Will we ever see a managed funds hub?
TheAustralian Stock Exchange(ASX) announced in May it had dropped plans to develop FundConnect, its exploratory managed funds transaction hub, because of the risk of poor returns on its investment. At the time, the ASX said its decision was based on the issue of how long it would take for any hub in the market to reach a critical mass, risking unknown costs while waiting for a commercial return.
The decision left competitorsAusmaqand InvestmentLink leaders in the hub market, and the industry wondering what this could mean for the viability of an industry-wide transaction hub take-up.
AsMoney Managementreported last week, the MfundEC and SuperEC projects, designed to create standards and move the industry towards straight-through processing (STP), are to merge in an attempt to move them and the standards they have developed into an implementation and take-up phase.
It appears theInvestment and Financial Services Association(IFSA), theFinancial Planning Association(FPA) and theAssociation of Superannuation Funds of Australia(ASFA), which joined forces on the merger of the projects, see hope for the take-up of a hub and the associated cost savings.
ASX deputy managing director Angus Richards says there are definite gains to be made in terms of efficiency should a hub be taken up, but believes the problem is getting enough of the industry on board to make it viable.
“It is a question of getting critical mass. In these network systems, the benefit depends on the number of players,” Richards says.
“To align a critical mass of participants within a reasonable period of time was where we saw the major difficulties.”
Ausmaq chief executive Richard Burrows agrees that attaining critical mass is a major hurdle for STP.
“You have to get a critical mass of users. If you are the only person on a hub, all you can do is send messages to yourself,” Burrows says.
Richards says the inability to attain critical mass is because a lot of institutions, typically fund managers, have a tendency to sit on the fence, with each one waiting on the other to be first.
He says what is needed is for eight or 10 of the key institutions to come on board to encourage the rest of the industry to make the move.
InvestmentLink managing director Peter Phillip says the industry wants one process of adopting electronic commerce, where they are elevated together, because if they are first on they will not gain a benefit.
Though getting the first managers on board has been a problem, Richards says another issue is that there have been too many players purporting to offer some kind of similar hub service, and that left the market perplexed.
Phillip says there is a great business case for one hub, but not for two, given that duplicating the number of systems would increase the overall cost to the industry because of more expensive infrastructure.
Ausmaq chief executive Richard Burrows believes the withdrawal of the ASX’s FundConnect project has eliminated some of this ambiguity in the market.
He also says that getting into a hub is not a two-minute exercise, and there are a lot of considerations with regard to building interfaces and companies figuring out what to do to their own systems.
Therefore, much work needs to be done for full STP, according to Burrows, and the way to get around this is to take an incremental approach and do “the easy yards first”.
Phillip says that just because there is not much progress on the STP front does not mean it has stalled. He believes these things happen in phases and expects managers will start to invest this year.
And despite the absence of the ASX in the space, Richards says that ultimately it will have to be a response to cost pressures, and the lure of cost savings to be made by an electronic system that will get managers on board.
Phillips says that people expect electronic connectivity in every part of their life, and to suggest that it won’t happen in the managed funds industry is incorrect.
“The industry needs to do it for the common good, as long-term it will deliver huge savings,” Phillip says.
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