Australian investment managers are some of the most receptive to the idea of outsourcing their trading function, according to recent data from Northern Trust.
In a survey of 300 global asset managers that aimed to assess trends in asset management, nearly 40 per cent of Australia-based respondents who have not yet adopted outsourcing said they would consider it.
“While cost considerations were a focus for half of Australian survey respondents, there is a growing realisation among managers that there are viable alternatives to increasing alpha beyond cost cutting,” Northern Trust’s APAC head of brokerage, Robert Arnott, said.
Local managers are eyeing several asset classes for expansion. Nearly 73 per cent were looking at digital assets, 64 per cent were interested in private equity, and another 64 per cent were focusing on real estate.
“But expanding into new asset classes often comes with a price: increased complexity,” Arnott said.
As such, local managers may lack the expertise required for executing trades with optimal effectiveness and efficiency when entering new markets.
Northern Trust’s head of client solutions for global banking and markets, Gerard Walsh, said that expanding services into new markets is first and foremost a “knowledge-based challenge”.
“It takes deep expertise to plan and develop a new market entry and skill to implement the plan,” Walsh told InvestorDaily.
He noted that investment managers are increasingly focused on two things: gathering and managing assets and managing those assets for a return.
“That, in turn, means they are open to other sources of knowledge and expertise to deliver other elements of the lifecycle of an investment decision, especially those that can best be sourced from providers like us at a variable cost,” Walsh said.
“Trading is one of those areas.”
Expounding on this, Arnott said that outsourced trading providers offer global capabilities with extensive expertise and resources. This includes local market knowledge and cross-asset class proficiency, which can be crucial for firms entering regional markets for the first time.
“For instance, for a firm entering markets in Asia for the first time, a global provider can offer expertise in local market trading and settlement to help with activities such as trade oversight and foreign exchange execution at a low variable cost,” Arnott said.
Another reason why Australian managers may be more amenable to an outsourced relationship, Walsh added, is a “correct identification of the value proposition”.
“Managers earn a return from expert asset management and it’s not always clear, or indeed true, that trading by the manager itself needs to be a part of that value proposition,” he said.
“It may be possible and plausible to achieve a better all-round trading outcome by passing orders over to an outsourced desk that has scale and scope, access to broad liquidity including unique pools of liquidity and expert people, resources, systems and technology.”
