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Taking custody to the next level
The Australian custody sector remains highly competitive as superannuation funds seek to evolve their service offering and take elements such as investment management in-house, Mike Taylor finds.
The Australian custody market is evolving and, in many respects, defying the notion that continuing superannuation fund mergers are serving to reduce the size of the market and therefore commercial opportunities.
While mergers are continuing to be a fact of life for superannuation funds, so too has been the push by funds to insource functions such as investment management and elements of member analytics – initiatives which play to the technology strengths of the major custodians.
This is something which has been well recognised by State Street, with the firm’s senior vice president and head of global services for Australia and New Zealand, Paul Khoury, who makes the point that superannuation fund executives expect more of their custodians than simply custody.
Indeed, he points to the manner in which the company’s product suite has positioned it to meet the evolving needs of superannuation funds.
Khoury has outlined three key areas in which he sees growth opportunities evolving out of the capabilities of custodians – middle office, investment analytics and data warehousing.
Discussing middle office, he said he was really talking about transaction management in circumstances where larger superannuation funds were looking to insource their investment management and had a requirement to facilitate transaction flows and create some portfolio structures.
“The whole middle office thing is highly relevant to State Street where we are the largest provider of those services globally and it is relatively straight forward for us to deliver that component of delivery,” Khoury said.
However, he noted that from the delivery of middle office services, custodians could build a relationship with funds’ front office.
Dealing with investment analytics, Khoury said that delivery had moved beyond simple daily pricing and was today much more about analysis as a determinant of performance and about stock selection and timing and what was really driving underlying performance.
“That then extends into the area of risk which was traditionally an after event factor, but now what we’re focused on is understanding the make-up of a portfolio and market testing and what aspects of a portfolio need to be brought to surface,” he said.
Looking at data warehousing, Khoury pointed to the manner in which it had evolved to a stage were custodians need to have the ability to capture data and replay it back to their clients; to store the data and then allow for the folding in of external data.
“[There is a] significant difference between data and information,” he said.
Khoury’s analysis of the evolving needs of superannuation funds was largely endorsed by BNP Paribas Security Services head, David Braga, who said that while continuing fund mergers were an issue, the sheer scale of the assets held in superannuation funds were probably a more important factor.
“Obviously, a lot of what we do is driven by the sheer size of assets and that is going to develop almost independently from the number of funds because of how many people are employed and their ongoing superannuation guarantee (SG) contributions,” he said.
“Instinctively, it is still an enormous sector with a structural growth element which will drive complexity for the back office.”
Like Khoury, Braga pointed to the need for superannuation funds to closely examine the technical ca pabilities of their custodians.
“The funds do need to choose the right strategic partner to provide ongoing service and that includes more than just the back office,” he said.
Braga said that was why it was important to be able to leverage the bank-wide abilities of an institution as large as BNP Paribas.
He noted the example of BNP Paribas having recently implemented a tail-risk hedging strategy for a client – something which would not normally have been part of the conversation between a custodian and client.
“Capabilities like that when you’re at the table listening to the problems that super funds are looking to solve are important,” Braga said.
Like Khoury, he pointed to the importance of technology as an enabler for the delivery of a broader range of services to superannuation fund clients.
“Technology is always going to be important because of the scale nature of what we do which in recent times has included analytics and risk reporting across a wider range of assets and more complex structures,” Braga said.
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