Matt Pells, Product Manager, Funds Administration, explains that the firm works with four of the world’s five biggest custodian banks supporting their role as transfer agents.

“Our clients use our software to run their administration on behalf of fund managers,” he says. The firm also supports wealth managers and offers a front-end advice solution which supplies a digital platform for advisers.

Pells says: “Pre-Covid, on the transfer agency side of our business our clients were all about growing their business using a core registry that was resilient and scalable.

“Post-Covid, that focus switched from our clients who had achieved that scale and then needed to lower their costs and their risks so we were reaching out beyond the core registers, developing enabling technology and orchestration – business process modelling – that would enable clients to reduce their costs.”

Here, Pells reports one client reduced their operational overhead by 60 per cent.

However, clients wanted to reduce their risks as well and the firm created a financial messaging platform, Babel, which trades over a trillion a year, designed to take out the risk and cost element of trading.

The firm found that their clients also wanted to increase the digital experience of their clients, encouraging them to self-serve more, so the firm built new tools for end users, only to find that they struggled with digital adoption, so the next step was to work with clients to raise digital adoption across their clients.

“Change takes a little while to flow through,” Pells says, diplomatically, adding: “In financial services in particular, people are used to doing things in a particular way.”

Looking forward, Pells says that the firm’s clients are seeing new technological developments with new start-ups based on distributed ledger technology (DLT) systems and blockchain and new providers claiming they can use AI.

“Our clients are sitting up straight and saying ‘we will be left behind here’ so they are coming to us to ask what we are doing in this space.

“Fund managers are saying we want new products and a quicker time to market and our clients used to come to us and say, ‘can you support money market funds or hedge funds’? Now that has swivelled, and they ask for features such as ‘can you support liquidity management or performance fees because they recognise that investors are driving new products.

“It’s not an asset management type solution that they want, but a menu of features they can pick and choose from.”

Pells predicts that as the technology advances, there will be more collaboration as there will be no one solution from one firm so partnering will be more important particularly as new asset classes, such as crypto, appear and they want to go in as quickly as possible.”

The change is driven by new and better technology. “The impact of DLT will be huge and we will move to tokenisation in our business over time, but this is a long term play for the industry as a whole so near term solutions are vital,” Pells says.

His firm is taking its core registries and breaking them out into modules so that rather than three big systems, the firm has a set of modular solutions and in that process it is also mindful of the arrival of artificial intelligence (AI) in the industry.

“AI needs data and in the right format, so we have an eye on the future examining how we prepare that data model so that when AI comes along, we know how best it can consume that data. We are thinking about the future as we move towards it step by step.”

More than half of managers (54 per cent) are currently using AI within their investment strategies or asset class research and that enthusiasm continues to grow with 37 per cent planning to use (37 per cent) that technology in the future AI, according to a 2024 Mercer global investment manager survey.

Generative AI (Gen AI), which consultancy EY describes as “the new poster child of AI applications [and] promises to deliver superior performance while executing information search, retrieval and synthesis tasks on unstructured content, along with content generation capabilities”, is among the most likely AI to join asset manager toolboxes.

The Mercer research shows that 26 per cent of asset managers currently use Gen AI while 51 per cent plan to do so in the future.

This comes as no surprise to Oliver Johnson, chief revenue officer at SaaS provider SimCorp, who says Gen AI has multiple functions for the buyside.

“AI in investment management isn’t new; we’ve seen hedge funds using the technology to help them make investment decisions for years. The main difference now is the steps that Gen AI has taken. It ultimately makes that technology more accessible, enhances productivity and supports multiple aspects of asset management.”

Johnson says the buyside is ‘on an AI journey’ starting with what he describes as ‘conversational AI’ moving to incorporating the technology into more complex investment decision making.

“Conversational uses Gen AI to ask questions and improve productivity, but you rely on your users to have some skills in prompting the AI. An example there could be, ‘tell me my exposure by geography or by sector and what are the biggest contributors to my portfolio?’. The answers can help inform decision making.”

Johnson adds that Gen AI is also helping investment managers process the plethora of reports they receive from multiple sources into a consistent digestible format.

“Asset managers get a lot of analyst reports but they’re not very good at storing those in consistent formats. AI gives the ability to pull a research report from various sources, collating the data and providing a report, which makes life more efficient.”

Johnson says more managers are moving to using AI as an assistant where it can perform autonomous tasks.

“An example there is asking AI to create a block trade or transactions or rebalance the portfolio. It’s still human led, but the technology can take a task through multiple workflow steps.”

This is especially useful, Johnson says in private markets, where investors receive capital calls in myriad formats.

“If you’re a big pension fund with 200 private equity fund managers, every single week, they get different call and distribution notices coming into different formats. Machine learning can take that data, even if it’s in a different kind of format, and create a transaction in the platform. Again, it’s an efficiency step,” he says.

More recently, SimCorp has been focused on taking asset managers into the more advanced stage of AI, which Johnson calls an autonomous copilot.

“This is where AI collaborates with the users, it anticipates needs and it’s more proactive than reactive. Rather than asking the AI to rebalance the portfolio, it would detect a cash injection and suggest a simulation of three different ways that you could rebalance your portfolio,” he says

The Mercer survey reports that a quarter of managers report using AI to support investment decision-making, broadening inputs to investment risk-management frameworks (21 per cent), and portfolio construction and rebalancing (18 per cent).

For asset managers concerned such technology looks as if it is becoming a threat to jobs, Johnson argues that humans are still needed to make the ultimate rebalancing decision.

“We strongly believe that technology is not going to replace portfolio managers. Technology is going to make them way more efficient, but it’s still going to be the human at the end that makes the call.”

He continues: “We all thought a few years ago we wanted autonomous driving cars but that hasn’t happened. I think it’s something similar here. I don’t imagine we would ever be in a regulatory or a social place where we don’t want humans making the investment decisions, we just want to help them make better ones.”

The organisation writes that it is GBAM is a global organisation with boutique members across five continents. It comprises specialist asset management firms that share ideas to strengthen their presence in international markets. Ward and Ferraz have joined to add their experience into the mix across the network and increase the presence of both the Group and its constituents across the investment industry.

Andrew Ward has over 11 years of asset management experience following a 22-year career in the British Army. In 2012, Andrew Joined First State Investments from the British Army, where his last role was Commanding Officer of the Infantry Battle School. Andrew initially worked in the EMEA Distribution team of First State Investments, before being promoted to the Head of the Institutional Client Team for Stewart Investors (a separately branded division of First State Investments).  He was latterly the Chief of Staff of Stewart Investors, working across the business on a range of multi-disciplinary projects, before moving to Aubrey in January 2019.

In 2019, Ward joined Aubrey Capital Management from Stewart Investors, following a similar path by working across multiple areas of the business as Chief Operations Officer, Chief Compliance Officer and Director. He was promoted to Chief Executive Officer in March 2022. 

Charles Ferraz brings over 26 years of Brazilian and American asset management experience to GBAM, having worked in São Paulo, Miami and New York. Ferraz began his asset management journey at BankBoston in 1997. As Managing Partner, Ferraz oversaw the BankBoston Asset Management unit and managed approximately USD13 billion, roughly BRL27 billion in AUM as of 2006. 

Itaú acquired BankBoston in 2006, and Ferraz stayed within the business, working across the roles of Head of Investment Strategy at Itaú Private Bank (2006 – 2008), Chief Investment Officer at the Banco Itaú Europa International Miami Headquarters (2008 – 2010) and Chief Investment Officer at Itaú Private Bank Brazil (2010 – 2016). 

In August 2016, Ferraz assumed the role of Chief Executive Officer at Itaú USA Asset Management in New York responsible for the operations and the growth strategy of Itaú Asset Management across the USA. Besides his executive role for Itau USA Asset Management, he is the Global Head of Solutions at Itaú Asset Management, responsible for teams based in NY, Miami and Sao Paulo.

GBAM Chairman Tim Warrington says: “We are thrilled to welcome Andrew Ward of Aubrey Capital Management and Charles Ferraz of Itaú USA Asset Management to our esteemed Group of Boutique Asset Managers. Their expertise and proven success across multiple geographies will undoubtedly enhance our community’s collaborative spirit and innovation. We look forward to their valuable contributions to our Group.”

The firms write that the Utila platform provide a comprehensive and user-friendly approach to crypto asset management, with personalised wallet infrastructure that simplifies day-to-day crypto management for institutions. 

The new partnership with Coincover offers a new MPC (Multi-Party Computation) solution that aims to simplify institutional access to crypto.

Utila customers will have access to Coincover’s third-party recovery technology. With access to an added layer of protection, the firms writes that Utila customers can confidently utilise a self-serve key backup solution that removes the complexity and concerns surrounding potential lost access to funds. This partnership empowers Utila customers to take control of their digital assets while enjoying the peace of mind that comes with Coincover’s protection, the firms say.

The firms write that the onboarding process is seamless and Utila customers can easily select Coincover as their backup provider without the need for complex referral procedures. This streamlines the setup of crypto businesses and removes entry barriers, helping to stimulate institutional involvement in crypto.

Ridhima Durham, Chief Commercial Officer, Coincover, says “Our partnership with Utila is groundbreaking. Customers benefit from industry-leading blockchain protection technology whilst enjoying the extra perk of self-servicing key backup through Utila’s platform. It’s the perfect blend of top-tier recovery and an effortless user experience, making the journey smooth and seamless.”

Bentzi Rabi, Co-Founder and CEO, Utila, commented on the partnership, saying: “At Utila, we’re genuinely excited about our new partnership with Coincover. CoinCover’s unrivalled expertise in crypto asset security perfectly aligns with our commitment to easily safeguarding our users’ keys and digital assets. By enabling our customers to secure their key backup with Coincover for all of their keys created and managed via Utila, we’re poised to take our enterprise-grade wallet to even greater heights, ensuring our clients enjoy the highest level of protection and peace of mind in their crypto endeavours.”

The firms writes that this collaboration signifies a major step forward in providing a comprehensive solution for crypto asset management, combining recovery expertise with an advanced wallet infrastructure. Both Coincover and Utila anticipate that this partnership will contribute to greater trust, security, and ease of use in the evolving landscape of digital asset management.

Eight out of 10 (82 per cent) senior legal, compliance and marketing professionals across the asset management and investment sector in the UK, US and Australia admit that they see their relationship with each other as adversarial and ‘us and them’.

In fact, marketers in the sector see the compliance approval process as their biggest challenge (42 per cent agree), even more than reaching the right audience with their content.

Within the compliance review process the relationship with the legal/compliance team is seen as the second biggest challenge (chosen by 29 per cent), just behind concern over the lack of rules for new(er) marketing channels like social media (30 per cent).

Three-quarters of marketers (76 per cent) even think legal and/or compliance is in the way of them getting their job done, with 77 per cent believing the review process is too long, with too many steps.

The study surveyed 330 senior legal, compliance and marketing specialists across the UK, US and Australia, working in asset/fund management organisations with 5,000+ employees.

It also found that compliance and legal professionals in asset management are equally unimpressed with their colleagues in marketing: eight out of 10 (80 per cent) think marketing doesn’t understand why they have to abide by complex compliance rules, while even more (88 per cent) think marketing just wants someone else to take the blame when their content is challenged externally.

Nine out of 10 (88 per cent) have often heard their marketing colleagues say that the compliance rules are ‘over the top’, and the same number (88 per cent) say it would be much easier to get reviews done if they did not have to check the basics repeatedly.

Mark Wood, COO at Red Marker comments: “The tension between marketing and legal/compliance in this sector illustrates that the delicate balance between creativity and compliance can easily become adversarial.

“Providing a successful wealth management service – and standing out from competitors – relies on swift, effective and compliant marketing. These teams need to find better ways of working together to ensure content is produced and approved efficiently – but also in a way that reduces risk.

“The marketing compliance process has traditionally been under-analysed and there has been a lack of optimisation, with a certain ‘we have a process’ complacency. Many organisations have built quick-fix solutions or outsourced this process, but new technology means there’s no longer an excuse for inefficiency and apathy.

“With organisations identified as having misled customers receiving publicised penalties, there’s nothing more important than ensuring the marketing compliance process is watertight. That starts at the most basic level with robust communication and openness between teams.”

Eight out of 10 of those surveyed (80 per cent) agreed that the ideal review process would have the minimum amount of human subjectivity, which is where technology can play an increased role.

One such area is artificial intelligence (AI). Marketing, legal and compliance specialists (95 per cent agree) think that an AI-based tool that can intelligently scan and highlight marketing content for compliance and brand risks would support a more effective review process within their organisation.

The main benefits that asset management teams would most like to see from AI is automated checking of standard content like disclaimers, sources and T&Cs (35 per cent agree).

Their main concerns (31 per cent agree for both) are how to ensure an AI tool is set up correctly – and identifying what happens and who would be accountable if the tool missed a risk.

In addition, 82 per cent of those surveyed agree that productive conversations about how to make things happen are needed.

Wood adds: “One of the key barriers between these teams is the stereotypes: marketers seeing legal and compliance as being deliberately hindering, versus legal/compliance teams seeing marketers as too ‘gung-ho’.

“Auditors would expect to see a three line of defence (3LoD) model in place for day-to-day risk management, including management of compliance risk, but how cohesive is the 3LoD model with all this conflict?

“Giving marketing teams the training and tools to consider compliance issues early and often could pave the way towards a more symbiotic partnership.

“However, cooperation is paramount and both sides agree that they need to work together more efficiently to improve the business and help it meet its overall goals. That means having constructive conversations – and it could also mean using AI-driven technology to enhance processes by focusing on automation and standardisation.”

If you can imagine a counterbalance with four weights – North, South, East and West. On the North and South scales, you have Financial Institutions (Tradfi & DeFi) on one side balanced with the Regulator. And on the West and East scales, you have Security balanced with Speed – you will understand start to understand the elements driving custody in the world of digital assets.

Definition of digital asset custody

According to the Alternative Investment Management Association (AIMA), which provides leadership in industry initiatives such as advocacy, policy and regulatory engagement, educational programmes, and sound practice guides – the concept of digital asset custody revolves around the safekeeping of a private key. 

Their membership understands that as private keys are used to store, manage, and transfer digital assets by the owner and help with the decryption of messages and authentication of transactions, they represent a single point of failure in the system.

The trilemma for financial institutions adopting custody of digital assets has always been security, speed, and scalability. One of these is always had to be sacrificed in traditional Custody-enablement solutions. The market for Custody solutions is being driven in response to regulatory and technological changes, market infrastructure developments and enhanced risk awareness. 

The market requires a world-class technology for storing digital assets and a custody solution that solves all three issues of digital asset custody as the financial markets adopt blockchain technologies. The market for Custody solutions is being driven in response to regulatory and technological changes, market infrastructure developments and enhanced risk awareness

Transforming the financial services landscape

Several traditional financial institutions have publicly stated that digital assets are here to stay. One such organisation, BNY Mellon, are committed to supporting its clients as they adapt to this emerging asset class. And even with recent market volatility and discretions of 2022, it seems their level of conviction remains strong. They are keeping their sights on the long-term opportunities and transformative potential of the underlying technology. They like other banks and FI’s are on a journey towards a future where blockchain and related capabilities will transform the financial services landscape.

Michael Demissie, Head of Digital Assets Unit and Advanced Solutions at BNY Mellon commented: “Our research shows 70 per cent of respondents would increase their digital asset activity if services like custody and execution are available from recognised, trusted institutions.”

It is evident that the requirements of organisations vary greatly based on their position in the market. For example, small crypto funds that engage in active yield farming across a wide range of DeFi tokens have vastly different needs compared to multi-billion-dollar hedge funds that prioritize working with qualified custodians. Additionally, larger organizations often require specialized technology solutions for different funds, segments of their portfolio, or different regions.

Ideal attributes of Central Bank Digital Currency

The Digital Dollar Project – a non-profit organisation devoted to catalysing private sector research and exploration of the potential advantages and challenges of a U.S. central bank digital currency (CBDC), or “digital dollar.” – believes that an ideal digital dollar should be private, secure, accessible, and transparent:

·      Private: The CBDC should avoid subjecting users to undue corporate tracking or government surveillance and should allow users the ability to limit having their information shared with financial services providers. 

·      Secure: The CBDC should provide robust security against theft, hacking, illegal seizure, and fraud. As such, it should provide a new way for people to handle money individually, utilizing a system that is both secure against attacks and legally protected.

·      Accessible: The CBDC should improve global dollar users’ access to financial services by increasing efficiency and lowering the cost of transacting. Widespread CBDC usage should spur competition in financial services to produce better services at lower costs. Additionally, accessible, and low-cost digital vaults or wallets could serve as an on-ramp into the financial system for the un-and-under-banked.

·      Transparent: The CBDC system should have transparent operations to enable stakeholders to independently gain assurance about its technical functioning, security, and resistance to impermissible monitoring or other exploitation.

The story of 2022 – hack – innovate – protect – repeat 

According to web3 Studios and Blockstories, 2022 year in review in Crypto and Web3 – the crypto and web3 space has had a rough ride this year: significant declines in the market prices of major cryptocurrencies, a slowdown in the trading volume in many adjacent verticals (DeFi, NFTs), and bankruptcy for some of the space’s leading figures due to failed risk management and the misappropriation of consumer funds. The price of Bitcoin (BTC) reached a two-year low, and the rest of the market saw intense selling activity after the crypto exchange FTX collapsed.

It also showed that the “DeFi hacker” had a successful year in stealing over USD2 billion from multiple protocols (e.g., USD325 million from Wormhole, and USD625 million from Ronin), particularly through vulnerabilities in bridges which are essential for the ecosystem’s development but are still in the early stages of development.

It concluded that even though there has been a slowdown in capital and talent inflow, this in fact has brought the community back together, with people driven by conviction leading the way. The market may be down, but innovators are still working tirelessly on creating the tools and infrastructure to shape the future of crypto and web3.

Quantum computers threaten to break today’s cryptographic algorithms

Accenture Labs reported in their Cryptography in a post-quantum world, the importance of preparing intelligent enterprises for a secure future. This applies to the digital asset world as well as cryptocurrencies. Algorithms using traditional CPU computing have been engineered to be mathematically strong enough to support a 20-year service life requirement. However, recent technology developments have cut this service life expectation in half, causing the US National Institute of Standards and Technology (NIST) to rescind the current public key standard of RSA 2048 released in 2016 and aggressively seek more complex cryptographic algorithms to thwart attackers.

The advent of quantum processors that have the capability to break our current cryptographic primitives is a very real threat on the horizon. Accenture believes quantum processor capability will be able to compromise existing cryptography within the next eight years. Financial institutions have a complex task ahead to identify, evaluate and prioritize the business remediation to protect their data from cryptanalysis breaches and compromise.

Security driving Tokenisation

The Tokenise Europe 2025 initiative members indicated in a recent report that Tokenisation requires all its stakeholders to work together for its success. Legislators and regulators will be key to creating a simple and harmonised legal framework that facilitates innovation and incentivises corporates and citizens to further drive tokenisation while maintaining high standards of security and protection. Central banks and other financial institutions should prepare for the tokenisation of assets and put in place the infrastructure – again prioritising security. And finally, financial institutions will have to explore the possibility of introducing programmable money with a focus on overall benefits to the (token) economy.

Implications to regulation – prioritising Custody in 2023 

In November 2022, GDF convened their annual crypto and digital assets summit, involving a series of panels in which industry leaders exchanged insights on the regulatory landscape and emerging risks and opportunities related to digital assets and the financial services sector.

Some of the panellists contemplated how the “crypto winter” may in fact advance the digital assets agenda by focusing minds on the core capabilities of the technology and reducing the focus on the hype around cryptocurrencies.

Moreover, in the aftermath of such events, there is likely to be a push to implement new digital asset regulations — some of the issues that are likely to be addressed include custody, segregation of client assets, conflicts of interest regarding activities undertaken on behalf of firms versus activities undertaken on behalf of their clients, and insolvency situations.

Holy grail of balancing risk with innovation – real-time cold storage

The GDF annual report in 2022 reported that one of DeFi’s largest risks is around scams and hacks because users often self-manage custody and the value can be transferred automatically and approved only by software and attack vectors can be exploited by hackers. 

They also talk about opportunities presented by the technology as crypto and digital asset technology continues to evolve at an unprecedented rate. While the recent market correction has limited the potential for consumer harm or systemic risk, history has shown that prices may rise again at some point in the future.

Traditionally, the storage and custody of digital assets have been defined as hot wallets, warm wallets and cold storage with security concerns decreasing as you go down the value chain – but the counterbalance to being more secure is the time it takes to access the digital assets and trade with them. 

Hot wallets allow better control and interoperability but are still exposed to the risk of theft or fraud. Cold wallets are more secure, yet as hardware systems, they can malfunction, or users may lose access codes.

Newer innovations are hitting the market with redefinitions and contradictions like custody enablement organisations offering real-time cold storage over an airgap. Several large financial institutions are looking at such solutions to overcome the pitfalls of hot wallets with cold vaults. So, this type of storage is cold and allows for better control and interoperability and is not exposed to the risk of theft or fraud with high levels of security with mechanisms for counteract hardware systems that could malfunction, users, will never lose their access codes.

Custody technology to restore trust, transparency, and integrity

“Not your keys, not your coins” has never been more ubiquitous. We’ve experienced a dramatic blow-up in CeFi-institutions (e.g., 3AC, BlockFi, Voyager Digital, FTX etc.) caused by fraud, recklessness, and lack of transparency among these institutions. Meanwhile, DeFi stayed robust and performed as expected at any time. To restore trust, centralised exchanges are now adopting new standards such as Proof-of-Reserves. Despite these efforts, it is likely that the trend toward self-custody will continue, as people seek to take control of their own assets.  

Custody providers will also have to develop solutions to protect against bad actors

Whether it’s an individual (FTX founder Sam Bankman-Fried), a collusion (BSV Claims against Binance, Bittylicious, Kraken and Shapeshift in 2022), or a hacking cyber group (North Korea’s Lazarus Group masterminded USD100 million Harmony hack) – users need the ability to add policies and permissions to their account, technologically, limiting who can move funds, how frequently, how much per day, which addresses can receive them, etc. That kind of control can limit the amount of damage a bad actor – whether internal or external – could do to your balance sheet of digital assets. 

Another protection mechanism, which is required from a regulatory point of view is to segregate holdings of crypto-assets on the behalf of clients from their own holdings and to ensure that the means of access to crypto-assets of clients are clearly identified as such. They shall ensure that, on the DLT, clients’ crypto-assets are held at separate addresses from those on which their own crypto-assets are held.

Lastly, “Losing your keys, without losing your coins” for the end user means a more forgiving, low-burden, flexible recovery experience is required. The client can be the best crypto investor in the world, but if their crypto gets stolen or lost, they will lose every last bit. So, it’s important to safeguard their crypto, on their behalf, as best you can. 

Summary

2023 will be the year of Custody. The existing market perceptions of trust in digital assets, cryptocurrency and stablecoins can and will be restored with new rules of engagement like segregating trade execution and custody, use of institutional-grade custodial solutions, proof of reserves, auditing and so on. 

Technology – the sentiment in 2023 will be to take the time to build, innovate and sustainably create. Custody providers will partner with secure innovative companies and build an ecosystem for the safekeeping and execution of digital assets. There will also be improved cybersecurity and secure asset transfer to prevent hacks and fraud and much better risk management practices for people, finance, security, and operations. 

Regulation – Custody providers will not expect the regulators worldwide to regulate the blockchain or the technology around it – the emphasis will be more on regulating people.

Governance – There is an inevitable battle between decentralisation vs centralisation. Custody providers will ensure any solution they use in the custody space can cover use cases in both, and there will be potential hybrid solutions, which make the best of both worlds.

Markets – 2021 bull market was driven by mass adoption. Unfortunately, it started to become greedy, and in 2022, the focus switched to leverage, leading it to crash. 2023 will all revolve around protection and security – and stringer foundations for the future upswing

Investment – Over diversification will quickly become diluted. The focus will be on what companies are great at, and sticking to their core competencies, rather than trying to build the entire ecosystem.

These aspects alongside new education supported by innovative companies with something different for the market will make 2023 – the year of Custody.

The sale is expected to complete in the second half of 2023, following satisfaction of certain conditions including receipt of customary regulatory approvals.  The sale involves the transfer of approximately GBP6.1 billion in assets under management and approximately 140 employees. The agreed purchase price to be paid at completion is GBP140 million, subject to certain adjustments, principally reflecting activity in the period to completion.

In order to succeed in the longer term in the DFM market, abrdn’s view is that this part of the business would need to build much greater scale. With abrdn’s strategy for its Personal vector focused on integrating the high-tech, high-touch model of interactive investor (“ii”) with financial planning, abrdn has concluded that another owner would be better placed to invest to deliver greater scale in the DFM business. 

abrdn’s Managed Portfolio Service (“MPS”) business, which is currently part of the DFM business, is better aligned to its group strategy and will be carved out and retained prior to completion of the transaction, the firm says. abrdn views MPS as an important growth channel that aligns well to the way that the UK personal investment market is developing. The MPS team will be moved to sit within abrdn’s Adviser vector in order to maximise opportunities available through that business’ distribution model.

Stephen Bird, abrdn CEO, says: “We are establishing one of the UK’s leading personal wealth businesses, and this deal represents an important step forward in our strategy to focus on our high-growth, platform-led, businesses.

“Our track record over the past two years shows that where we identify non-core capabilities, we will look to divest and redeploy capital in ways that better align with the interests of our investors, clients and customers. 

“The decision to sell our DFM business underlines our commitment to that principle.” 

Richard Wilson, CEO Personal, adds: “DFM is a high quality, profitable business with a strong client focus and a brilliant team. However, in line with the way the market is moving, it needs greater scale and will be a better fit for LGT.

“Within abrdn’s Personal vector, our strategy for growth is focused on integrating the services of ii with financial planning services for our customers.”

Noel Butwell, CEO Adviser, says: “The Adviser vector is a natural home for our MPS colleagues, and we look forward to welcoming them. We’ll continue to invest in our MPS solutions and build on the successes that the team has had to date.

“The prospects for MPS solutions look positive with almost half of wealth managers expecting to use these solutions more extensively in the near term and we are confident that our skills, expertise and track record will deliver real results and help our UK adviser clients serve their customers better and grow their businesses. 

“Our focus on serving advisers in the UK means we are committed to making it easier to work with us. Advisers will see a greater alignment of our technology and investment solutions to support them in meeting the needs of their clients.”

The business being sold to LGT delivered c.GBP40 million in revenue in 2022, and currently serves around 4,000 clients. Evercore acted as financial adviser to abrdn in relation to the transaction.

Bertrand Faure, portfolio manager of Eric Sturdza Investments’ Strategic European Silver Stars Fund, has delivered outperformance consistently and irrespective of market conditions over the past eight years.

Even during the market horrors of 2022, the fund, which invests in European small- and mid-cap companies, returned +12.89 per cent relative outperformance.

“I never take a view on where the market is going and if anyone says they have a view, they are lying,” Faure says. “If I knew where the market was going, I would not spend my time talking to 500 companies every year. I would buy and sell futures, my day in the office would last 30 seconds and then I would go and play golf.”

Instead, Faure says he invests in companies that deliver stable, sustainable returns in all market conditions, and that means finding businesses with demonstrable free cash flow.

“Traditionally [investors] tend to look at P&L, then if they have time, they look at the balance sheet to figure out whether the company is leveraged or not, especially when interest rates are going up. And then finally, if they have some spare time during the weekend, they go and look at the cash flow statement. Our process is totally the other way around.”

Faure starts by examining a company’s cash flow statement to assess how much cash is delivered during the 12-month period and whether that leads to genuine net debt reduction. Only when this is complete, does he look at the company accounts.

“At the end of the day, P&L is just a nice way to present things. What you really need to know is cash flow because companies need that to repay their debt. And that becomes even more important when interest rates are rising,” he says.

Testament to Faure’s focus on cash flow is the positive contribution made by 11 out of the 29 companies held in the Silver Stars Fund during a challenging 2022.

However, Faure says he prefers volatile condition arguing that life gets more difficult for an active manager to prove its worth when the markets are up, as they were two years ago. 

This is demonstrated in 2021, when the Silver Stars fund outperformed the index by 2.65 per cent, versus an outperformance of 30.62 per cent in 2020 and 12.84 per cent in 2022.

“While 2020 was not easy, it was easier [than in 2021) because we just had to avoid investing in certain sectors. In 2021 when the market took 25 per cent [Silver Stars’ benchmark index returned 24.91 per cent in 2021] it was actually harder for us to deliver that outperformance.”

The Silver Stars fund is also fortunate in that it benefits from long-term exposure to companies with strong ESG credentials, with its largest holding in French renewable energy company Albioma.

“Albioma has been the largest position in the fund from day one not because of ESG but just because it has a fantastic business model with fantastic margins,” he says.

Looking to the rest of 2023 and Faurer will not comment on the macroeconomic outlook but given his confidence in the Silver Stars Fund’s process, he expects similar success this year.

The firm launched in 1999 as a business that worked for CFOs and treasurers of large companies to help them with their bank relationship management. Vafai says: “The genesis was that buyers of financial services seemed to have less information than sellers and there was an asymmetry there that we felt we could address, particularly with the help of technology.”

Very quickly, within a year, the firm realised it could do the same for pension funds and other types of institutional investors who were looking to appoint fund managers. 

“So, we built another leg to our business, working for institutional investors and have been doing that for 23 years,” Vafai says.

2015 saw the firm demerge its treasury advisory services division and focus exclusively on being an investment consultant helping investors, not only with fund manager selection but with a range of other services such as asset allocation, ESG advisory, risk advisory, fee benchmarking and operational risk management.

The firm is now an independent, global supplier of assets consultancy services with clients in 43 countries and offices in 10.

“We are the only truly global independent investment consulting firm,” Vafai says. “We are not on the same scale as some of the big global consultants, but we don’t manage money and we don’t do fiduciary management. We are sticking to our knitting, focusing on providing tech-enabled advisory services and helping our clients to get better access to fund managers across all asset classes.”

The client base includes large asset owners, from pension funds to insurance companies to endowments, family offices, central banks and even wealth managers. The smallest client has under USD1 billion while the largest has over USD1 trillion.

“The average client has USD30 billion so they are reasonably large and sophisticated with good in-house capabilities and teams with lots of knowledgeable people,” Vafai says. “They see a firm like us an extension of their team, solving problems or answering questions where they feel they need that extra help or another viewpoint.”

bfinance prides itself on working differently from other consultants, particularly in manager selection where they do a full market review using an RFP process with the client’s mandate, which means that their analysis is customised for the investor’s objectives and based on fresh information.

“Many consultants rate managers to create a buy-list, a one size fits all solution, whereas we have a one size fits one solution which is very bespoke,” Vafai says.

With specialised practitioner teams across all asset classes in public markets, private markets and other alternative investment strategies, the firm is keen to provide clients with high quality expertise as well as a rigorous process.

“What’s interesting is that investors are much more sophisticated than they were 20 to 30 years ago,” Vafai says. “Teams are well-staffed with people who know their stuff inside and out. In the nineties, many corporate pension funds were ticking along, usually invested domestically in balanced mandates and it all changed with a change in the interest rate environment and the explosion in the number of asset managers.

“Being an investment consultant is much more interesting than it was – the big change is diversification, which has meant that returns over different market conditions should have improved on a risk-adjusted basis.” 

Being independent has a huge impact for clients, Vafai believes. “You have financial institutions that are offering advisory support to investors but also selling them asset management products, which can be challenging as incentives aren’t aligned. Firms will make a lot more money if they sell clients an asset management service rather than advice, particularly in the case of smaller clients, so there has been a massive shift in the landscape with the major international firms all managing money now. These firms have a lot of great people and offer lots of different solutions, but it’s not as easy to be on the side of the client when the best solution for them might not be the most profitable solution for you.”

Vafai looks back to when Frank Russell became Russell Investments 22 years ago. “They became an investment manager overnight and made that shift pretty clearly and more recently, within the last 10 years, the three largest investment consultants have also made that shift, which has changed the market quite a bit.”

Vafai numbers three to five global investment consultants as competitors and then a large number of local consultants that serve particular markets – around 10 in the UK, perhaps 600 in the US, most of these coming from a pension consulting perspective. These local consultants have good client bases but lack the international orientation which he feels is a differentiator in his business.

“Our positioning is quite different because of the breadth of our reach and the level of our independence,” he says. “We were owned by private equity but we have always been an independent firm and we can be masters of our own destiny with our clients’ best interests at the core of what we do. This is an exciting next phase for us, bringing more of our people into the equity structure and aligning all of our teams for the sustainable growth of our business.”

A megatrend that Vafai observes in institutional investment over the last 25 years is diversification by asset class and region. “There are more and more specialist strategies in private markets and alternative investments as well as within traditional equities and fixed income. It’s a much more interesting and complex landscape that it was 20 years ago” he says.

“Another big trend is the so-called “democratisation” of private markets for clients with smaller investment sizes, such as the wealth market. Private markets managers are seeking to diversify their client bases and Wealth Managers are wanting to offer more of these opportunities to their clients, with lower entry points of say USD50,000 or 100,000. You no longer need multiple tickets of USD5 million+ per manager to have a diversified portfolio of private markets. Of course, it’s quite a complex area from a fund structuring and liquidity perspective so the industry still has a way to go in developing the right solutions there too ”

“At AP2, we are trying to be in the fore front when it comes to investment solutions. Therefore, I think the platform solution BTON offers in terms of automation based on machine learning suits us very well. In finance, the integration of data and technology is inevitable and undeniable. It will drive the industry forward and provide a competitive advantage for those who embrace it,” says Mathias Eriksson, Senior Trader of AP2 

“We are thrilled to work with AP2, a leader in the asset management industry. At BTON Financial, we are committed to revolutionising the way that asset managers approach trading and by working with AP2, we have an opportunity to make a real impact on the industry. Together, we show that asset management firms can collaborate whilst remaining in competition with each other,” says Dan Shepherd, CEO of BTON Financial.