Remembering Paul McNaughton
Paul McNaughton, who passed away this month has been recognised for his sporting achievements, in several codes, and not just as a player, but as a manager and coach. He was also a seminal figure in the development and emergence of the Irish investment funds industry. As a flavour of his involvement in those early days and the vision he shared regarding the potential of the Irish investment funds industry, we republish an article he wrote in Finance Dublin in 2003 giving his personal account of the development of the Irish funds industry from its inception in 1989, entitled ‘IFSC funds inc. - an incredible success story’.
There has been so much written about the funds industry of late that I am loathe to repeat many of the excellent points made about the success and the challenges of the industry since its inception in 1988/89. I have also realised at the time of writing that I myself have travelled the full circle over this period from initially helping AIG Group setting up the first fund in the IFSC when running Bank of Ireland’s fund administration business back in 1989, to the establishment of Morgan Grenfell/Deutsche in 1991, to Deutsche’s take over of Bankers Trust in Dublin in 1998, and then finally overseeing the sale of our own Deutsche Bank operation to State Street this year.

However, I look back with a keen sense of pride, achievement and enjoyment at what IFSC Funds Inc has developed in the past 13 to 14 years from a modest start in a depressed financial world in 1989 to an industry that has developed into being the biggest employer in the IFSC with a true worldwide reputation.

It must be said that the key role of the funds industry was not in the original IFSC script. Indeed the original planners of the IFSC initially developed the IFSC legislation primarily to cater for corporate profits tax of 10 per cent on trading, lending and investment management activities.
Paul McNaughton
Paul McNaughton

Indeed it took a redrafting of the legislation and a return visit to Dail Eireann to seek the key tax exemption clauses for Irish domiciled mutual funds prompting one perplexed TD to exclaim; “Is a 10 per cent tax rate not low enough?”. Other important legislative changes in the 80s and early & 90s was the introduction and implementation of the UCITS Directive and the Units Trust Act of 1990, and a key agreement with the revenue commissioners to allow Irish funds access to Ireland’s DTA treaty network.

However, once the tax legislation was passed Ireland Inc got to work with the government/ semi-state/private sector working together feverishly promoting, legislating, removing blockages, and generally driving the business forward which reflected the hunger at the time of a country with an 18 per cent unemployment rate. I remember dozens of road shows in places such as Zurich, Paris, London, New York, Chicago, Boston, Seoul, Tokyo, Hong Kong and Singapore with some senior figures in the industry permanently on the road.

At every stop new legislation was promised, alongside cheap audit fees, cheap listing fees, cheap legal fees (if there is such a thing), pooling, cloning, multi-manager, multi-class, tax recovery etc. Much promised, most of it delivered even if there was a level of doubt at the time about exactly what was being promised.

Stories about these trips are legion. On one particular road show in Geneva, a senior IDA man (who shall remain nameless), in introducing his panel to a Swiss audience waxed lyrically about the strong connections between the Swiss and the Irish over the previous centuries finally making the point that Irish and the Swiss have a lot in common except that the Swiss do not have the good Irish sense of humour. The Swiss were not impressed did not find his remarks funny which probably proved his point anyway.

On another presentation in Seoul, again the IDA representative was giving an introduction to Ireland, and talked about the stable economic and governmental environment, emphasising the stable nature of the coalition government dominated by a right of centre conservative party with a small left wing coalition partner. Inadvertently with the microphone on one of the exalted Irish panel uttered, “Yes, but it’s the small left wing party that runs the whole show”, which while confusing to the Korean audience certainly woke up the rest of the panel.
While all of these road shows, IDA Marketing Programmes etc, were important in the initial stages, the key breakthrough in my opinion came when Barings decided to re-domicile a large range of their unit trusts from the Channel Islands to Ireland. A new Unit Trusts Act was rushed through, the funds were established and suddenly the global fund management industry started to take notice.

Barings were quickly followed by other British institutions including Morgan Grenfell, GT Invesco, Natwest and Lazards. While the establishment by the British investment managers of large fund ranges gave the IFSC its credibility it was the establishment later on of management groups such as Frank Russell, Fidelity, Goldman Sachs, Barclays, Nomura, Pioneer that gave the IFSC funds industry its world-wide appeal.

The mid to late 90s was the growth period of much of the global financial services business world wide and the IFSC funds industry was no exception as the level of mutual fund penetration for both retail and institutional investors increased enormously world wide. The inflow of the established mutual fund management groups and their funds soared alongside huge inflow of monies into existing funds and stratospheric stock market values.

In the period from the mid 90s to late 2000 the IFSC experienced its own bubble with huge amounts of new business flowing in, fuelling astronomical wage increases, outrageous rent reviews, huge labour turnover etc, and it has to be said IFSC Funds Inc along with the rest of the country took its eyes off the ball and enjoyed the party.

Asset levels peaked in late 2000 as stock markets plummeted with the retail investor ending its 10 year love affair with mutual funds and equity investment in particular consequently squeezing and in some cases eliminating profit margins in the global fund management industry which is the engine of growth for our business in the IFSC.

All of this has lead to pressure on costs in the industry and a strong push by the management companies to reduce costs and seek reduced service fees wherever they can get it. So in 2003 we have a fund administration business that faces static or declining revenues and rising costs in Ireland in particular.

The future
The IFSC funds industry has grown from a position in 1989 where there was one fund registered with the Central Bank to an industry with over €300 billion under administration with several of the largest global investment management groups domiciling large ranges of funds within the IFSC, and almost every global custodian/administrator present in an industry employing several thousand people, which has expanded outside the IFSC to such places as Kilkenny, Cork and Galway.

The growth of Dublin as a world-class centre for non-Irish domiciled hedge fund administration has also been a major achievement to be proud about. However, we face several challenges:
- We are not a low cost location anymore and we need to reverse wage inflation trends quickly if we are to survive and prosper.
- We do not have a competitive advantage in relation to quick approvals etc, that we trumpeted so much in the past when competing against Luxembourg and others.
- The main engine of growth i.e. the global investment management industry is and will remain for the foreseeable future under pressure both in relation to costs and asset/revenue generation. These pressures are leading to pressure on service costs, consolidation of fund management companies, fund ranges, fund domiciles etc.
- Asset management companies may respond by outsourcing their middle office functions more. Ireland will have to compete for this business not just with traditional offshore fund administration centres but also with domestic branches of global providers in the UK, USA and Germany etc.

So we are facing a tougher environment over the next three years than we probably faced since the early ‘90s, but undoubtedly not nearly as tough as the environment faced when the IFSC and the funds industry itself was established in the late 80s.

The IFSC funds industry, law practices, accountancy practices, listing companies etc have a huge level of experience and work far more closely as a team with both their competitors, service providers, regulators and government departments than in any other country or competitive centre that I know of.

We have had a good restart with the introduction of the Common Collective Fund for Pension Fund pooling and now the fund administrators themselves must respond by investing in the technology in pooling etc to match the ambitions and potential of these new vehicles. Lastly the DFIA and IFSRA must come to a commercially viable agreed interpretation of the UCITS directive especially as it relates to management companies.

As mentioned before just like the high tech industry the late 90s was our bubble period and while it may never have actually burst it has certainly deflated fully, resulting in a wake up call for us all.

Fortunately given the successful journey that the industry has made over the last 13 to 15 years, it has undoubtedly demonstrated it has the capacity and experience to re-invent and re-energise itself with the serious challenges that lie ahead.

This article originally appeared in the June 2003 issue of Finance Dublin.
Paul Mc Naughton at the time was a managing director of Deutsche Bank AG which was then completing the sale of Deutsche’s Global Securities Services to State Street Corporation.
This article appeared in the December 2022 edition.