Globalization Creates New Needs: Fund Companies Look for Tools to Adapt
June 12, 2006
WELLESLEY, Mass. - As U.S. mutual fund companies continue to globetrot in search of growth opportunities, they are increasingly looking to service providers to help them adapt.
"In a globalizing world, we're beginning to see so much we didn't know existed," said Taylor Bodman, a Boston-based partner with Brown Brothers Harriman. "It's expanding our horizons."
When fund executives look toward those horizons, they see vast opportunities, but also new competitors and regulatory systems they must learn to manage.
"It is folly to think we will have the intellectual capacity to deal with every site all around the world," said State Street Executive Vice President Peter Cherecwich's during a roundtable discussion at the National Investment Company Service Association's General Membership Meeting, held here last week.
So, while domestically, some companies may be looking to streamline their operations by partnering more closely with fewer service providers, (see related story on streamlining, page one) when doing business abroad, fund complexes are looking for as many tools as possible to win a competitive advantage.
For service companies looking to win some of that business, Cherecwich had this simple message: "You have to be in front."
"Service providers are facilitators," said Nancy Wolcott, chief operating officer of Wilmington, Del.-based PFPC. "It's a partnership, it's a trust game and we spend a lot of time working on it."
PFPC tries to ensure its staff has a truly well-rounded perspective. "One of the things we do is to move people every six months," Wolcott said. "It's one of those Walk a day in my shoes,' to [help them] truly understand."
By actually going to different locations, often employees see not only the differences, but the ways in which the methods to which they are accustomed might be adapted to another environment to capitalize on the economies of scale.
"All of a sudden, you see you can do it the same way," Wolcott said. "The idea exchange is extremely valuable."
The problem comes when local regulators get involved, or what Wolcott calls the "jurisdiction question."
"Dealing with one country is one thing, but to deal with six or seven," said Cherecwich, "we need to learn how to lobby as an industry in Europe."
Ideally, there would be a uniform system of processes and rules that apply the same in Idaho as in India as in Ireland, but that is not the case. For example, although they are both in the European Union, he noted, Germany and England have distinct regulations, while France has its own accounting system.
"We don't do French accounting, so we bought a Sunguard system," he said. And while the company may want a platform that can manage the French system, they also want a company that has experience with the system to guide them, he said.
Meanwhile, increased U.S. regulations and costs associated with compliance continue to drive companies off of American exchanges to competing markets, such as the German Boerse, the Nikkei in Japan, and even the emerging exchanges of South America and Eastern Europe, said Amrit Kanwal, senior managing director for Putnam Investments in Boston. Besides the 25% increase in compliance cost, he said, companies are deterred by the additional staff required. "You're talking about 10 people who didn't exist 10 years ago," Kanwal said.
Beyond acclimating to outside issues such as the regulatory environments, fund companies face several internal issues. "If you have an office in London and Luxembourg, how do you set up your local office operating model? It's not just fund accounting, it's how many trading desks," said Cherecwich.
"Just because it's right for us in the U.S., does that mean it's right for us in the London office? Or right for us on the continent?" Bodman added.
Despite the differences between offices, State Street uses its global operations to complement one another. When American employees go home for the day, workers in India pick up where they left off, reconciling trades. "The world is demanding information right now," Cherecwich said. "That said, we can't have everyone in Mumbai doing reconciliations."
Ernst & Young has employees in India working on mutual fund U.S. tax documents, said Robert F. Mulhall, a partner with the company.
Lower labor and operating costs add to the advantage of working the global clock, he said, but "it's not just a cost play. It's another pool of educated people."
However, for service providers, opening offices abroad doesn't always make sense, Wolcott said. "If you're doing it as a pure cost play, unless you have numbers [of employees] in the thousands, it's not worth it," she said. "We still have places right here in America," she said, citing Idaho and Montana as American outposts with low overhead and ample resources.