(This article first appeared in the Q4 2020 issue of GlobalTrading.)
By Karen Zachary, CEO, CRUX Asset Management
CRUX Asset Management is a boutique FCA regulated Investment Manager established in 2014 with trading commencing in June 2015. The business commenced operations with just under £1bn of assets under management and currently runs £1.7bn of assets. Our principal investment strategies are European equities with two smaller strategies focussed on UK large and small cap. Our investors are predominantly UK based investing in our UCITS funds and comprise retail and institutional platforms, multi asset managers, discretionary and private wealth fund managers.
CRUX employs 18 permanent employees which includes five investment managers and five distribution focussed personnel. CRUX’s mission is to provide superior investment returns to its investors and its now well-known brand has been established to emphasise the overall objective of the business.
CRUX operates on a robust and well-established operating platform which it built throughout the first year of operations. As we reflect back on the size of the firm and assets we were to manage at the time, there was a clear direction of travel towards outsourcing in order to ensure that operating costs were well-managed and that operational risk was minimised, given the embryonic stage that the business was at. We also wanted to leverage the skills and operating platform capability that an established service provider could deliver. The level of outsourcing the business has in place has remained consistent and a key component of this model is the outsourcing of trade execution.
Outsourcing of trade execution has worked well for CRUX, particularly as a smaller business looking to minimise fixed overheads such as technology, data and personnel costs. To effectively manage and carry out our own trading, CRUX would need to have employed at least two trade execution staff with experience in investing in businesses across the market cap scale and across Europe, and the UK. Further as there is scope to invest outside Europe US markets expertise would also be required. This would be quite a challenge for a smaller business to resource and support financially. CRUX would also have had to invest in the systems and data architecture to effectively manage and control the execution process through multiple brokers and provide adequate reporting to clients in respect of best execution and MiFID transaction reporting.
MiFID II, which came into effect in early 2018, brought with it a number of challenges which were more financially and operationally damaging to smaller boutique investment firms than the bigger global household names. CRUX was able to leverage the support of our outsourcing partner at the time (a well-known US custodian bank) to support our business through unbundling of research and trading commission, the implementation of transaction reporting, and changes to the depth of knowledge needed to trade in the increasing number of trading venues, whilst monitoring dark pools in line with regulation.
If I were to discuss and conclude on the disadvantages of outsourced trading, then the focus is on the education of the fund managers who have worked with in-house traders in the past and enjoy the day-to-day direct contact and relationships they have with an in-house team. The fund managers will often say that the trader ‘knows’ them well and understands the relationships that exist with the broker community. Other than those key points and, like with all outsourced service providers, with the appropriate oversight and controls in place I believe there to be limited downside to outsourcing but it is important that the fund managers know their team at the provider nonetheless. Relationships are a crucial component to outsourcing and should not be disregarded nor should a complacent approach be adopted.
As far as a complementary advantage is concerned, then in my mind it is clear that the ability of the business to work with its outsourced service provider to ‘get to grips’ with current or forthcoming regulation is a fundamental advantage. Regulation changes every six months to one year in the environment in which we operate — why try to blaze trails, particularly when you are a smaller business operating in a large and very commercially competitive environment?
My final thoughts surround the COVID-19 pandemic and how we have managed to continue seamless operations throughout various lockdowns, part home/office working and the numerous technology-related issues that we have had to tackle. I must say that having the trade execution outsourced has removed countless operational, market and regulatory risk issues that could have arisen with the short notice we had to work with. Our current trade execution service provider was quick to act, had the technology and infrastructure readily available and a team large enough to continue operations without impact. Markets were extremely volatile and we as a business experienced some periodic investment performance knock-backs on our funds, nevertheless we could not blame this on equity execution issues. Our platform was stable and did not cause underlying issues with performance as a result of delays or errors on their behalf.
I speak at a few conferences each year on this topic and am relatively confident when I say that more and more managers will look to outsource. Initially the focus has been the smaller boutique managers outsourcing due to the need to mitigate risk and keep fixed costs as low as possible, without impacting regulatory compliance. Now I see that more larger institutional managers are reviewing their operating models and considering the move towards a greater level of outsourcing through their value chain. The only danger is that the outsourced service providers become complacent, the relationships we know so well deteriorate due to ‘too many clients syndrome’ and we come full circle back to ‘in house’. I would say and hope we are a good way from that yet though.