Only a decade ago, there was no real buzz or scale around the Australian custody market: a country of less than 20 million people, with no critical mass in its funds management or pension industry, it didn’t have enough funds under management to warrant the interest of global custody players, and it lacked the innovation that competition brings.
Fast forward to 2008 and Australia’s compulsory superannuation – or pensions – regime, which began with a mandated 9% employer contribution of a worker’s salary and is now the favourite legislated route for national savings, has created an entirely different picture.
A$1 billion (US$971 million) a week is flowing into Australian pensions and total superannuation assets broke the A$1 trillion barrier a year ago. The impact has been a booming financial services sector which has driven remarkable growth for the funds management industry, at all levels.
The subprime crisis notwithstanding, Australia has a burgeoning hedge fund sector and its boutique funds sector is a world leader. Managers who have proven themselves with major players dream of going out on their own, where their stockpicking skills and dealing acumen can make millions, and occasionally billions, at small companies with big ideas.
Inflows spur sophistication
A growing industry of this size, of course, needs custodial services. A boutique fund manager, for example, doesn’t want to invest in costly infrastructure to support his or her operation. They prefer outsourcing to a major player. And Australian superannuation funds, under the sheer weight of inflows, have had to become more sophisticated, and look outside of Australia for investment opportunities.
The net result has been that the custody market has grown alongside the rest of the financial services industry. Add to this the development of banking technology, online banking and the increased participation of global players and Australia now has a custody market as competitive and sophisticated as anywhere in the world.
According to industry group the Australian Custodial Services Association (ACSA), Australian assets under administration reached A$1.363 billion as of June 2007, the most recent industry update. Dominant in that market are global players such as State Street, BNP Paribas, and JPMorgan Chase along with top-ranked local the National Australia Bank.
As Chris Field, head of sales and marketing for State Street in Australia and New Zealand puts it: “our part is the part of the iceberg, which is below the water rather than above the water, and the bit that people don’t ordinarily see. “But the rise of superannuation funds, which are obviously mandated, continues to underpin the rise in funds under administration, and the Australian market is very attractive in that respect.”
State Street, according to the ACSA, had just under 20% of the Australian market with A$267 billion under administration as at June last year. That figure, says Chris Field, has now risen to around A$300 billion.
BNP Paribas, which has done business in Australia for more than 100 years, is an active rival with A$257 billion under administration, according to the ACSA figures for June 2007. Newly arrived head of relationship management Ken Shaw, who came to Sydney from BNP in Paris, says even in his limited time in Australia the shift in asset allocations among pension funds has had a big impact on custody. “Historically superannuation funds in Australia were heavily dominated by purely domestic assets, where now there’s been a shift in thinking,” explains Shaw. “The funds have moved into foreign assets, direct property, alternative investments such as hedge funds which were in the no-go zone for super funds a few years ago. “If you are an investment manager who has been Australia-focussed and now wants to look overseas and maybe expand and look at distribution outside of Australia you tend to go to one of the global players like ourselves because we have that kind of network. If you want to launch a fund in Asia or the UK we have local people on the ground who can talk you through it, and understand the different regulatory regimes.”
It’s all been part of the drive for better performance: “Those funds, which have a greater exposure to a wider variety of asset classes, will probably perform better,” says State Street’s Field. “Traditional pension funds in Australia had a small allocation to certain alternative asset classes with a bias in the past to domestic equities and domestic fixed income.
“And if there is to be an increased asset allocation in alternative asset classes from a custodial perspective there is also an increased reporting requirement, and that is a challenge for the custodian to embed them into the overall structured portfolio and delivery clarity.”
The shift has had a big impact on the custody business. Not only are providers settling more trades offshore in a growing diversity of asset classes, but in a competitive market they are being asked to provide a range of reporting and analytical tools, packaged as a downloadable application available on a client’s desktop.
Size matters
Then there is Australia’s new superannuation licensing regime, which means increased compliance, and the demand for more precise registry services such as unit pricing and performance analysis. The whole information and reporting aspect of custody has changed the industry and in that context, big global players with scale and technology to leverage such as State Street and BNP Paribas are at an advantage. “Scale is a very important part of what we can do, and it really is our scale which gives us the opportunity to innovate,” says Stephen Tremelling, BNP Paribas’ head of business development. “Our online desktop tool for instruction capture for example, has been developed through our scale advantage. Many of the parties we deal with are not SWIFT enabled and we can provide a level of security which they would not previously have had. “If you want to launch a fund in the UK or Asia or a developing market, we have local people on the ground and can talk you through the different regulatory regimes.”
At State Street, Chris Field agrees. “Custody, or investment administration as we call it, is always going to be a scale proposition just by way of the sheer numbers of transactions which are passing through the organization and the scale of the reports and the services which are required,” he says.
Custody has also moved well beyond plain vanilla into a range of service offerings which clients can select from depending on their own capabilities and their inclination to outsource. Rather than being commoditized, providers are now able to prove their points of differentiation. At State Street, the pitch is of a full service offering delivering as close to straight through processing as it is possible to find, all leveraged off the company’s global strength.
No longer plain vanilla
“The custodian will continue to perform the underling role of book of record, but increasingly as more alternative and different instruments are used the custodian will need to provide a high level of reporting for those asset classes,” says Field. “We don’t just provide back office services. We look at the overall structure of the portfolio to continue to ensure accuracy and provide a transparent service to clients. “We have moved away from plain vanilla. Anyone can settle trades in local markets and hold assets on behalf of clients but it’s now about things like implementing a derivatives platform that can report back to clients in a timely manner, report on their private equity in a web environment in a compatible system which can be manipulated to make it a seamless process at the end of the day.”
At BNP Paribas, Ken Hall says the value added comes from the bank’s global resources – in people and technology – leveraged in Australia. “We have the same application platform as the UK, and recently installed a trade capture settlement platform with a global online reporting tool, and we have taken a query tracking tool developed in Australia and deployed that globally,” he says.
Custody may have become more sophisticated and global, but – at its best – it still needs to be invisible – “the part of the iceberg below the water” according to Field. “I don’t know if you are going to see too many headlines in the financial press about custodial services,” says Field. “There are hundreds of thousands of transactions each day and that is our bread and butter, but it’s the piece that people don’t see, unless something goes wrong and we are not doing our job properly.”
