Fund Administration: Outsourcing Perspective

Investors evaluate mutual funds based on the fund managers who run these funds. Over the years the tons of regulatory work and the increase in analytical activities to counter the turbulence of the stock markets has resulted in stretching the physical limits of these managers. Apart from the analyzing the data, a huge amount of the work related to fetching the data for analysis, preparing the reports for auditors, calculation of the NAV etc., have been considered for outsourcing.  Time is one of the key factors necessary to study and optimize the performance of these funds in the market. Outsourcing, helps these managers to utilize the time lost in administrative tasks and thus visionaries of many financial firms have been considering fund administration as a worthy candidate for outsourcing. However, outsourcing is a double edged sword and care should be taken as the onus of the quality of  ones business falls to a large extent on the firm that takes up this outsourcing job.

Activities involved in Fund Administration:

The main activities involved in the life cycle of the fund are:

• Gathering assets and
• Managing the assets and deciding on how to spend the money.

Many fund managers consider tasks that does not fall into one of the two categories as a candidate for outsourcing. According to an article on wikipedia, “Fund administration is name given to the set of activities that are carried out in support of the actual process of running a collective investment scheme, whether the scheme is a traditional mutual fund, a hedge fund, Pension fund, unit trust or something in between”. Many KPOs such as S.G. Analytics provide the following services with Fund Adminstation:

• Calculation of the Net Asset Value (NAV) including the calculation of the funds income and expense accruals
• Corporate actions and cash reconciliations
• Daily accounting, recording and maintenance of all investment activities including multi currency accounts

The above list is just a summary of the task involved in Fund Adminstration.

Security Issues:

There are a huge number of security issues while outsourcing a financial activity which was summarized neatly in the blog post titled, “Outsourcing Financial Activities”. An important point mentioned by the blogger is, “Security issues are vital and should be given ample thought and time during the discussions. Financial activities form the keystone for the success of a company, hence look out for certification such as ISO 27001″. This certification thus becomes necessary while looking out for candidates worthy of outsourcing any financial activities.

Sovereign Wealth Funds: Funds that hold the wealth of nations

Over the years a good amount fund administration activities by financial analysts has been centered around Sovereign Wealth Funds (SWF). According to this article on SWF, the first SWF was a commodity SWF created in 1953 of the Kuwait Investment Authority from the oil revenues before Kuwait gained independence from Great Britain. However, the term Sovereign Wealth Fund was first used in an article entitled, ‘Who holds the wealth of nations?‘, by Andrew Rozanov.

Sovereign Wealth Fund Size

Where does this money come from?

The foreign reserves of countries are typically in dollars, euros, or yen. However when a country accumulates more reserves than it feels isnecessary for immediate purposes, it usually creates a sovereign fund to manage those resources. Some countries such as Kuwait and the United Arab Emirates (UAE) have created SWFs to diversify their revenue streams as their revenue streams rely heavily on oil exports and are vulnerable ups and downs of the oil market. The SWFs thus is used as a shield by these countries against oil-related risks. According to this article in investopedia, “The amount of money in these SWF is substantial. As of May 2007, the UAE’s fund was worth more than $875 billion.  Still, the holdings of such funds remain quite concentrated and seems to follow the 80-20 rule as with the top five funds are accountable for about 70 percent of total assets in SWFs.

What is the future of SWFs?

The future of the SWFs is summarized beautifully by Simon Johnson, the Economic Counsellor and Director of the IMF’s Research Department, in his article, The Rise of Sovereign Wealth Funds. According to this article, “Sovereign wealth funds are major state-owned players of the 21st century. Hedge funds, while becoming more prominent in this century, are in some sense a throwback to the end of the 19th century, when large pools of private capital moved around the world with unregulated ease—and generally contributed to a long global boom, rapid productivity growth around the world, and a fair number of crises. What happens when the 21st-century state meets the 19th-century private sector? The outcome remains to be seen.”