As fund managers move away from the sale of linear asset classes such as equity funds, bond funds and alternatives funds in favour of outcome-orientated “solutions” products, they are also reevaluating the corporate structure of their businesses.
Partly driven by customer demand and partly driven by regulatory changes, the way that fund firms trade fixed income and foreign exchange is radically altering, with firms seeking integrated systems and a workforce that understands that investors are seeking predictable returns and visible transactions.
For trading teams, this phenomenon is starting to filter down in the form of integrated dealing desks, multi-asset execution management systems and top-down execution analytics. As a result, the way the buy-side trades bonds is also beginning to change.
In Asia, this story is leading to an overhaul of how institutional dealing desks manage trades and counterparty relationships. Among those organisations embracing the current wave of changes is Eastspring Investments.
Eastspring – the Asian fund management subsidiary of UK insurer Prudential – established in Singapore in 1994. It has some £86.6 billion in funds under management for institutional and retail clients.
Richard Coulstock, head of dealing at Eastspring Investments, has been managing the integration process at Eastspring and observing the wider trends throughout the industry.
He says: “Whereas, historically, fixed income trading has long been embedded within the fixed income fund management team, rather than on a multi-asset desk, this is gradually changing. There has been no big bang in this process over the past 12 months but rather, a slow adjustment has been happening.”
The “equitisation” of foreign exchange and fixed income is partly a consequence of global regulators imposing stricter capital rules on banks and reforms to the global derivatives market.
It has meant that the buy-side has had to make widespread changes to how institutional dealing desks manage counterparty relationships.
Coulstock says: “Equity dealers are used to a world of change, a world of measurement, a world of being beaten up by compliance departments faced with ever greater regulatory scrutiny. This is increasingly happening in the less transparent markets of foreign exchange and fixed income.”
However, Coulstock warns that this will have consequences, specifically around whether or not staff are adequately trained to handle an expanded job role and whether or not they have the right tools to cope.
He explains: “Sizeable managers may be fortunate enough to have experienced dealers in each asset class. However, not every manager will have that luxury.
“Trading a bond or currency is very different from trading an equity. As a result, for some managers it may be the case that equity dealers are taking on fixed income trading roles from portfolio managers, in which case new skills will have to be learned.
“For existing bond dealers moving to a multi-asset desk, new skills will be required as they move to a more equity style mentality in terms of trading electronically and having performance more closely-scrutinised.”
Of course, any sort of seismic shift of this nature needs dealing teams to evaluate their systems as to whether their EMS has multi-asset capabilities, whether new systems need to be built for forex and bond trading workflows and whether the current approach to measuring execution performance is adequate.
Coulstock says while all this is true, there is a big plus in that the increased use of electronic platforms in non-equities makes it easier to train dealers in the execution of different asset classes.
He says: “On the electronic side, there can be some concern about the number of platforms a team may need on their desktops to electronically trade across asset classes. Each system requires IT time, training time and possibly new connections with counterparties.
“However, increasingly order and execution management systems are embedding such tools into their blotters, making the process far more efficient and helping towards the cross-asset class trading potential for buy-side dealers.
Globally, the growth in popularity of electronic trading of bonds has seen numerous new trading venues pop up leading to greater competition for deal flow.
While the large banks are expected to be present in the future – albeit in a lesser role than in the past – it is the new market entrants, which are influencing the behaviour of multi-asset desks on the buy-side.
Coulstock says the increase in electronic trading may provide an opportunity to revisit how broker relationships are managed.
He explains: “If we consider that at just one brokerage on the equity side there will be senior touchpoints in cash, program and electronic trading. Add onto that facilitation and perhaps a regional head of execution and three or four senior sales traders across Asia and you quickly come to nine important contacts with just one counterparty… in just one asset class.
“Multiply that by the number of equity brokers you use then add on execution only partners, vendors and transaction cost analysis vendors and the number of potential meetings over a year is astonishing. That is before you look at non-equity relationships.
“We are now preparing for the possibility in the long term that we could have one electronic touchpoint covering all asset classes.”
Eastspring’s dealing boss says that brokers’ legacy structures of having multiple people responsible for different asset classes can make multi-asset trading tricky and the buy-side needs to take the time to work through that with their trading partners in the interests of investors.
He says: “Compounding the problem of multiple touchpoints with each counterparty is that brokers tend to be highly siloed across asset classes, which can be problematic in terms of doing multi-asset trading reviews. Breaking through these silos is a challenge, but perhaps on that increased electronic trading can help alleviate.
“All the changes should follow a simple philosophy aimed at producing the best results for clients and the continued development of the overall dealing team. In both cases it is crucial to increase trading autonomy and improve performance against agreed benchmarks, raising the profile of the desk within the company and the wider investment industry.
“The focus will need to be on quality, not quantity. Asset managers will need to seriously think about how they conduct reviews and arrange meeting schedules with each counterparty to ensure diaries are not flooded with repetitive meetings adding little value.”