In Conversation with Convergence, Episode 18: George Evans and Reid Thomas of JTC Group Discuss ESG Funds as Specialty Fund Administration

What three themes did Evans set for the ESG conversation?

Evans says ESG is a topic the first 18 episodes had not covered. He sets out three themes: implementing ESG doesn't need to be a burden if it is done correctly, ESG funds are specialty funds and should be thought of that way, and success requires the right expertise. He says Thomas will discuss purpose-built technology and the adaptable capabilities needed because ESG is fluid. Evans says that if a firm can check those three boxes, it will be a very successful investor and a very successful provider of ESG services.

What trends is Thomas seeing in fund administration?

Thomas says he has spent about 12 years around fund administration and calls consolidation the dominant trend. He says much of it is fund administrators acquiring other fund administrators to get scale, and that JTC does a little of that. Evans says the alternative is a race to the bottom, as providers try to work more efficiently and more cheaply, and Thomas says JTC is trying to do it a little smarter.

Evans says about 650 fund administrators are named in SEC filings and describes an 80/20, or perhaps 90/10, rule. He adds that providers are also adding services, buying compliance companies and managed IT and cyber businesses, and that some believe buyers have vendor fatigue when they need eight services from eight firms.

What is a specialty fund, and how do advisers find specialty administrators?

Thomas says he grew up in the technology industry and that when his firm got into fund administration, it became apparent that all funds are not created equally, yet all fund administrators apply the exact same technologies. He says they buy the same three or four products from the same three or four general ledger vendors and differentiate on smarter people and better customer service, while clients and fund managers differentiate on different things.

Thomas gives Opportunity Zones as an example: a private equity fund combined with a tax incentive program and an economic development program. He says specialty funds are ones where investor motivations may differ, compliance requirements may be unique, the customer is differentiating on a certain skill set or feature, there may be complex compliance and reporting needs, and there may be potential for fraud and abuse.

Evans asks how 20,000 SEC-registered advisers can find specialty firms among more than 600 administrators. Thomas says there is a lot of noise and that JTC tries to educate the market that specialty funds are a category, and he says Convergence has started to reflect that in its league tables. He says JTC has been successful when it carved out a niche, such as Opportunity Zones and the EB-5 immigrant investor program, and got in front of the market. Evans says Convergence thinks about best fit for service providers, looks at their books of business, and is working to show advisers the top 20 administrators servicing digital assets.

What is the state of ESG investing, according to Thomas?

Evans says someone told him that about $14 trillion has reportedly been invested in ESG funds and initiatives, and that if it were true the industry would not have the problems it has. Thomas responds that this sounds overstated.

Thomas says the state of the industry is a lack of definition around what is truly making a difference in an ESG investment. He says there is demand from investors and from a social-good perspective, but how to report and measure it is not where it needs to be, so huge numbers are cited without real results. He says many great ESG and impact funds are getting lost in the noise.

Thomas says there are too many frameworks and reporting methodologies, including over 250 software companies that claim to have ESG reporting packages, which he calls the wrong approach. He says investors have different passions, such as mental health or carbon emissions, and that rolling them into large frameworks and scoring methodologies loses that. Evans says the special requirements put a larger burden on everyone and that administrators will have to decide whether to invest in being flexible enough.

How can administrators measure ESG impact without adding burden?

Thomas says that for ESG not to be a burden, an administrator should report and measure the impact of an ESG fund based on information it is processing anyway. He says many economic models used in the federal government, such as jobs created, are extrapolations derived from expenditures, and that fund administration and fund accounting track expenditures at their core. He says third-party software and reporting packages cannot do anything without that core data, which administrators have, so the approach is to build out from there.

Thomas says much of this can be heavily automated, but each fund has its own passion and needs customization. He gives the example of a client focused on recidivism, measuring whether people with convictions who return to the workforce succeed or return to prison, which cannot be derived from accounting data. He contrasts starting from accounting with hiring a third-party consulting firm to send questionnaires and report data that is two years old. He says reporting quarterly, alongside the accounting data, lets investors monitor the difference they are making next to the yields and returns they are getting.

How does data management support ESG reporting?

Thomas says the work involves massive amounts of data from multiple sources: publicly available census data on a community's makeup, education level, and poverty level, questionnaires and surveys, and the accounting data. He says the data must be aggregated and pushed to multiple places. He says JTC spun off a company called Harmony, a data aggregation company that pulls data from disparate sources, aggregates it, and pushes it back into JTC's fund administration solutions so reporting is more efficient.

Evans says expertise is what gives data its color and meaning, and that creating derivative data from data requires understanding the data. He says Convergence aims to put out meaning and color, not just data.

What are JTC's plans and challenges for 2023?

Thomas says JTC acquired NES Financial, where he originally worked, almost three years earlier. He says JTC has a private client business as well as an administration business, along with trust capabilities, and that it recently bought a company called SALI in Texas that focuses on another specialty fund category. He says JTC will continue to make strategic acquisitions and also bought Perform Due Diligence, which gives it an operational due diligence capability that it can bundle with private client, escrow, and administration services.

Thomas says ESG is a good category for bundling, combining data collection, expertise, and compliance reporting for alternative investment fund managers (AIFM), the EU Sustainable Finance Disclosure Regulation (SFDR), and the United Nations Principles for Responsible Investment (UN PRI). On challenges, he says JTC faces the same macroeconomic and political headwinds as everyone else, and that the key is how flexible and adaptable a firm is. He says JTC built its own purpose-built technology to fill gaps in the marketplace, alongside third-party and best-of-breed products. Evans says integration is key and varies among acquirers.

In closing, Evans says Thomas's firm is a long-term Convergence client.

How did the four service-provider markets grow from July 2021 to July 2022?

After the interview, Evans reviews fund growth in four markets from July 2021 to July 2022: fund administration, audit, prime brokerage, and custody. He says funds grew about 11% in each of the four markets.

The figures below are as Evans states them, rounded or approximate, and all measure funds.

Fund growth by tier, July 2021 to July 2022, as stated by George Evans

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Evans says funds are being awarded to audit firms ranked five through 25 at a much bigger and faster pace than to the top four, and that the prime broker market shows a much more even distribution. He says Convergence will keep discussing the changes in the leaderboard every month. These are 2022 figures; Convergence's current league tables are published in its monthly league tables post.

Topics Covered