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Half of Asset Manager Respondents to Citi Survey Plan to Outsource Valuation Function, 28% to Outsource Risk Management

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Back and middle office functions such as evaluated pricing for illiquid instruments, data management, corporate actions processing and risk management are all on the radar for potential outsourcing by asset managers over the next three years, according to a recent survey by Citi. The survey, which involved 237 asset managers from 29 countries, indicates that 28% of respondents have already outsourced the valuation of illiquid investments and 22% are planning to do so in the next three years.

Derivatives pricing and processing is an even more popular area for outsourcing, with 31% of respondents already having outsourced and 25% planning to do so by 2013. The decision to outsource the valuation of derivatives and illiquid instruments is likely driven by the desire to buy in specialist knowledge and increased transparency around the process of pricing. By outsourcing, asset managers can also gain vital efficiencies; as noted by one respondent: “Clients want fewer managers with better operational platforms that embody quality assurance.”

Investor services, including proxy voting, is also relatively high up on the list for outsourcing, with 38% having outsourced and 6% planning to do so in the next few years. The world of corporate actions processing is gradually becoming more automated and asset managers are seemingly keen to ensure they can keep pace with the increasing volumes of corporate actions events caused by a volatile economic environment; outsourcing is a logical step.

Less popular but also under the spotlight are risk management and data management. Although the vendor community has for some time been declaring the market ripe for outsourcing, the majority of the asset manager respondents to the Citi survey are not considering outsourcing their data management function. Only around 15% have already taken the step and 10% are considering the move over the next three years; not great news for the vendors in the space.

Risk management services are also on the radar for potential outsourcing, albeit with less of a presence than valuations. A marginal 8% of asset managers indicated they have already outsourced this function, with 20% indicating they were planning to outsource in the future.

The appetite for outsourcing in the risk management space is likely to have increased due to pressure from incoming regulatory reporting requirements around risk. The focus on Basel III and the spectre of enterprise risk management has meant that many in the financial services community are looking to outsourcing partners for assistance with functions they may never have before considered outsourcing such as risk.

One respondent to the Citi survey noted: “Outsourcing gives you operating leverage and quality assurance. It’s an external tool to influence the internal change.”

The survey was conducted in May this year and included respondents from asset managers with total assets of US$29.1 trillion. Survey participants included respondents from eight Asian countries, 15 European countries, three Middle Eastern countries, South Africa, Canada and the US.

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