Chris Field, head of sales and marketing for State Street, says there is definitely a trend for clients to ask for more services “up the food chain” in support of the front office of managers. The growth of hedge funds and increasing use of hedge fund-like strategies by traditional managers are placing further demands on investor services companies. Field says: “Hedge funds are definitely more complex as clients. Their performance reporting, for instance, usually involves performance fees with high water marks and so on. The trick is to automate the processes as much as possible. “We’re the largest hedge fund administrator globally and it’s a priority for us to look to see how we can service all aspects of that market sector. It’s a global initiative for State Street.”
The big super funds are not only watching developments in the master manager space, they are also working hard on improving the efficiency, which usually means reducing costs, of other aspects of their management of members’ money.
Foreign exchange and cash management have traditionally been services provided by custodians which have not drawn much client scrutiny. Increasingly, though, super funds are looking to have panels rather than single providers of foreign exchange services and to look for better ways to handle their cashflows.
JP Morgan’s David Braga says: “We’re looking at all the ways whereby super funds can get the maximum benefit from their scale. We’re looking at trading patterns, tax, crossing, lending for long/short portfolios… We’re finding ways to ring fence the benefits.” Ian Martin, the head of State Street’s Global Markets division for Australia, which runs the firm’s standalone foreign exchange operations (as distinct from State Street Global Advisors’ funds management activities or the investor services business), admits that for the company as a whole, currency, cash management and securities lending activities have tended to be a higher margin business than traditional custody.
He says, with currency, that clients can always manage the transactions themselves by directing them through third-party banks. If they choose to direct currency execution via their custodian they may have slightly higher spreads but will need less infrastructure. “With the introduction of transaction cost analysis in the 1990s, there’s a much higher level of transparency now. And various systematic approaches, such as benchmarking, have added to the transparency.”
More than 90 per cent of State Street Global Markets’ foreign exchange business is not directed through the firm’s custody clients. Global Markets is the arm which also provides transition management services, acting as an agent only, as the consultants such as Mercer Sentinel do. The investment banks which also offer transition management act as principals. “Neither approach has really taken over in a definitive way,” Martin says. NAB Custody introduced a foreign exchange panel in 2000, where five or six banks are asked to provide competitive bids on each transaction.