Des O'Donohoe: Hi guys, Des from Fund Recs back again. And today I have Mr Jon Willis from Calastone. Welcome Jon.
Jon Willis: Thank you very much for having me.
Des O'Donohoe: Right Jon, what are we going to talk about today?
Jon Willis: Well we're not going to talk about Brexit, we're not going to talk about loads of other things. Let's talk about the funds industry. Where the funds industry is today and where it's heading for, for the future.
Des O'Donohoe: Cool. Let's do that.
Jon Willis: I think the funds industry is starting to recognise it's got to change. It's been around for a long, long time. It's been very successful. It's generated hopefully good returns for investors and also for industry participants, but now we're seeing changes. We're seeing changes in the ability to get performance - in a low interest rate economy finding value is harder to do. We're also seeing the Regulator fundamentally look for greater transparency and to allow the end investor to really understand the choices they're making, what those choices are likely to cost them, and what returns they might get. And that's driving challenges through the industry. We've seen it recently with MiFID II and the unbundling of research fees. You know research fees used to just be paid as the cost of trading in the underlying assets of the funds. You never really could tell as an investor what the drag of research fees and other associated fees within that fund were. Now, either it's been borne by the management company, or it's got to be declared very clearly to investors.
Jon Willis: And it's about trying to give the investor that choice. And as all of these things start to bite, are we going to see greater levels of competition in the industry? We're already seeing deals, Janus Henderson, (is a) big deal bringing people together, Standard Life Aberdeen, again, bringing those together-
Des O'Donohoe: Yeah. Huge deal.
Jon Willis: We're seeing consolidation in the distribution space. We're seeing consolidation in the administration space because I think people are understanding that when investors have this transparency, they're going to look for a return. They're going to look for value, and therefore you've got to be able to deliver that very, very clearly.
Des O'Donohoe: Okay. So start to 2018, that's where we're at now. What is it that Calastone are looking at doing? What are the changes you guys are bringing, even into your own organization because you're saying everyone is changing?
Jon Willis: So we've been doing a number of things at Calastone, we describe the organization in quadrants. So we have our BAU piece, which is just about continuing to drive automation through the lifecycle of investments, so automated trading, settlement, reconciliations, all of those good things that we come to expect. And then for the last few years we've been working around data. We see a lot of data across the Calastone network and what we've been trying to do is turn big data into something meaningful. People have talked about big data for years and years and years, and there's nothing smart or clever about big data, you know, having a whole bunch of stuff just in a big bucket doesn't mean anything.
Des O'Donohoe: Because you're right on that because big data is a buzzword and people use it all the time, but I've yet to see somebody actually influence, certainly in the fund space do something significant. So what would something significant look like to you guys? What's the plan?
Jon Willis: Well, it's trying to identify those trends, those movements as early as possible. We're galloping into a much quicker, faster digital age and the funds industry traditionally has worked out what it's going to do, looking at what the market did three, six months ago, plan a campaign, build a product, launch a product. But the world's moved on very, very, very rapidly. Interestingly in airways, so we're not discussing Brexit, but when Brexit happened, everyone saw movements in property funds. Everyone talked about it. The day after we saw movements in European equities that nobody else was talking about for weeks because everyone saw the one thing and didn't see the second thing. So if we can take data that we see in near real-time, I mean Calastone is a real time transaction network, we're in 34 countries now, we carry about seven million fund orders a month. If we can see where that money is moving to, see what people are coming out of or buying into or buying more of, that becomes really useful data. So it's trying to turn that data -
Des O'Donohoe: To see where the trend is-
Jon Willis: To see where the trend is, to see where you're going and the cost of acquisition of clients now is much greater. So before if you were a fund manager, you launched a couple of funds, you'd just buy people a load of plane tickets and send them around the world and say, "Right, go register these funds in all of these countries and go see what you can do". The cost of that now, the drag of that on the fund performance, all of those things are being analyzed. So rather than just putting a load of people on a plane, if we can put the data together in such a way where you're going to launch a European income fund and we can say, "Well actually, do you know that European income funds are selling very well in Chile, in Brazil, but actually less so in Singapore and Hong Kong, but really well in Australia", you can turn this stuff into really useful data.
Jon Willis: And therefore you can go with a targeted piece. So we've been doing a lot of work around that. And then the final piece is really thinking about where the technology in the funds industry is really going, right? We all work on, in the most part, relatively old technology. If you look at the distribution platforms, they're all quite old and they've come over from... -
Des O'Donohoe: There's a lot of legacy stock there, let's be truthful-
Jon Willis: There's tons of legacy. Most TA systems are at least 10 years old and some of them are closer to 30. They run on batch, overnight processes and all of these things, they're not the new-
Des O'Donohoe: An awful lot of double and triple handling is something that I would have seen-
Jon Willis: Oh, if you think about, as you look at the distribution chain, from when the client enters the distribution chain to where something appears on a register of fund managers, how many times is that touched and passed through? So we've been looking at the latest technology and we've been looking at distributed ledger technology and trying to understand how a distributed market infrastructure - because Calastone is effectively a market infrastructure - would impact on the distribution chain. So if you can think about now the entire Calastone network on a distributed ledger technology. So people can come in, they can trade funds, they can settle funds, they can re-register funds. They can do all of those things, that then really opens up opportunities for a whole range of different services. It makes things a lot easier.
Des O'Donohoe: One thing on that then, because I know people that will be watching this will be saying, "Well if we bring in the likes of blockchain and it does work, where are the jobs going to go?". That'd be the first reaction of someone who's in an operations mode might say, "Well if this is automated, what's next for me?". So for the transfer agents out there, for example, what would be next, is it they would change the role in terms of the service that they would provide and provide a better service?
Jon Willis: Absolutely this isn't an annihilation moment, right? But it is a bit of a Kodak moment, right, that's the best example I could use.
Des O'Donohoe: I'd agree with that, yeah.
Jon Willis: We still take pictures today, we're being filmed today, but not on a traditional video camera, on a phone. But people are still taking pictures, people are still doing videos. The world has moved on. There's still a lot of money in photography and camera technology, but it's moved to different things. The funds industry will be exactly the same. You're not suddenly going to wake up one morning and go, "Ah today it's all here, Mrs. Miggins wanting to put her money into a fund is suddenly going to go on this blockchain thingy and do something. And it's going to end up over here". This is going to be a movement towards, and that's why at Calastone we've just announced that by 2019, we will have put our entire network on that technology.
Jon Willis: Not because we expect the world to be there by then, but actually it will allow different clients of ours to move at different paces, but get those absolute benefits. Everyone's going to change. Calastone will change. Distributors will change. You guys will change. Transfer agents will change. When you understand what the industry used to have to do with the old technology and then you look at, "Well actually, how do I add value?", because that's everything that everyone's been asking to do. You don't add value by doing a change of address, doing all of those manual things. You add value-
Des O'Donohoe: Touching something three times, probably doesn't need touching-
Jon Willis: You add value by giving the clients insights, by poking the end consumer to say, "Hey, did you know these funds are doing really well? Actually you might be crystallizing a capital gain here. Do you want to put some- take some out? Do you want to switch some funds? Do you want to put in? You haven't done your investment this year. Your pension is lagging behind". There's so many more things that you can do rather than just admin. So I don't see this as-
Des O'Donohoe: An end game-
Jon Willis: An end, but it is a wake up call to say you need to start changing. And those people who react to that change and prepare for it at the earliest point, well those people who will retool, who will retrain and will come out of it with a business that I would imagine probably looks better than their business today.
Des O'Donohoe: Yeah, very good. Jon, absolute pleasure having you in here. Thank you very much indeed.
Jon Willis: Thank you very much for that.