Frenetic pace the norm in operations departments

As money managers look to increase assets under management, their operations departments are scrambling to keep up with the growth so investment performance doesn't suffer from weaknesses in execution, processing or reporting.

At the same time, chief operating officers are trying to ensure that portfolio managers and traders don't run into problems getting investment ideas implemented or trades done.

All this activity is taking place in an environment of increasing compliance and regulatory requirements as well as the growth in use of automation.

"For us, growth … is key," said Barb McKenzie, chief operating officer at Principal Global Investors, Des Moines, Iowa. "It's a great place to be, but it is very challenging as we move into other types of asset management, with different security types than we're used to."

A prime example, she said, was fixed-income derivatives, where "there are so many opportunities to add alpha for clients but you have to stay focused all the time to be able to service what (portfolio managers) want to buy."

So one of her main goals is to make sure fund managers and traders are not distracted by operational hiccups, which can eventually hit performance.

"No. 1 is to make sure we've got a reliable (operating) environment," added J. Scott Fox, vice chairman and chief operating officer of ING Investment Management, Hartford, Conn., listing functions such as internal control, business continuity, back-office systems and client reporting.

"No. 2 is to provide applications that can help make the difference with the investment product" to help grow the business and increase assets under management, Mr. Fox added.

Joan Binstock, chief operating officer at Jersey City, N.J.-based Lord, Abbett & Co., agreed that keeping the wheels of portfolio managers and traders greased, as well as building systems that are scalable, or easily expandable, are the two paramount functions of operations.

"It's more the norm that people in my position are paid to not just get it down, but to invest in operations because if you want to build for scale, you have to invest," she said. "You can't just Band-Aid everything every time something new happens.

She also said a key goal in the operations side of the business is enhancing transparency, not only of trades as they move from portfolio manager to trader to marketplace and through the middle and back offices, but also the transparency of accounts.

Two options are typically available to address the operations needs of asset managers — building functions internally or outsourcing — and COOs agree they prefer to build functions that are closer to portfolio managers and clients, and outsource functions that are more processing oriented.

Mr. Fox at ING said the firm tends to focus more on investing in "processes that are absolutely core to our business or core to our reputation," citing trade attribution and fixed-income reporting among such functions.

At Principal, Ms. McKenzie and other executives "have a lot of those discussions" about what can be outsourced and what should be built.

"Our big theme is what do we think we do well, what are our core competencies, and that relates back to making sure our clients are happy," she explained. "With those thoughts in mind, it's pretty easy to get to the decision to outsource."

She said Principal outsources functions like its transfer agency and is considering outsourcing administration of its wrap fee business.

Robert Fawls, managing partner at Basis Point Group LLC, Boston, a firm that advises investment managers, banks and brokerage firms on operations, said one of the problems with operations is that many COOs are driven by fear, with no way to measure the success or strength of their operations.

"I can measure risk on the outbound side — how much risk are you taking specifically in my account," he added. "You can look at style drift and you can look at how close your accounts within a style deviate from the average.

"You want the same kinds of measurements in operations."