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Mutual Fund Growth Creates Opportunities for Data Providers

Date: Wednesday, December 6, 2006
Author: Emma Trincal, Senior Financial Correspondent, Hedgeworld.com

NEW YORK (HedgeWorld.com)—New market trends, particularly the search for alpha, have forced mutual funds to operate in a more complex environment than they did two decades ago, contributing to a greater reliance on market data suppliers than ever before. As a result, mutual funds are viewing technology and data integration as keys to their future success, according to a Greenwich Associates' survey commissioned by Reuters that will be released Friday [Dec. 8].

"More and more mutual funds are looking for third-party providers to help them do their business," said Charles Fiori, senior vice president and global product business owner of DataScope Mutual Funds, which is part of Reuters, during a presentation for the press on Wednesday [Dec. 6]. "This is because there are more and more asset classes, more and more cross-trading and more and more globalization."

Reuters is the parent company of Lipper and Lipper HedgeWorld.

The survey underlined some of those new market trends that have emerged over the past three to five years, which point to the fact that in their search for alpha, mutual fund managers—and not just hedge funds—are devoting more of their activity to non-traditional assets.

"In the stretch for new ways to make money, a mutual fund complex will have to go out of its traditional comfort zone into places where it has not been involved before," said Mr. Fiori. For instance, mutual fund managers have assumed greater credit risk and have delved deeper into structured products and derivatives in their search for higher returns uncorrelated to the markets, the report said. Additionally, strong returns in emerging countries are attracting new mutual fund offerings. Overall, mutual funds took in 50% more new assets in 2005 than they did in 2004, according to Lipper. Finally, the increased scrutiny by U.S. regulators is creating a need for greater transparency and timely reporting.

The survey provided insights on the mutual fund industry's current data consumption habits and future needs in both the United States and Europe. Findings were based on a survey of 89 users of financial news and market data services, including portfolio managers, traders and operations managers.

Survey respondents identified data accuracy/quality as the most "significant" issue. Timelessness/real-time market data emerged as the second most significant issue. Another important factor was technology, which 57% of the respondents found to be relevant. The type of content covered was also important. Michele Kelsey, senior vice president and product business owner for DataScope Pricing and Reference, also part of Reuters, gave some examples of key content, such as pricing; identifiers for the securities (for instance, CUSIP number); coupon or interest calculation; and the ability to immediately assimilate the news for trading purposes.

Some of the trends that support the greater reliance on timely market data are the competition among mutual funds for market shares, the proliferation of new asset classes, the increasingly sophisticated use of data by traders and the greater focus on cost efficiency.

In terms of accuracy, Mr. Fiori said that he would like to see customers becoming more involved in monitoring the quality and accuracy of the data they get from their providers. "As a rule, customers tend to react to data quality issues rather than being proactive. Those who will be working on data issues in advance will be in much better shape in terms of costs and search for alpha," he said.

The survey posed questions such as how growth trends in the industry affect mutual funds' use of data; what challenges are faced by mutual funds in obtaining high-quality, timely and customized data; and the extent to which intensified regulatory scrutiny, along with the trend for greater transparency affect mutual funds' data needs.

More than half of the respondents expressed interest in a one-stop-shop approach, as it is more efficient to integrate all the data onto one screen. But in reality, 66% of U.S. funds cited using three or more providers versus just 30% of European funds.

In both Europe and the United States, the main reason why market data is used is portfolio pricing. However, the survey underscored differences in how American and European mutual funds use data. In the United States, respondents more frequently mentioned compliance, risk management and net asset value calculations as reasons they use market data than did Europeans. The discrepancy may indicate that European mutual funds have not been under the same pressure from regulators, according to the report. The difference in the way regulatory pressure is perceived on the two sides of the Atlantic can be explained by the fact that Europeans are in a fragmented market. "In Europe, the different regulatory entities have not been as intrusive as they have been here," Mr. Fiori said.

Mutual funds tend to remain loyal customers to their data suppliers and over the past two years, the majority of U.S. and European funds reported having made no change. Adding or switching providers is an often difficult and costly process, which may explain the aversion to change. Traders cited familiarity, cost and operative disruptions as factors that may prohibit them from switching providers as well as re-training personnel and implementing a new system.