Outsourcing middle office activities such as processing transactions made by asset managers’ front offices is the biggest growth market in the asset servicing business, according to State Street’s Dick Taggart. ‘We want to become the Amazon of asset management outsourcing’, he told Investment Officer.
Taggart leads the expansion efforts of State Street’s open architecture investment and data analytics platform State Street Alpha, which is a result of the firm’s acquisition of investment software provider Charles River Development in 2018. The platform competes with similar services such as Blackrock’s Aladdin and Bloomberg. ‘But our competitive edge has always been that we can provide synergy between the middle and back office services. Now that we own Charles River, we can also engineer how the platform works with the front office.’
And this is where the open architecture element kicks in. While an asset manager can decide to outsource their middle and back office activities to State Street, it can still continue to use data analytics programmes of different providers. An example of this is the deal with M&G that State Street announced earlier this month. The UK asset manager will extend its current fund accounting and custody services for the wholesale fund ranges to include middle office services such as portfolio services, cash reporting and transaction management. State Street will perform these services largely relying upon BlackRock’s Aladdin platform.
European growth opportunities
Taggart sees huge growth opportunities in especially middle office outsourcing. ‘At this moment perhaps 30% of asset managers have outsourced their middle office, but we believe this can grow to at least 50%.’ State Street’s middle office clients are currently mostly US-based asset managers such as Pimco and Morgan Stanley. European clients include AXA IM, Allianz GI and Deutsche AM. ‘These asset managers tend to be large global players that have often grown through acquisitions. As a consequence they tend to have a sophisticated and complex infrastructure. They can clean this up by outsourcing it to us,’ says Taggart.
Taggart estimates asset managers can on average save about 10-15% in costs by outsourcing their middle office to State Street given their economies of scale. The firm declines to reveal the margins it makes on these activities. ‘We don’t report the margins for our separate business lines,’ says Taggart.
State Street expects to grow its services through State Street Alpha in Europe especially, also by expanding beyond asset managers to other institutional asset owners such as pension funds. ‘At the moment, 95% of our clients are asset managers,’ notes Taggart.
Pandemic accelerates growth
These growth ambitions are being accelerated by the coronavirus pandemic, according to Taggart. ‘The pressures of the pandemic have stimulated asset managers to start to think differently about resiliency,’ he says. ‘They now ask themselves whether they can continue to afford running their own operations. CIOs and CFOs call us up saying asking to take some of this out of their hands.’
He adds: ‘These people have become more focused on the question what they want to invest in and how they want to spend their management time. They are realising that infrastructure is not differentiating. Instead these firms are saying they want to focus on where they can add value. As a consequence, our pipeline of new clients has expanded significantly.’
Taggart declines to provide further details on this, but notes that ‘on average deals take 18-24 months to be implemented from start to finish’. It could therefore still take some time until we see how much the pandemic has really accelerated things. The recently announced M&G deal had, for example, already been initiated before the pandemic.