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Collective investment schemes gain traction among EAMs during pandemic thanks to cost cutting effect

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The COVID-19 pandemic has fuelled demand by external asset managers (EAMs) for setting up collective investment schemes, as these solutions enable EAMs to promote their brand and lower administrative efforts by being custodian-agnostic.

Industry participants have shared with Asian Private Banker that smaller EAMs are likely to be more affected in the pandemic lockdown than larger financial institutions, as they have limited resources and probably didn’t have plans for digitalising their operational processes prior to the pandemic.

Sascha Zehnter, head External Asset Managers, Asia Pacific at Credit Suisse, granted that the EAM industry experienced some turbulence with volatile markets in 1Q20, but contended that there have been several “bright spots” in EAMs’ operations.

Sascha Zehnter, Credit Suisse

“EAMs have rapidly increased technological adoption of digital platforms to accelerate their growth and communication with clients, and in tandem, we have seen an increased take-up of government tax incentives (13x and 13R) and digitalisation grants (MAS Digital Acceleration Grant),” Zehnter told Asian Private Banker.

Usually blessed with a simpler corporate structure compared to international banks, he said EAMs demonstrated a high level of agility and adaptability in terms of implementing new technology and processes and have generally proven to be resilient during the pandemic.

“Some have realised the operational advantages, in times of high client and market uncertainty, of running their own discretionary portfolio model versus advisory,” he added.

Collective investment schemes more popular
In particular, more EAMs have been adopting collective investment schemes — including Actively Managed Certificates (AMCs) and Private Label Funds (PLFs) — so as to simplify how investments are organised and managed, he said.

For instance, a PLF consolidates different underlying assets and client funds from various accounts and custodians into one investment vehicle, allowing EAMs to deal with custodians as a single interface.

“These solutions enable EAMs to promote their brand, establish a track record and lower administrative efforts and costs, including the burden of additional account openings during the pandemic,” he said.

By consolidating into one structure, administration costs and regulatory risks can be minimised as there is no need to transact across each account or custodian, and the risks and responsibilities are delegated to the fund manager, as opposed to managing individual investments across multiple client accounts and custodians separately.

Also, the need for overlapping account openings is reduced, which could be a lengthy process during the pandemic.

Externally, by pooling assets into a larger investment vehicle, EAM may gain access to more sophisticated institutional platforms and solutions and have the opportunity to attract investors of a larger scale.

As the AMC/PLF is usually labelled under its own name, with full discretion in deciding the investment strategy and fee structure, these structures can be promoted as an investment product manufactured by the EAM and the formal structure can provide an official track record on the EAMs’ investment strategies — which can be helpful if EAMs are interested in stepping into a more institutionalised and external investor-seeking business model.

Deeper EAM-custodian engagement
Zehnter said there has been an increase in EAM engagement with custodian banks, as EAMs seek guidance to navigate the current uncertainties in the investment landscape, such as the pandemic and the increased geopolitical tensions.
As a result, Credit Suisse has provided EAMs with more opportunities for advice and access to the bank’s investment experts.

As EAMs are ramping up their digital capabilities, Zehnter said the pandemic has prompted the team to digitise more processes, with a focus on investment advisors providing tailored advice, and timely and expert execution.

He provided an update on the collaboration with Privé in building a “next-generation” EAM wealth management solution that is independently operated by the fintech firm. “Our collaboration with Privé is progressing well. Our current focus is on enabling straight-through order management and execution for equities and we are concurrently working on enabling intraday data (positions, transactions and cash activities) on the platform,” said Zehnter.

“We are exploring opportunities around digital onboarding, investment suitability and product risk classification. In parallel, we keep enhancing our own digital private banking offering to introduce several self-service features.”

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