A bit more than a year after getting into the business, outsourcer racks up deal number four. Fixed-income manager Pacific Income Advisers (PIA) has selected Citigroup’s Global Transaction Services (GTS) as service provider for its $2.5-billion separately managed account (SMA) program. The deal marks the resumption of an outsourcing trend that gained significant traction in 2005.

Going back to 1995, 24 SMA outsourcing deals have been made public, more than half –14 in fact – of them in the last 14 or 15 months. In addition to Citi, JPMorgan Chase, Mellon, State Street, the Bank of New York, PFPC, SEI and BISYS provide SMA ops outsourcing.

Some industry watchers say that makes a half-dozen or so too many, and that a shakeout is coming. They figure a manager needs at least $1 billion in SMA assets across roughly 4,000 accounts to make outsourcing worthwhile. That means only another 50 or 60 managers have SMA programs big enough to make outsourcing worthwhile.

Glimpse under the hood

But it’s worth keeping in mind that total SMA assets – now verging $700 billion – have grown about 20% a year through the past decade. At that rate it’s conceivable that additional managers are getting to the point where outsourcing becomes an option.

Anyway, Citi seems to be on a bit of a roll. PIA is the fourth manager to choose it to provide its SMA operations. The others – Vontobel, Lazard and Janus – all took the plunge last year. But then Citi is fairly new to the business, having waited until late 2004 to announce its intention to become the eighth business-service providers in the SMA space.

Though Citi has a policy of not naming vendors, sources there say its SMA-operations platform is compatible with technology provided by Vestmark, a Wakefield, Mass.-based software maker, that positions its connectivity, portfolio administration and performance-measurement platform as an alternative to CheckFree Investment Services’ APL platform. In that Citi isn’t unique, however. JPMorgan’s and BISYS’ business-service platforms of also work with Vestmark.

But Citi’s SMA platform also features overlay, optimization and tax-management technology from Upstream Technologies. Thomas Prior Boston-based Upstream’s head of sales, provides a thumbnail sketch of Citi’s support providers. “We’re the front end, [Thomson Financial’s] Portia is the accounting and Vestmark provides the workflow.”

Risk characteristics

PIA says it was hard-pressed to find an outsourcer equipped to handle fixed-income SMAs. “Most vendors lack the ability to scale to the large volumes of SMA accounts and to integrate fixed income manager tools for portfolio decision support, trade-order management, pricing and attribution,” according to Tim Tarpening, PIA’s director of business development. “Citigroup is providing a level of automated processing in fixed income management previously unavailable in the SMA marketplace.”

A lot of that comes down to Upstream, according to Prior. One of the challenges of managing fixed-income portfolios, he explains, stems from poor liquidity. “The portfolio manager often can’t get the exact bonds he needs, so he looks for a ‘generic’ with risk characteristics that fit his model,” he says. “Upstream defines those characteristics for the portfolio manager – at least for corporates and treasuries.” Where municipal bonds come into play, Prior adds, Upstream’s platform links with technology provided by Chicago-based InvestorTools.

In addition to supporting Citi’s SMA outsourcing, Upstream supports SMA programs run by Arrivato Advisors, Advisorport and Russell.

Meanwhile Citi sees more fixed-income opportunities in store for its SMA outsourcing. “Fixed income is a fast-growing segment of the SMA market,” says Andrew Clipper, a product manager with the New York-based company. “And I think you’ll see more innovative fixed-income products emerge as aging baby boomers who are rolling over 401(k) plans look to SMAs generate income for their retirement years.” –FWR

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