evolving regulatory environment?

Clayton: An expanding asset mix typically adds new geographies and currencies. Using a few proxy currencies to model exposures doesn’t really provide an accurate or useful view of risk. Asset owners must be able to “look-through” to each external manager for an accurate view of underlying currency exposures, supporting better informed hedging and neutralisation of unwanted exposures. In essence, IBOR can be thought of as an “exposure book of record”.

The ability to look-through a complex security is key to helping organisations understand risk in their portfolios. For example, a fund holding a Unit Investment Trust (UIT) will see a single line item in their accounting book of record (ABOR), priced in local currency. But that UIT can consist of a global basket of different asset classes priced in multiple currencies. Leveraging existing integrations with asset managers via a custodian and fund administrator enables asset owners to determine what actually comprises a UIT and align that with their internal view of holdings.

Additionally, with asset owners now subject to Uncleared Margin Rules (UMR), efficiently managing margin and collateral workflows likewise depends on a timely view of holdings and cash. In the front office, traders require visibility into what counterparty to select, what Credit Support Annex is in place and realistic pre-trade margin estimates. Back-office teams also need to know what assets are available and cheapest-to-deliver as collateral. For an asset owner with multiple outsourced fund managers, the organisation can get far better terms for the entire fund when all external managers are on the same collateral management and negotiation agreement instead of each fund manager negotiating terms off their far smaller book of business.

Peter: Emerging regulations such as Portfolio Holdings Disclosure in Australia require funds to report at least one level beyond that UIT so that members have greater transparency into what their fund is invested in. Fund administrators have integrations in place to support look-throughs, and established relationships with most of the asset managers these funds allocate to, either as external managers or as UIT investors. By outsourcing this capability to an administrator, funds can leverage those integrations to achieve faster access to their holdings because the information is available earlier in the trade lifecycle.

From a technology standpoint IBOR needs to support the disclosure regulations and the tax and structural aspects of UITs.

The single currency investment/return of UITs make them very popular vehicles and convenient to manage from both an operational and accounting perspective. By enabling transparency and granular views of holdings, IBOR enables firms to perform meaningful risk assessments on these assets.

Lucy: You talk about the ability to look-through a complex fund structure to understand the exposure to different asset types of the whole fund for example. Typically, in these situations cash can present challenges, can you discuss some of these?

Lucy: Lastly, as an organisation, how are we helping asset owners evaluate, reshape, transition and scale their operating model to support growth and ultimately better serve their members?

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