They say good things come to those who wait – but clearly not for investors if last years dramatic drop in new funds entering the market is anything to go by. According to Investment Adviser, the number of funds launched in 2017 slumped to a decade low.
Is this caused by stretched valuations across multiple asset classes, or simply a case of fund selectors waiting until the industry familiarises itself with the post-MIFID II world? While it is hard to pin point the exact reasons, the investment community shouldnt use this downturn as an excuse to brush the operational niggles that have hindered fund launches under the carpet. After all, Vanguards recent launch of two retirement funds for the young proves there is still a need to address these underlying problems today. A fund launch typically takes 6-8 months, but 2 months should be the target timeframe.
So what exactly are the challenges? Well, they essentially break down into two key areas – the use of outdated systems, with their associated manual processes, and the challenge of mapping and managing different fund fee structures, and account information. Take the problem of relying on old systems first. Typically, a large-scale fund generator will have anywhere between 50 and 100 different people involved in launching a fund. The challenge is that numerous elements go into each launch. These include defining the fund, its strategy and target demographic. Then there is marketing the launch, not to mention legal/regulatory administration, writing compliance disclosures, as well as planning the distribution strategy and setting the associated fee structures.
The trouble is that right now, too many of the major fund management houses have a very cumbersome way of gathering all this information together and maintaining it. Currently, data is compiled in multi-tab spreadsheets or 20-page long Word documents, which are then passed through many hands over email at various different stages of completeness. A fund launch is a non-linear process, with teams working in parallel on inter-dependant elements of the launch. For example, the disclosures cant be finalised until the fund strategy is approved, but preparation for both needs to occur in tandem. Think of all the headaches from the constant back and forth between the fund and legal teams working on any wording corrections, risk profile and share class validations, or escalations of issues.
Also keep in mind that every regional jurisdiction that an investment manager operates in will demand some unique fund launch processes. For any launch across multiple countries, workflow processes will need to include regional variations of similar steps.Once the launch preparation is complete, each department enters the information into their systems. If these arent integrated the interrelationships between the numerous data elements become disconnected, impairing operational efficiency when promoting and running the fund.
On the institutional side, fund generators need to match the plan sponsors and participants with the funds available. The difficulty is that the greater the variety of size among plan sponsors, the greater the number of fee structures. Pre-launch, the future information needs of plan sponsors, participants and registered investment advisors (RIAs) also need to be documented. This includes capturing relevant indices or benchmarks. Fund statistics, from Morning Star or Lipper, is one example. The allocation of dividends or impact of corporate actions, as notified by custodians, is another case.
For retail clients, fee structures are being squeezed while fund planning and launch is becoming more complex. Millennials are becoming far more investor savvy and want more insight into where their money is going. They do not want to pay upfront management fees, rather they want to pay based on performance. Investment managers need to document the key interactions and payment structures with their RIAs – who are responsible for selling their funds to the retail investor and smaller plan sponsor community. As part of the self-service expectations of todays plan participants, the allowable number of movements between funds adds to the mounting pre-launch check list.
Given the difficulties in linking differing fees and fund information to different accounts and the fact so many still operate on systems from a bygone era, how can investment administrators overcome these long-standing issues when launching new funds? The answer lies in housing all information relating to a fund launch in a central place and automating the fund launch processes via workflows with built in controls and checks. This way, investment administrators can ensure all activities and approvals can be streamlined much faster than through a spreadsheet or Word document. After all, these documents constantly need manually updating and are prone to version control issues.
Automating the fund launch process sets in motion operational efficiencies and reduces risks of errors from manual processes. On top of this, having everything in one place and feeding relevant information to sales, compliance, administration and finance from a common source reduces the chances of inadvertently selling an inappropriate product to a client. Some fund management firms are improving fund launch processes as part of changes to their client, account and product data management capabilities. These days it can be difficult to build a case for change without a pending regulation. However, the need to reduce inefficiency and accelerate fund launch processes can be a compelling element of a business case that also aims to modernize overall data management practices.
Despite the overall drop off in the rate of funds coming onto the market in last year, the major houses still typically launch between 50-100 new funds every year. These range from funds with a new strategy, a new share class, such as crypto currencies, or the merging of two funds.Those fund generators that embrace the new solutions available to them could find that the operational headaches surrounding fund launches may soon be a dim and distant memory.
Prashant Kumar is Senior VP at GoldenSource
By , Senior VP atGoldenSource
