Case study: Creating Europe’s second-largest fund manager
Mike Tumilty, Member of the Board and Director of Global Operations, Aberdeen Standard Investments discusses lessons for the future of fund management following the Aberdeen Asset Management and Standard Life Investments merger
Fund Operator Editor POSTED ON 12/29/2019 8:53:13 AM
When Aberdeen Asset Management and Standard Life Investments merged, they created the second largest asset manager in Europe combining £300 billion of assets from Aberdeen and £270 billion from Standard Life Investments (SLI) to create a significant global power house.
We have the scale to invest as well as many complementary strengths, a global footprint and proximity to clients. We have clients across 80 countries and 50 unique distribution centres, which is a testament to how global we are as an organisation.
Having over 1,000 investment professionals gives us an opportunity to diversify away from traditional long-only asset management.
We see more demand for alternative asset classes including private equity, real estate, infrastructure, hedge funds, private credit. Bringing the two companies together gives us significant scale in those alternative asset classes.
The two organisations were similar, but they had different approaches to areas such as Asia-Pacific. This was a region where Aberdeen had a local footprint in 10 target countries.
Standard Life Investments chose to look at targets rather than territories and bring global capabilities to some of the more significant institutional clients across the APAC region.
"When you bring together two significant organisations, management expects cost synergies"
My job is to ensure we have a scalable platform, by investing in technology to improve efficiency and service for all of our clients. We also want to continue to innovate in areas of next generation client demands. For example, digital is very high on the agenda.
When you bring together two significant organisations, management expects cost synergies.
On the day of the merger, 14th August 2017, our target was £200 million of annual savings. We have already taken actions to deliver £135 million allowing us to increase the target to £250 million.
Three quarters of these savings expected to be in place by the end of year two with the remaining quarter to be delivered in the third year of the programme.
Meeting strategic priorities
In terms of our chief executive’s strategic product priorities, real and private markets are important. Institutional clients are willing to invest in diversified private market type funds. They have a much better understanding of their future liability strain in relation to their assets, and they want to diversify and take advantage of illiquidity premia.
The merged organisation has the eighth largest private markets business in the world with £69bn of Assets under Management (AUM), including one of the leading European real estate platforms, with £39 billion of AUM and extensive capabilities in private equity, infrastructure, and private credit.
For factor-based investing like quants, we have £69 billion in AUM. For Environmental, Social and Governance (ESG) and impact investing, which is growing in importance and interest for clients, we have £10 billion in AUM.
"Institutional clients are willing to invest in diversified private market type funds"
The merger has given us a massive opportunity to play in certain spaces. There is no getting away from the fact that although we may have a ticket to the match, whether we win or not will be dictated by performance.
If performance is not great it does not matter what the AUM is, you will see assets flow away. That is one of our biggest challenges in making sure our flagship franchises of equity and multi-asset are firing on all cylinders.
What I have learnt is that an acquisition is a lot easier than a merger. When you acquire, you know why you are acquiring and what you want. It is challenging and there is a lot to do, but actually it is easier than a merger.
This is particularly true when you have a merger of equals and two firms of similar size, scale and geographies. This is particularly true within operations in making sure that you are bringing together the best of both organisations to create a very inclusive operations strategy which considers the needs of the entire firm.
The importance of operations
The role of operations has changed as we have become reliant upon third party service providers. To be successful within operations one must develop relationships internally with different stakeholder groups and externally with third party service providers.
When you are clear about the relationships you have, it is about building out genuine global capacities of middle office, client reporting, data management and performance measurement.
You need to translate these capabilities into services that you deliver globally in a consistent, scalable and efficient way.
"The role of operations has changed as we have become reliant upon third party service providers"
Between the merger announcement and taking up my role in August, I worked with the operations leaders to make sure we had a clear operations strategy.
Operations has a massive role to play in establishing and maintaining equilibrium within the firm. I say to the operations people that without clients and client assets to manage, we don’t have a job because all we are is an enabling function. We are dependent on winning and retaining assets, and client satisfaction.
We help power the investment management process. We must get the fund managers the right instruments and data in a timely manner, ensuring that the quality is as good as it can be.
We also have an important role from the global distribution perspective with getting clients on board, building operating models globally and getting involved in the product development process.
"We want to be a facilitator, but we have to be brave"
I bring the insights of a lot of our third-party service providers to our teams, whether they be fund management or product teams in the business. This is increasing all the time and I believe that we can help foster innovation within the organisation.
We want to be a facilitator, but we have to be brave. We should say when we can’t produce a client report within one working day of month end because we might have to wait for commentary from a fund manager.
We must be realistic and help to set some semblance of equilibrium in the firm so that we don’t have sales people who are going out promising the earth that we won’t be able to deliver.
Likewise, we must rein in some of our portfolio managers who would love to include some esoteric, derivative-type instrument in a daily priced fund on which it may be difficult to get a daily unit price.
We don’t want to say no all the time, but we do want to take an element of responsibility.
The role of outsourcing
Both organisations were heavily outsourced in terms of their overall operating models. Both Aberdeen and Standard Life outsourced around 2003. The operation functions in both organisations have almost reinvented themselves.
It was quite refreshing not to have to contemplate dealing with in house fund administration because that was consigned to history a while ago within both organisations.
I did have to consider how we structure ourselves, within Operations at Aberdeen Standard Investments (ASI).
"The operation functions in both organisations have almost reinvented themselves"
We focus on the component parts comprising a global client operations function which is about investor services; strategic client operations; and a global information provision capability which in the old days would have been client reporting but today it is about data delivery and digital access.
We have the investment operations functions which are about performance measurement, and service design and innovation, which is about employing people who can have conversations with fund managers about their aims and asking how we should line up our service capabilities to support that.
We then check to see whether the market data, info service providers and ourselves are on top of whether people really are using Bloomberg terminals. We ensure that when we no longer need a benchmark that we have cancelled it rather than simply continuing to pay for unconsumed data.
We have also created a global private markets operations function. We know that real estate and private equity are different asset classes, but we are seeing more demand from clients to create diversified private market funds.
"We ensure that when we no longer need a benchmark that we have cancelled it rather than simply continuing to pay for unconsumed data"
We have a real estate, private equity, infrastructure and fund of hedge funds together in a single function, so we can identify whether there are any similarities across the operation.
Operational due diligence is clearly one aspect where you have overlap in terms of the disciplines across the different alternative asset classes.
Data management and middle office operations are utilities. They follow the life cycle of a trade out to the market and then ultimately the data coming back into the organisation overnight.
The process is about ensuring that trade gets to the third-party service provider where they settle and confirm. Then we get that data back from a middle office perspective.
"Data management and middle office operations are utilities"
We also deal with cash and everything else that you would expect in terms of market operations and making sure that markets are available.
We also have another utility which makes sure, from a first line defence perspective, we are operating consistently and that we get value from the rather large amount of money we pay our third-party service providers.
We need to ensure we have enablement, governance and control.
Another function is transformation and integration. In terms of strategy and business management, I have around 840 people in operations globally and the strategy of a business management function is about ensuring I know where these people are and how the headcount looks as we evolve and realise the benefits associated with the integration.
"We need to ensure we have enablement, governance and control"
On the day of the merger I was an overwhelmed operations director with multiple instances of Charles River and Markit Enterprise Data Management (EDM).
Although EDM may come with a consistent toolkit, you can use it and manipulate it in many different ways, the three instances in Aberdeen were all very different and the one from SLI was different again.
We had one trade manager each, three middle officer providers, three different providers of performance measurement services three different ways in which we produce client reporting, lots of custodians and fund accountants.
Pre-merger and as part of the due diligence, we identified the operating models for both organisations and came up with the To-Be operating model and future state ASI, which will be a single instance of Charles River.
We have thinkFolio and are working with the Quants team to look at whether they really need this or if they can shift onto Charles River.
"Pre-merger and as part of the due diligence, we identified the operating models for both organisations and came up with the To-Be operating model and future state ASI"
There is a difference in terms of the numbering convention on Charles River. Aberdeen was not eight versions behind SLI, they changed the numbering convention from what was 9.8 to the calendar year. We will have one single enterprise data hub in relation to Markit EDM, one route out to the market in terms of trade management and one route back.
We have a bit of competitive tension within the supply chain because we have a couple of custodians and fund accountants of our own volition. Looking at the institutional business, we can’t dictate who our clients use as custodians and fund accountants, so our operating model is agnostic.
But where you have your own choice you really do not want multiple or too many fund accountants and custodians if you can avoid it. For the UK business we will have single transfer agent.
A year of consolidation
2018 was the year of back office consolidation and we have just about broken through with consolidating the custody and fund accountant in the UK.
This was no mean feat and certainly a big achievement. We would have preferred to consolidate Charles River before we had hoovered up custody and fund accounting, but when you are faced with four instances of Markit EDM and are trying to work out how you are going to create single instances, it takes time.
From July 2019 we started the consolidation onto a single version of Charles River, which we will complete the end of the year.
In 2020 we will consolidate from three middle officer providers to a single one, and by the end of 2020 – we should be ready to go again. This would put us in a much better position as a consolidated organisation to contemplate further M&A type activity.
"We would have preferred to consolidate Charles River before we had hoovered up custody and fund accounting"
The Aberdeen operating model – with two middle office, performance and client reporting providers – was a consequence of the Scottish Widows Investment Partnership acquisition.
Aberdeen used Markit EDM to integrate the business at the Front end. The reality was that bringing the two organisations together was a merger from middle and back office of three firms: Standard Life Investments, Scottish Widows Investment Partnership and what was Aberdeen Asset Management.
In September we moved £11bn of AUM from a custody and fund administration perspective. We want to get to a point where we have got the £91 billion in our UK mutual funds business with a single provider of custody and fund administration.
"This is a massive opportunity to try and create a genuine global, scalable and operational platform that will be fit for the future"
On the 10th of December we will consolidate the Aberdeen and Standard Life Transfer Agency activity carried out by DST Systems. We will bring the two books together on to a single database with around 160,000 retail investors.
SLI launched unit trusts back in 1986 and we have had a valuation point of 7:30am for the best part of 32 years. Aberdeen has a valuation point of 12 noon. On the 10th of December, we will harmonise all valuation points at 12am, as well as bringing together practices like swinging single price and the application of dilution levy.
It is a big initiative and marks a significant end to the year. Not only have we broken through with consolidating all the custodian and fund accounting partners in the UK, but we will consolidate all of the transfer agency onto a single database. We are also changing the valuation points of quite a lot of funds.
It has been challenging but if you are excited by change and not frightened by a challenge, where else would you choose to be? This is a massive opportunity to try and create a genuine global, scalable and operational platform that will be fit for the future and that will drive future profitable growth for Aberdeen Standard Investments.
This article is taken from the research report Fund Technology, Data and Operations, Europe 2019. To download the full report click here.
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