Changing of the guard in the back office

Two years ago, the funds management back office outsourcing market was dominated by BT Portfolio Services and Perpetual Fund Services. Perpetual’s move to sell off its outsourcing business last month signals a major changing of the guard in the market. It is also a watershed for back office technology giant DST International. Stuart Engel investigates the new direction for DST now its dominance of the market has reached saturation point.

Last month's decision by Perpetual to offload its funds management back office outsourcing business to the Royal Bank of Canada marked another major turning point for the back office technology business.

The move signalled the end of Perpetual's two year campaign to build a back office outsourcing business. Perpetual entered the market just as BT's assault on he market was starting to hit its straps. BT had already snared the likes of Deutsche Funds Management, Ipac and Ord Minnett (check) and was in discussions with a number of fund managers looking to outsource back office functions.

BT's successes would no doubt have made DST International Australia's managing director Ian Matheson a little edgy. DST dominated the back office technology market through the Hi Portfolio system it acquired from Hi Portfolio Pty Ltd six year prior. BT was one of the few funds management groups not using the Hi-Portfolio software to power its investment and registry systems. The danger for DST was that some of their clients may move from using the Hi Portfolio system inhouse to adopting the BT system in an outsourced capacity.

DST made its own move into the outsourcing market through the joint venture with Perpetual which quickly established itself as a strong competitor to the BT offering. The joint venture picked up more than 20 clients, including Rothschild, Contango, Norwich Union/ Portfolio Partners and Ansett Superannuation.

BT sold its back office outsourcing business to JP Morgan Chase late last year. JP Morgan Chase already has an alliance with DST International and is likely to adopt the Hi Portfolio technology within the next year.

Last month, Perpetual joined BT in backing out of the outsourcing market, citing a strategy of concentrating on core businesses of wealth management and corporate trusts in light of a major review of operations. The move signals the beginning of a partnership with the Royal Bank of Canada subsidiary Royal Trust Global Security Services for DST.

Most clients of the Perpetual Fund Services have already agreed to move to the Royal Bank of Canada owned business, including Perpetual Investments and Rothschild, who told Money management it viewed the change in ownership as "a positive move".

"Perpetual has been in close contact throughout the sale process so we have been comfortable with the new owners since initial discussions took place," a Rothschild spokesperson said.

Royal Bank of Canada will manage the relationships for the outsourcing business, while DST provides the technology. DST has similar relationships in Australia with the National Australia Bank, the Commonwealth and JP Morgan Chase.

Managing director of DST International's Australian operations, Ian Matheson, says DST International's strategy has always been to act as the technology partner rather than controlling the entire outsourcing relationship, as its parent company, DST Systems, does in the US.

DST Systems is the world's largest financial services outsourcing business, providing the back office functions for more than 40 per cent of the US mutual fund industry. The NYSE listed technology giant has a market capitalisation of more than $12 billion and annual revenue of more than $2.5 billion, mostly generated from the US operations.

DST International's technology partner strategy has certainly paid dividends in the Australian market. So close has the group come to saturation of the Australian funds management back office market that Matheson says it is easier to name the groups who do not use its Hi Portfolio system than list those who do.

However, dominance does have its drawbacks. While constant changes to the taxation and superannuation laws means there is a constant stream of bolt-on upgrades for the system, maintaining strong revenue growth is difficult if there are only a small pool of potential customers who do not already use the technology.

Due to its saturation of the market, about two years ago DST International embarked on a strategy to diversify its technology offering to the financial services industry. While it remains committed to developing the Hi Portfolio system, the group has launched a number of other platforms which complement its existing offerings.

"We have always been strong on the institutional back office systems but I think the strongest growth over the next few years will come from systems aimed at the retail market and front and middle office functions," Matheson says.

Matheson says the financial planning industry is one of the markets the group is attempting to establish a beach-head. He says he hopes to sign a major dealer group to its recently launched Hi Wealth software within the next year.

But the group's highest hopes are pinned to its Hi Trust registry system acquired last year when the group bought the MaxTrak Technology business. The system, previously known as MaxTrust, has already been installed by the likes of Navigator, Vanguard and Equity Trustees.

Matheson says Hi Trust, which was developed by a number of former DST employees in Australia, fills a gap in the registry technology market.

"In the past, many companies have developed registry systems in-house or simply used spreadsheets. But the rapidly growing number of customers seeking managed funds and the increased demand for service from these customers, many fund managers are seeking a more sophisticated system to manage registry issues," he says.

"We are currently in discussion with a number of fund managers considering implementing the system and hope to make announcements in the near future."

Matheson says DST is responding to the push by investors for more choice and more information delivered in a more timely manner.

"Tools such as the Internet and straight through processing are allowing fund managers to deliver choice and information in a more timely and cost-efficient manner," he says.