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Outsourcing gains followers but still demands leap of faith

Outsourcing is still a utopian dream for many investment houses. The idea that a fund manager can offload all of its back-office responsibilities and concentrate on investment performance alone remains an enticing aim, particularly in tough markets. However, so far only a few full outsourcing deals are actually being undertaken, with varying success, while one or two of the biggest custodians have yet to get their products off the ground. This stuttering start has left the investment community uncertain of its next step. If outsourcing really is investment nirvana, fund managers will still want to pursue it. However, the pain endured by those already on the path has made them wary. Will faith help to silence the doubters?

Mark Tennant

These are austere times for fund managers. The long bull run of the 1990s made everyone drunk on record highs for indices and the juicy returns that came with them. With the market corrections came the hangover and the realization that the good times would not go on for ever and that portfolio management wasn't simply a game of buying stock and watching it go up and up.

With increased pressure to produce returns, investment houses are looking around for ways to save a few basis points in costs here, a few there. Even these relatively small amounts, the arguments run, can make a difference.

In this environment the debate over the value of outsourcing the back office will inevitably take greater prominence.

As Daron Pearce, managing director, European outsourcing services at Bank of New York, says: "There has been a massive increase in competition between asset managers, and margins are under a great deal of pressure.

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