Clouds hang over outsourcing

A cloud hangs over the business of providing outsourcing services for fund managers, following the decision by Macquarie Portfolio Services to close its wholesale outsourcing division.

Macquarie's first client, Over 50s Investment Group, has switched its administration services contract to State Trustees. The move by Macquarie follows the move by the biggest player in the market, BT Portfolio Services, to sell its custodian outsourcing business to Chase Manhattan a few months ago.

Macquarie Bank executive director Bruce Perry says the decision to shut the wholesale outsourcing division was taken in early 2000 and it has taken a number of months to transfer the records of members.

Perry says one of the problems the bank discovered with wholesale outsourcing was each client wanted a customised service.

"This meant we had to come up with a complete system for each client, so we learnt the business was highly customised," he says.

Economies of scale was another problem as the Australian fund management industry is not big enough to develop this area of complete outsourcing.

BT Portfolio Services says it is transferring most of its funds management customers to the Chase Manhattan to "concentrate on the wrap service".

BT and Macquarie both embarked on a push into providing back office outsourcing services to fund managers about three years ago. The rationale behind the business was that both groups already provided administration services for their own substantial funds management groups and could easily transfer that expertise onto other managers.

BT signed up a number of smaller fund managers to the service including Deutsche Funds Management, Credit Suisse and Fran Russell. The biggest fund manager to outsource its back office requirement was Rothschild who signed a deal with Perpetual Trustees about two years ago.

Like BT Portfolio Services, Macquarie says it will concentrate its efforts of its wrap service, especially to financial planners.

Over 50s was Macquarie's biggest client and Macquarie had about six other clients. Perry says the remaining clients will gradually be transferred to other outsourcers during next year. When it outsorced to Macquarie three years ago,

Over 50s said it would save about $8 million n head office costs, however, the society did have $1.5 billion of funds under management.

Rehak says the move to State Trustees will result in further savings of administration costs which will be passed onto the members. State Trustees have been given a three-year contract to handle the outsourcing of Over 50s administration.

In a separate move, Over 50s has sold its Collins Street building for $20 million.

The building houses the FPA and high profile financial planner Kevin Bailey among its tenants.

Rehak says is the sale was "well in excess" of book value and allows the society to be cashed up ready for its demutualisation in February next year.