Top 10 emerging trends in Ireland’s funds industry
Ireland is set to retain its dominant position as a European funds domicile
Large fund managers have hired significant teams of data scientists to analyse and seek trends in a wide range of data sets.
There are many current and emerging trends in the funds industry. We take a look at the top 10 that are expected in 2019.
The regulatory burden has increased substantially for the funds industry and has ultimately led to the emergence of RegTech. Risk monitoring needs to be executed efficiently and in a demonstrable way. In addition, the level of risk reporting to regulatory bodies is substantial. A reliance on old, XL-based systems is no longer feasible, and hedge funds and administrators are looking for new RegTech solutions that allow them to meet the regulatory requirements in an efficient manner. This has created a substantial opportunity for Ireland and many new, exciting RegTech start-ups have emerged in recent years. The challenge for 2019 will be to capitalise on this emerging cluster, and to firmly position Ireland as a market-leading location for RegTech in the funds space.
2: Data analytics and data science
Data science has many potential uses, but one area where it has already made an impact is in proprietary investment research. Large fund managers have hired significant teams of data scientists to analyse and seek trends in a wide range of data sets, ranging from car-park occupancy in supermarkets to keyword mentions on social media platforms. Irish firms such as Eagle Alpha are at the centre of this trend, providing software tools used by fund managers to analyse data.
3: Nearshoring and regionalisation
These are accelerating trends, as regional locations in Ireland are becoming increasingly attractive to both Irish and international funds companies. The advantages are clear: access to a talented and motivated workforce; access to national and international transport; and a benign business environment. Northern Trust is now one of the most important employers in Limerick, as is State Street in Kilkenny. Meanwhile, companies Carne and Centaur have set up offices in Kilkenny and Maynooth respectively in the past 18 months. (Billy Hanley, senior development advisor at Enterprise Ireland)
4: Ireland to retain its dominant position as a European funds domicile
Ireland looks set to continue to retain its dominant position within the European investment funds industry. With continued growth throughout 2018, the assets under management of Irish funds have reached yet another record level and stand at €2.5 trillion as of last September. Irish funds are distributed in more than 80 countries worldwide and there are more than 463 fund promoters across Europe, the United States, Asia, the Middle East, Africa and South America that have established funds in Ireland. Net sales into Irish funds have continued to grow.
5: Increased transparency and investor protection
Investors continue to seek greater transparency and measures designed to protect their interests. Irish funds are very popular among such investors as they are heavily regulated by the Central Bank. We see managers provide enhanced transparency as a reaction to investor demand without being compelled to from a regulatory perspective. However, by their very nature, Irish funds are subject to a high level of regulation. Generally this regulation comes from European legislation and the Central Bank. As a result of Brexit, the role of the European Securities and Markets Authority (ESMA) is being enhanced and there is the emergence of a new European financial services regime. The UK has in the past generally been aligned to Ireland’s positions in relation to financial services legislation and our largest ally is potentially about to leave the European Union. This could cause issues for Ireland and lead to a weakening of our negotiation powers within the EU and its potential impact on the Irish funds industry needs to be considered carefully.
6: Increased costs
Due to the high level of regulation, the costs of operating a fund are constantly increasing. While investors welcome enhanced protection and transparency, they are also investing to make a profit and the rising level of costs impacts on returns. New regulatory changes therefore must be considered necessary and not simply the result of additional administration in order to be welcomed by the investors that it is seeking to protect.
7: Increasing number of socially aware funds
We are seeing more socially aware investors, in particular from millennials, which has resulted in an increase in the number of funds created with investment policies that have environmental, social and governance (ESG) mandate investors. We have launched a number of ESG funds which have developed systems that monitor and track the energy consumption of listed companies and will only invest in companies that exercise resource constraint, others that monitor environmental performance, in addition to monitoring their financial performance. We think that ESG investing will continue to increase and remains popular with investors. (Gayle Bowen, investment funds partner and head of office at Pinsent Masons)
8: Increase of the outsource model
We expect to see an increasing number of global managers either initiate or continue increasing their outsourcing activities as the demands placed on chief financial officers and their teams continue to grow, such as regulatory and investor-specific reporting. We do not see this trend being restricted to the back office, as we are increasingly discussing with private-equity houses the option of outsourcing parts of the middle office, which traditionally has been very much an in-house area (functions such as treasury management and some investor relations processes). As Ireland is one of the most popular global jurisdictions for funds, its fund industry is well placed to grow along with this trend.
9: Growing presence of management companies (ManCos) in Ireland
This is clearly a consequence of Brexit, but also reflects a more global trend, particularly North American managers setting up their own structures in Europe as the search for yield opportunities continues to globalise. With Brexit uncertainties and risk surrounding London, Ireland and Luxembourg are seeing an increasing number of new ManCo authorisations. In Ireland the large number of submissions currently working their way through the Central Bank’s authorisation process will come through in 2019 and will continue to offer opportunities further up the value chain than the traditional back-office administrative functions which have undergone a trend of outsourcing to lower-cost locations in recent years.
10: Innovation of alternative lending products and platforms
Whilst not new, fintech innovation and, in particular, the evolution and growth of alternative lending products will continue apace with the promise of becoming accessible to a more diverse base on both the investor and borrower sides. This will facilitate greater capital flows and allocations to this sector. The exciting thing is that much of this innovation is coming from Ireland and the pace of new products, in line with new technologies, is greater than ever and as such there are many products we will see in a few years that are not even concepts at this stage. (Ross McCann, head of fund services Ireland at Alter Domus)