A slowdown in capital market activity did not prevent asset service providers from experiencing a bumper year in 2023 as they reported solid growth in revenue, fee income, and transaction volume despite a decrease in both listings and value of funds.

The business benefited from clients who were caught in a frenzy of issuing money market funds and mandates, among other activities, in the wake of renewed market confidence following the end of the pandemic.

Although the growth in assets under custody was minimal as a result of low market valuation, many in the industry experienced growth in net interest income as well fee income as they attracted new business and garnered incremental activity from existing clients.

Among leading players, there was a renewed focus on generating business from buyside clients as the institutional investor segment is seen offering huge opportunities. There was also increased business from mutual fund, pension fund, and insurance industry clients.

The opening up of the Middle East markets to financial services as well as continuing opportunities in Africa also benefited asset service providers operating in those markets.

In terms of products, the rising demand for multi-products solutions, involving not just custody but also fund accounting, fund services, transfer agency, as well as fiduciary services, generated an increase in the number of mandates.

Overall, most service providers saw business growth from existing clients and opportunities from new prospects both in footprint and origination markets.

However, there was some consolidation in one part of the industry, particularly in alternatives. BNP Paribas Securities Services acquired HSBC’s hedge fund administration business in November 2023. HSBC, on the other hand, deepened its focus on private debt.

In terms of technology, there is growing demand for financial infrastructure services such as data management as a service, data aggregation as a service, etc., as clients realized it is more cost-efficient to outsource these services rather than invest in it themselves or keep it in-house.

Another industry trend is that clients are getting more interested in decentralized finance, particularly tokenization of physical assets. This provides another opportunity for asset service providers as they help clients navigate and become competitive in a highly digital market.

China market

Amid the volatility of A-share markets, a growing number of Chinese investors are seeking opportunities overseas, which is why the Qualified Domestic Institutional Investor (QDII) scheme has been gaining a lot of traction since last year.

Institutional investors such as insurance companies are actively utilizing the channel to capture overseas investment opportunities. Meanwhile, QDII funds, such as QDII exchange-traded funds (ETFs), have caught the fancy of retail investors. 

On the other hand, regulators have been tightening control over the granting of QDII quotas since last July, prompting asset servicing players to lobby regulators and wangle for quotas for their clients.

As of March 2024, a total of 186 institutions have been granted QDII quotas amounting to US$165.52 billion. Among them were 39 banks with a combined approved quota of US$27.03 billion; 75 mutual funds, securities firms and asset management subsidiaries of securities firms, US$90.55 billion; 48 insurance companies, US$38.92 billion; and 24 trust companies, US$9.016 billion.

There is also a strong demand for global asset allocation under the Qualified Domestic Limited Partnership (QDLP) programme.

Unlike QDII, which only invests in the secondary market, pilot funds under QDLP invest in both primary and secondary markets, with overseas institutions managing the funds. Cities and provinces like Beijing, Shanghai, Guangzhou, Chongqing and Hainan have been actively expanding the pilot programme.

As a result, cross-border servicing capability has been a key topic among Chinese custodian banks since last year.

By no means is the flow of money simply out of China. In terms of inbound investment, the Qualified Foreign Institutional Investor (QFI) channel is also buzzing with activity. More than 80 new investors were approved under the QFI scheme last year, indicating a solid interest among global investors in Chinese assets.

The majority of the QFI investment still comes from Hong Kong and Singapore, but there are cases in which US asset managers and asset owners invest through segregated accounts managed in Hong Kong and Singapore. Southeast Asia accounts for a smaller portion of the business.

The QFI arena has long dominated by regional and global banks.  But over the past two years, Chinese banks have been joining the fray, capturing some of the business, particularly from hedge funds interested in investing through the QFI channel.

It is in this context that we at The Asset are announcing this year’s winners of the Best Subcustodian, Best Domestic Custodian, Best Fund Administrator - Retail Funds awards for North Asia, Southeast Asia and Australia, South Asia, and the Middle East, as well as winners of the Best Fund Administrator for Alternatives (Hedge Funds, Private Debt Funds, Private Equity Funds) awards. These form part of The Asset Triple A Sustainable Investing Awards for Institutional Investors, ETFs, and Asset Service Providers 2024.

Please click here for the list of winners of the Asset Servicing Awards.

To join the in-person annual celebratory dinner on June 14, 2024 in Hong Kong, please contact us at [email protected].

Related article: Tales from the front: Asset service providers win some, lose some