Fund managers anticipate greater outsourcing to streamline costs, says report

Feb 07, 2011 by Charles Gubert

Many fund managers anticipate low returns on their equity products in 2011 – something they predict could lead to an increase in outsourcing, according to a survey by RBC Dexia and Accenture.

More than 75% of managers believed there would be in an increase in outsourcing over the next three years in order to streamline costs.

The report revealed a majority of fund managers expect returns on equity to remain below the pre-crisis levels – 59% anticipated a return on equity of 15% or less in 2011 while 14% forecasted a return of less than 10%. Prior to the crisis, average returns for these fund managers stood at approximately 20%. This has prompted many managers to focus on cost reduction.

Furthermore, managers look likely to adopt more innovative product initiatives. The report said new financial products would be more “sophisticated in future with this trend driven largely by active fund managers expanding their investment mandates in ways which would allow them to take short positions for the first time.”

This is a clear turnaround – investors during the post-crisis period largely shunned complex derivatives such as credit default swaps and collateralised debt obligations in favour of more mainstream products.

“The backdrop of low-equity returns and pressure on fees and revenues have made efficient operations a priority for fund managers,” said Pascal Denis, senior executive in Accenture’s Financial Services group and managing director of the company’s operations in Luxembourg.

“At the same time, their clients are demanding new financial products which have greater clarity of risks, and they would also like to see risks mitigated. This means that products are complex, but in a different way than before the credit crisis,” he said

“All of this is happening in combination with clients expecting to pay lower fees for financial products. Having efficient, scalable operations and access to the new technologies will be a key competitive factor for any fund manager in the years ahead,” added Denis.

It is hoped that outsourcing will enable managers to support these advanced products and help sustain growth.

Cost efficiency will also be a major driving force for outsourcing.

“Our research indicates that certain outsourcing strategies could lead to cost savings of up to 20-25 percent for some managers. This trend will appeal to many funds, which are looking to increase operational efficiency and are urgently looking to grow their businesses by launching new and innovative products faster or by expanding into new geographies,” said Rob Wright, global head of product and client segments at RBC Dexia.

The survey comprised of interviews with approximately 100 fund managers at 80 companies in the UK, North America, Europe, Australia and the Middle East.

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