Fund Administration: Who Keeps the Books and Records

Fund administration is the record keeping behind a pooled arrangement: striking the value of what is held, reconciling the cash and the securities against the books, working out what each cost comes to, and producing the statements that go out. A party paid a rate on a value should not be the party that computes it, so the record keeping is kept apart from the investment decisions on purpose.

One number does nearly all the work in this business, and it is the value of what is held. The charge a manager earns is a rate applied to it. An investor's statement shows a share of that value. An investor pays going in and receives coming out on amounts worked out from the same value. A single number carrying that much weight does not appear by itself. Somebody computes that value, from a written policy, on prices that arrive from outside, and who that somebody is turns out not to be an administrative detail at all.

Everything below runs on one invented manager, Vaidehi Asset Managers Limited, which looks after assets under managementThe total value of everything a manager looks after for other people, added up. A manager's charge is applied to this total, and the total moves with the market whether the manager does anything or not. of Rs 1,80,000 crore.

What does fund administration actually do?

The job title says nothing; the tasks do. There are five, and the shape they make is the whole argument for splitting the work up.

The first task is keeping the books of the arrangement: a written record of every holding, every cost and every movement of money in and out. The second is striking the value of what is held, on a stated policy, using prices that arrive from outside. The third is reconciliationChecking two records that were kept by different parties, from different inputs, against each other, and then investigating every difference rather than picking whichever record seems more trustworthy.. Every cycle, what the books say is checked against what the party holding the securities says and against what the bank says, and every difference is investigated instead of a side being chosen. The fourth is working out what each cost comes to and when it is taken, an accrualRecognising a cost or an income in the period it belongs to, rather than in the period the money actually moves. How that recognition is done is covered separately. question rather than a payment question. The fifth is producing the statements and the reports that go out to investors and to the authority.

Look at those five tasks together: not one of them is a decision about what to hold. Nothing on that list picks a security, sizes a position, or changes what the arrangement is exposed to. Every single task is a record of a decision somebody else already took, or a check on a record, or a report of a record. That absence is not an accident and not a limitation. The absence is the definition of fund administration.

Four parties sit around one pot of money in an arrangement like this, and each of them holds a different piece of the job. The manager decides what is held. One party has the securities and the cash themselves. Another writes down what is held and what it is worth. A fourth keeps the record of which investor holds how much. Splitting the work four ways is inconvenient and expensive, and it is done anyway. The alternative is one party deciding, holding, valuing and recording all at once, with nobody outside it able to check any of the four.

Why does this work sit with somebody who is not making the investment decisions?

Here is the reason the function has a name of its own rather than being a department inside the manager. The manager is paid a rate on the value of what is held. Vaidehi Asset Managers Limited charges a blended 0.55 per cent of assets under management, and assets under management stand at Rs 1,80,000 crore, so the charge for the year works out at Rs 990 crore. Run that multiplication yourself and watch what it depends on. Every rupee of that Rs 990 crore is a rate applied to a value. If the value moves, the revenue moves with it, and nothing the manager did caused either.

So the principle is as plain as it can be made: the party paid on a value does not strike the value. Not because anybody is suspected of anything. The check is worth having whether or not a single person would ever act on the interest, and that is the part worth holding on to. A control is not an accusation.

The same arrangement is accepted everywhere else without a second thought. Nobody lets the vegetable seller hold the scales in one hand and read the weight out from memory, and the scales sitting on the counter where the buyer can see the dial too is no reflection on the seller. The visible dial is what makes the transaction easy for both of them. The seller does not have to be trusted. The seller therefore does not have to spend anything on being trusted. An arrangement makes the same trade when the computing of a value goes to a party who is not paid on the answer.

Who holds the securities, and is that the same party that keeps the books?

No, and a reader who merges those two has lost the reason there are two parties at all. One party has the securities and the cash themselves and can move neither without an instruction. Custody is that job. A different party writes down what is held, what it is worth and what has moved. Administration is that job. One has the things; the other has the description of the things.

The split looks like duplication. Two sets of records of the same holdings, kept in two places, at two costs, and somebody has to check them against each other every cycle. Why would anybody set it up like that deliberately?

Because the reconciliation between two records means something only when the two records were kept by different parties working from different inputs. That is the whole return on the duplication, and it is easy to miss. Two records kept inside one party agree by construction. Both records were built from the same source, by the same people, on the same system, and when they agree they have established nothing that was not already known. Agreement is evidence only when disagreement was genuinely possible.

A household makes the same point. Two people share the month's spending and one of them keeps the notebook, writing every entry twice, once on a running list and once on a summary list. At the end of the month the two lists agree. Of course they do. Now change it so that each person keeps their own record from their own receipts, and at the end of the month the two records agree. Two independent chances for that agreement to fail went by, and it took neither. The agreement is worth something.

So what does a check between two parties actually look like to somebody sitting in front of one? Two records are laid beside each other, line by line. Most lines match. One does not. The drawing below is that moment. The single line that does not match is what matters in it, not how many lines were laid out beside it.

What does an ordinary day look like, and why is the order the control?

Nothing about this work is dramatic. The work is the same sequence, in the same order, every cycle, and the order is doing more work than any single step in it.

First, prices arrive from outside, along with news of any corporate eventSomething a company does that changes what a holding is worth or how much of it there is, such as a split, a bonus issue or a payment to holders. affecting a holding. Second, the holdings on the books are checked against the record kept by the party holding them, and the cash on the books is checked against the bank. Third, the value of what is held is struck on the stated policy, and any holding without a price that other people arrived at goes down a route the policy already describes rather than being decided in the moment. Fourth, the costs belonging to the period are accrued. Fifth, the value is checked and released. Sixth, the statements and the reports go out.

Every one of those checks happens before the value is released, and that ordering is the entire control. A value that goes out and is corrected the next morning has already been used. Somebody bought at it, somebody sold at it, and a correction repairs the record without repairing either of those transactions. The bell cannot be un-rung. Most ordinary work is arranged as check afterwards and fix if needed, and arranging this work the same way would be cheaper. A value that has already been used rules it out.

Whose money, whose decision, whose risk, and who is paid regardless?

Four questions get asked of every party in this business, and the administrator answers them in a pattern that no other party matches. Take them one at a time.

Whose money is it? The investor's, and the administrator never holds a rupee of it. Whose decision is it? Not the administrator's, on anything that moves the outcome. Whose risk is it? The investor's for the value going up or down, and the administrator's for whether the number is right. And who is paid regardless of what the value does? The administrator, on a basis unconnected to whether the value went up.

The last pair is the finding: the administrator is the only party whose pay is disconnected from the outcome and from the decision at once, and that disconnection is exactly what makes it usable as a check on both. The manager is paid on the size of the money. An investor lives with the result. Only the administrator is positioned so that a higher value earns it nothing extra and a lower one costs it nothing, and a party with no stake in the direction of a number is a party that can be asked to compute it.

Where does the cost of this work sit, and who ends up bearing it?

The work is paid for either out of the manager's own cost line or by the arrangement itself, and which of those two it is decides who ends up bearing it. The general point goes no further than that without reaching for a figure.

Now the specific, and it starts with an absence rather than a number. Vaidehi Asset Managers Limited reports one cost line of Rs 594 crore for the year, with no split of it whatsoever, so what share of that line the administration and custody of anything comes to cannot be said. Not roughly, not as a range, not as a plausible-sounding fraction. No split of the Rs 594 crore appears in the reported figure.

The whole Rs 594 crore can be worked against two different bases, and it is worth working. Against revenue, Rs 594 crore over the Rs 990 crore of revenue is 60.0 per cent of revenue. The remainder is an operating marginWhat is left of revenue once the cost of running the business is taken out, stated as a share of that revenue. Settled separately and used here rather than rebuilt. of Rs 396 crore, or 40.0 per cent of revenue. Against the value being looked after, the same Rs 594 crore over assets under management of Rs 1,80,000 crore is 0.33 per cent of assets under management. One cost line of Rs 594 crore, two bases, two entirely different-looking numbers, and both of them correct. Say the base out loud every time or neither figure is portable.

What goes wrong when this work is done badly, and who finds out last?

Four things, and none of them looks dramatic while it is happening. A value struck on a stale price, where the number used was true yesterday and is not true today. A holding that exists on the books and not at the party holding it, or the reverse. A cost accrued in the wrong period, so one set of investors quietly carries a charge that belongs to another set. And a holding with no observable priceA price arrived at by other people trading the same thing, rather than one worked out from a model or from somebody's judgement. valued on a route nobody wrote down in advance.

And who finds out last? The investor. Every one of those four failures is internal to parties the investor never deals with, and the only thing that reaches the investor is the released number itself, with no working attached and no way to rebuild it. The investor is not being careless. The structure does it: a single figure travels outward while everything that produced it stays inside.

Which of these conditions is somebody else's to set?

Four of the things walked past above belong to somebody else to decide. Not the manager, and not any party in the drawings above. An authority settles each one, revises it whenever it needs to, and publishes the wording that currently applies. A copied answer becomes simply incorrect rather than merely elderly, and elderly is the better of the two to be working from. Each row below therefore carries the authority where the answer would otherwise sit.