Outsourcing solutions: What does this look like in a post-COVID-19 landscape?
In today’s environment, it is critical for both asset managers and owners to push boundaries through collaboration and innovation. Efficiently outsourced and implemented solutions can save asset owners unnecessary costs and improve overall control.
In recent years, the move to outsourcing has gathered pace within financial services. By 2022, it is expected that 20% of investment managers with AUM greater than US$50 billion will outsource some portion of their trading desks1. This shift will only continue as the investment landscape faces the challenges of increased regulation, transparency, cost pressures and advancements in technology.
As fees continue to be squeezed - and asset owners require greater control, transparency and delivery - an outsourcing model can help firms meet these needs, often via creating a more innovative and tailored partnership approach.
Preparing for a post-coronavirus landscape
The coronavirus pandemic has provided further evidence that the outsourced model is effective and resilient. Today, the majority of individuals across the globe are challenged with the new normal – working from home. This new way of operating through remote working has added to the challenges that companies are facing. This includes cybersecurity, VPN capacities and volatile broadband speeds – all of which are pushing companies to critically evaluate their infrastructure and its ability to weather another COVID19-like storm.
The traditional approach to outsourcing would include active managers seeking a more efficient way of trading through outsourced implementation, or an institution with a multi-manager equity framework looking to outsource middle and back-office capabilities.
With the increased diversification of asset classes, the increasing potential for extreme market swings and the ongoing pressure on managers to reduce fees, the need for a more seamless and cost-efficient trading model has never been more imperative. An outsourced implementation model can - and has proven to - achieve the best pricing via a team of appropriately resourced, experienced traders that understand the nuances of portfolio trading and risk exposures. The result? Gaining on-demand trading capability without the cost and operational burden of establishing this function independently.
A forward-looking solution towards centralised efficiency
By combining the evolution of outsourcing with centralised implementation of the middle office and trading capabilities, the elimination of the complexities and high fees associated with a multi-manager fund model bodes well for asset owners, due to reducing overall costs.
As a global solutions provider, Russell Investments partners with active managers – using a model-based investment approach for equity investments on a centralised trading platform called Enhanced Portfolio Implementation (EPI). With assets totalling more than £55 billion and using over 100 active manager models and growing2, asset managers are able to utilise the EPI to limit transaction cost impact to performance, improve operational control and visibility – providing an overall benefit for asset owners. New active manager models are added proactively for EPI and are tailored directly to meet manager selection.
EPI: Greater control and cost efficiencies
EPI is Russell Investments’ proprietary implementation platform designed to access active equity management through advisory model portfolios implemented in a single segregated account, rather than multiple segregated or pooled accounts. Investment managers continue to be responsible for the investment strategy, asset allocation and stock selection. However, instead of implementing their trades, we ask each investment manager to submit a model portfolio to our EPI portfolio management team. These model portfolios are provided by the investment managers after the market close and represent the long-only trade date positioning of their portfolio.
The EPI team will then effectively manage a client’s single segregated account against the implementation benchmark of their active managers, much like an index tracking portfolio. Underlying manager models are updated and monitored whenever the investment manager trades, which in turn directly updates the EPI benchmark to ensure the portfolio is always benchmarked to the most current positioning of the active portfolio managers.
Active equity managers are still hired for their strategic investment insight and asset selection. We simply combine this with our speciality – centralised portfolio management and execution in an enhanced structure. Not only does this allow investors and managers to work in a much more efficient and controlled infrastructure, but it also affords much more flexibility to make active manager changes or portfolio updates.
Incorporating ESG factors requires flexibility
The need to incorporate Environmental, Social and Governance (ESG) factors into the investment decision-making process is being critical to investors. Russell Investments centralised EPI platform enables a client to have control in applying ESG factors to their portfolio. Once a common policy is agreed upon, it is efficiently expressed when implementing the portfolio directly in the single segregated account. In the majority of circumstances, no additional changes are needed with each investment manager, as these particular changes can be directly applied to the centralised EPI portfolio management process when constructing trades. The integration allows for specific exclusions such as controversial weapons, tobacco or screening of companies with the lowest ESG scores in the investment universe.
Additionally, the EPI platform enables the client to go beyond simple exclusions and implement considerations such as a reduction in the funds’ carbon footprint or exposure to fossil fuel reserves. This capability can be used to achieve targets such as a 25% reduction in carbon footprint. Our research-backed energy transition solutions can be leveraged off the shelf or tailored to the client’s sustainability objectives.
The bottom line
The drive to improve margins, reduce underlying fees and increase efficiency has always been important. As investors look to the future of operating in a post-pandemic environment the drive for increased efficiency and transparency, combined with more resilient platforms delivering lower costs and fees, will only become even more prevalent.
1 Opimas, Report: Asset Managers and Outsourcing the Trading Desk.
2 Russell Investments, data as at 31 March 2021.
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