Nottingham's Meadows Talks Up Consolidation
March 12, 2012
Kip Meadows is the founder and acting chairman of Nottingham Investment Administration, which services more than $25 billion in assets for mutual funds and asset managers. As CEO, Meadows assists clients with the formation of new funds and improving the efficiencies of the foundations, endowments and government investment pools that it serves.
Meadows founded The Nottingham Company on the basis of investment advisors needs for an efficient way to pool their separately managed accounts together. He has been directing the growth and technological advancements of the company ever since.
Meadows recently shared his thoughts with Money Management Executive on the shrinking fund administration field and hedge funds' gravitation towards the mutual fund business.
Q. Why do you feel there will be more consolidation in the fund administration space?
A. Post Madoff and Stanford, and with Dodd-Frank and other regulations looming, a number of professional investors have become more "due diligence" focused. A question we often ask is "what are the assets under administration in your firm?" With some organizations, there is a tendency to assume that bigger means better. Of course, there are plenty of examples that demonstrate that's not always the case. Nonetheless, we have to be sensitive to the market dynamics of our business.
Q. How will increasing regulation and new technology force smaller fund administrators to start banding together?
A. Investment funds (both mutual funds and hedge funds) are outsourcing more of their functions, motivated party by a heightened focus on compliance and partly by pure economics (it's often cheaper). Systems that are capable of generating compliance reports, diversification tests, other pre- and post-trade compliance criteria are expensive to build and maintain. But while the fixed cost is high fixed cost, the marginal cost of on-boarding new funds is relatively low. Therefore the more funds and assets you put on systems the less expensive it becomes as a percentage of assets under administration, hence more profitability in a very thin margin business. Scale makes sense especially when looking at large technology investments. Single managers can rarely achieve the needed scale.
Q. Do you think the migration of long-only mutual fund managers to hedge funds will continue? If so, why?
A. What we are seeing is actually just the opposite. More hedge funds are considering the enhanced marketing channels available to them in the mutual fund world, and with the regulation of hedge funds increasing and likely to continue to do so, the reasons for opening a hedge fund instead of a mutual fund are no longer as compelling. We expect to see more hedge funds convert to publicly available mutual funds.
Q. What is driving the demand for new alternative investment products?
A. The need for alpha. Investors are using ETFs to track market indices and to participate in the broader market moves. They then build out their portfolios with alternative products that offer non-correlated return. At the end of the day, the hope is to create an overall portfolio with sufficient alpha to meet the return assumptions.
Q. What is the fastest growing alternative investment?
A. There may be statistical data on this somewhere, which we do not have. Based on our (business) and on the inquiries we're fielding, there is a higher percentage of real estate related funds being discussed, and there are a number of insurance related structures that firms are considering.
Q. What is the common theme among investment managers looking to launch a new fund?
A. Efficiency of managing one or a small number of pooled investment funds versus maintaining a much larger number of separately managed accounts. There is also interest in accessing markets that separately managed accounts cannot serve, like the substantial pool of investment dollars in accounts under $500,000.
Q. Do you think a great many more firms will be taking the plunge when it comes to actively managed ETFs? Or will 2012 be another "wait and see" year?
A. An excellent question, and one we are currently researching ourselves. I believe 2012 will be less wait and see (more filings moving in the direction of offering a product) but the bigger move will probably be in 2013 or later.
Q. What was the motivation behind your fund administration and fund launch predictions for 2012? Is this something Nottingham does every year?
A. It's always fun to speculate about the future and of course as part of our planning process we need to have a view as to where the industry is going. We put some of these thoughts on paper a few years ago. A few journalists saw what we were doing and called, which was enjoyable, so we have done it every year since. Nothing magical, just a chance to offer unsolicited opinion on things I suppose.
Q. Any predictions for 2013 perhaps?
A. A presidential election can have a big impact on the investment markets, both in sentiment and in direction of regulation.
So 2013 will likely bring a lot of change in one direction or another, which should come into focus in November and December 2012 (and afterwards).