Custodian competition gets rough

Damon Taylor reports that as consolidation continues to occur within the Australian superannuation funds sector, competition has increased among the big custodians for key mandates.

As an industry that continues to evolve despite what may be less than stellar investment returns, the trend within Australian superannuation seems set to be fewer but bigger funds.

In such an environment, service provider competition is as fierce as it has ever been, focus essential, and for Ian Martin – head of State Street's custody and global markets business in Australia – custody provision is increasingly front and centre.

“We’ve had a good degree of success in winning new clients at the end of 2011 and again early in 2012,” he said. “So to some extent, our current focus is onboarding those clients in SunSuper and QSuper.

We spend between 20 and 25 per cent of our operating expense budget on technology and this, again, supports our operating model going forward.
 

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“Clearly, the sales process is a long one, and so is the preparation for the transition – but once the transition has been executed, we’re moving towards a business as usual focus,” continued Martin.

“So with two very big transitions this year, that certainly has our attention.”

Yet having had that success, Martin said that State Street was looking to build momentum in the superannuation marketplace.

“We’re looking to take as much opportunity as possible from the current environment where it would appear a lot of the country’s big superannuation funds are evaluating their current arrangements,” he said.

“I think it’s fair to say that the global financial crisis put a number of their plans on hold, but three years later, I think people now feel that it’s time to re-evaluate.”

Such client transitions seem a common theme within the custody business, and yet for Pierre Jond, head of securities services, Australia and New Zealand, BNP Paribas has been equally intent on establishing its local banking infrastructure.

“So where we used to rely on BNP Paribas in Singapore for much of our custody and banking infrastructure, those services have now been migrated back to Sydney,” he said.

“That makes Australia the 23rd location and market in which BNP Paribas is a local custodian.

“But most importantly, it means an even better level of service for our clients,” Jond said.

Naturally, BNP Paribas’ implementation of local infrastructure is significant within Australian custody provision for the inevitable debate to which such initiatives lead.

That is, whether super funds are best served by a global custodian with global reach and scale or by a local custodian with an intimate knowledge of the Australian marketplace.

However, for Leigh Watson executive general manager for asset servicing at National Australia Bank, the advantages of local expertise and locally-based personnel cannot be underestimated.

“The story of NAB Asset Servicing’s position in the Australian marketplace is based on 60 years of history,” he said.

“But that history and our local expertise are aspects of our business that we believe our existing clients value.

“In terms of global reach, our clients are well supported through our cornerstone relationship with the Bank of New York Mellon,” Watson continued.

“But just as importantly, they are also able to leverage off our relationships with other global banks.”

Indeed, it is the range of global relationships that NAB Asset Servicing can boast which Watson sees as a point of differentiation within Australian custody provision.

“We obviously have an in-depth knowledge of the local market, but in addition to that, we can also offer our clients a diversity of expertise across many global investment markets,” he said.

“That’s something that an individual global custodian cannot necessarily offer.”

Alternatively, Jond said that while ‘local versus global’ had been a long-running debate in the custody business, it all came down to global reach and reassurance.

“As a global custodian, BNP Paribas has a worldwide reach,” he said.

“An Australian super fund can therefore invest in a whole series of different offshore markets, and rest assured in the knowledge that their assets will still remain in the safekeeping of the BNP Paribas business.

“So whether we’re talking about Germany, Brazil or any other of our 23 markets, BNP Paribas has an insight into those markets and can assure the safekeeping of a fund’s stocks with a local BNP Paribas custodian,” Jond said.

Taking a different tack, Martin said that the scale and technology that a global presence could bring was an equally important factor.

“Custody’s about that,” he said.

“And State Street’s heritage – its core DNA – is around being a custodian.

“We have $22 trillion in assets floating through our pipes on any given day, so we have that scale and focus,” Martin continued.

“But that’s also got to be backed by significant investment in technology.

“We spend between 20 and 25 per cent of our operating expense budget on technology and this, again, supports our operating model going forward.”

So as service providers to an industry that continues to feel pressure – both regulatory and competitive – it seems clear that focus remains vital for custodians. Core custody must be executed well, and yet custodians must pay equal attention to value-adding services for that point of differentiation.

So for Paul Khoury, chief operations officer Australia for State Street, custodians must look to the future.

“There’s going to be a number of $100 billion funds in Australia and they’re going to have a breadth of investment and levels of sophistication that we haven’t really thought about yet,” he said.

“Those funds have got to be extremely confident that their custody provider – and it’s a single provider because of the environment we’re in – is going to have all of the tools necessary to support that.”

Alternatively, Watson said that NAB’s focus was ensuring a deep understanding of their clients’ needs.

“We currently have an annual technology spend of $70 million and continue to see the benefits of that investment,” he said.

“We’ve now won 9 new mandates in 9 months, but intend to continue enhancing our capabilities and providing our clients with what we hope is an even better service.

“For us, that on-the-ground knowledge of the local market and that deep understanding of our clients’ needs is key.”