It takes global scale and substantial on-going investment in technology yet virtually all the major custodians have a presence in Australia and the reason is the nation’s nearly $2.2 trillion in superannuation assets.
Each of the custodians does good business in meeting the needs of asset managers in Australia, but it is the substantial mandates offered by superannuation funds which represent the foundation for their continuing investment in Australia.
There is only one Australian-domiciled custodian, NAB Asset Servicing with the remainder being representative arms of some of the largest financial institutions in the world from State Street, through to BNP Paribas, JP Morgan and RBC Investor & Treasury Services.
The competitive focus of the industry was driven home by RBC Investor & Treasury Services managing director in Australia, David Travers who pointed to the degree to which market share had shifted over the past 10 years on the back of some very large mandates moving between different providers.
This was also something acknowledged by JP Morgan Australian managing director, Bryan Gray who pointed to a combination of structural factors and superannuation fund policy as being pivotal in the changes to market share.
With JP Morgan currently rated as holding the greatest market share in the custody sector, Gray acknowledged that it had been the beneficiary of the NSW Government’s recent decision to consolidate custodial services arrangements for its investment assets.
The move, announced late last year, saw JP Morgan appointed to provide custodial services for the investment assets of NSW Treasury Corporation (TCorp), SAS Trustee Corporation (State Super) and Insurance and Care NSW (icare), which was previously known as the NSW WorkCover scheme.
Gray said his firm had therefore been the beneficiary of obvious structural change in the NSW Government where it was saying there were efficiencies in rolling the management and custody of three different funds into one.
Gray noted that there had been similar structural changes in the past such as when the Victorian Government created the Victorian Fund Management Corporation (VFMC) and in Tasmania with respect to that state’s Retirement Benefits Fund.
It happened many years ago in Victoria with VFMC. It has been happening. And the Retirement Benefits Fund in Tasmania going through a merger.
“That merger and restructuring activity is driving the mandates and the competition,” he said.
Gray said the merger and restructuring activity had occurred alongside the fact that more and more super funds were saying it was good practice for them to every three to five years go and assess the market.
“The custodian is one of the larger outsourcing providers alongside administrators and trustee boards see it as their obligation to review the market in some way for those outsourcing contracts and typically they do that every three to five years,” he said.
BNP Paribas Securities Services head, David Braga, concurred with Gray particularly with respect to the influence of changing mandates.
“The Australian market for securities services is always highly competitive,” he said. “With a lot of funds evaluating their business for the next cycle, competition is accentuated in the current market. We’re seeing a number of funds that are looking back over the past seven to 10 years and preparing for the future.”
Braga said the question was whether the funds would increase their executive team by splitting apart roles and whether if they chose to in-housing some of their activity how they would do so.
RBC’s Travers looked beyond mandates to point to margin compression as being a factor driving competition and forcing organisations to seek out new business opportunities.
“Margin compression driven by the low interest rate environment affects custody providers because of the amount of revenue we earn from non-fee based products,” he said.
Travers said that it was in the midst of this fee pressure than organisations were inclined to perceive scale as a panacea for driving down costs.
“The margin pressure is also affected by the level of regulation and we see that in Australia in the investment vehicle changes, tax changes and regulatory compliance burden so some organisations look to grow through scale,” he said.
Travers said that while RBC recognised the advantages of scale, it noted that there was increasing focus on organisations that could provide specialist services and could provide technology – something which enabled them to control costs and grow into the future.
Both Travers and Gray agreed that clients were still looking to custodians to provide their traditional support functions, but that technological capability was becoming an increasing factor.
“Technology is rapidly changing the way we do things,” Travers said, noting that larger, global organisations held an advantage.
“Some of the boutique providers will have some challenges,” he said. “In the collective investment vehicle regime there is a need to have a depository and if it goes the way it has in Europe the depository has to stand behind the assets it holds and deliver them.”
“Balance sheet strength is going to be very, very important.”
“Technology is certainly driving our requirements in our business and what we have seen at the top end of the market is that both the fund manager clients we have and the super fund clients we have are hungry for data.”
– Bryan Gray
All the major custodians are in agreement that technology and the ability to fund continuing global development represented a competitive key.
JP Morgan’s Gray pointed to the cost of technology investment being a barrier to entry to new players unless they had global backing, describing it as “prohibitively expensive”.
“You need to be able to leverage scale globally,” he said. “It is a hugely technology intensive business and the only way to make money is to do things once globally and make it work.”
Travers said many organisations were looking to utilise technology to take a more agile approach and this was bringing new technologies such as blockchain into play.
“I think blockchain will have ramifications down the track but, more immediately, robotics and cognitive technologies will allow us to focus on how we become more efficient.
BNP’s Braga agreed with Travers on the importance of blockchain saying that interest in technology had reached fever pitch with the three big topics being blockchain, data and automation.
“Blockchain will change how we transact and settle many of the assets that our clients invest in,” he said. “As a provider, we are fluent in the blockchain language of all the various assets that are being used, whether that is the ASX, a private market asset or a new derivative blockchain.”
Braga said the firm would be investing heavily in these new capabilities as they are deployed.
“Data is at the heart of what we do and the new approaches and tools that exist for making data available will also drive change in asset servicing in a way we haven’t seen for 20 years,” he said. “The ability to automate activity through new technologies such as business process automation (BPA) will make our services more timely and more accurate. So in short these new technologies are changing securities servicing faster than we have seen for a long time.”
RBC’s Travers said while lower cost was important so too was efficiency.
“If we are going to change the margins it won’t be the lowest cost but the most efficient that wins,” Travers said. “That is why we’ve built our agile methodologies and why we’re looking to improve the client experience in delivering data to our customers via standardised global platforms.”
Like Gray, Travers said global scale and technology investment gave custodians the capacity to deal with regulatory change.
“There’s a lot of regulatory change in Australia but that which is driven globally as well,” he said. “It is increasingly the case that the ability of global organisations to deploy solutions into Australia comes from doing the work globally.”
Travers said this raised questions about how locally-domiciled companies could continue to have a proposition in the local market without having global capacity and in the absence of forming partnerships with global players.
Travers suggested it would be wrong to take a too narrow view of the custody market in Australia, because superannuation did not represent the only avenue for growth, with asset managers always looking to enter the Australian market.
“It is not just about the size of the market here for custodians but new players looking to get into the market,” he said.
While Travers said RBC was keen to partner with asset managers, JP Morgan’s Gray pointed to the manner in which larger superannuation funds were looking to take asset management and other functions in-house and therefore creating an insatiable appetitive for data.
“Technology is certainly driving our requirements in our business and what we have seen at the top end of the market is that both the fund manager clients we have and the super fund clients we have are hungry for data,” he said.
“They’ve been hiring and building their investment teams and they’re hungry for data.”
“The custody business of old used to be about delivering a monthly, weekly or daily valuation report but more and more they’re less concerned about that and more concerned about delivering as much data as they possibly can so they can analyse it and make decisions in their business positions on OTC derivatives, loan portfolios etc,” Gray said. “You’ve got to bring all that together and drive it on a day to day basis.”
He said that for the smaller funds, without the sizeable teams in-house, it was a case of just wanting information such as dashboards available as cheaply and effectively as possible.
“What we’re doing is even feeding information through that goes straight into board reports – so its happening at both end – big funds and smaller funds but its about the data,” Gray said.
Gray and Travers do not rule out the entry of new players to the Australian market but they point to the barriers to entry in the form of technology and costs.
“Never say never,” Gray said. “We saw Northern Trust come in by picking up the Future Fund.”
“But it would be tough and consolidation has been occurring in the industry with fewer very large funds.”
“But there are some good providers operating around the world and if they came in with a different offering and picked off some funds you’d see another competitor in the market,” Gray said.
