While being far from immune from the financial crisis, asset servicing firms, such as custodians, have tended to fare better than many other financial institutions as the impact of the credit crunch permeated through the rest of the economy over the past 12 months. Custodians, in particular, which moved up the food chain in recent years to diversify their services in cash and foreign exchange management, have seen some business lines at record levels.
While client transactions such as mandate changes, high-activity equities management and rebalancing have been at low levels since the second half of last year, cash handling has been a strong offset factor. For once it has been the asset management arms of their parent companies which have weighed down overall business, along with those other services dependent on asset-based fees. Nevertheless, the crisis has left no financial services firm unscathed and, for some, things may have changed forever.
The 12th annual Investment Administration Conference, organised by Investment & Technologym in association with the Australian Custodial Services Association (ACSA), will focus on the risks in the system which have been exposed by the financial crisis and those which remain. It will look at the permanent changes which have occurred and new ways that business is likely to be transacted in the future.
The conference is being held on March 3, at the Sydney Exhibition and Convention Centre at Darling Harbour. For the industry generally, it is a “back-to-basics year”, according to Bryan Gray, ACSA chair and head of sales and marketing at JP Morgan.
“People just want to make sure that their assets are safe,” he says. “They are very much focused on security and the traditional role that the custodian provides. They are looking at counterparty risk … custodians are seeing a lot of business come back from the prime brokers.” Transaction volumes are set to go up strongly this year, having started to move in the December quarter, as Australian super funds in particular start their rebalancing process to get back towards strategic asset allocation levels.
According to a global survey by asset consultants Watson Wyatt, Australian super funds had a higher proportion of cash as at December 31 – 10 per cent – than pension funds in any other major market, even without considering the still-higher levels being maintained by self-managed super funds.
And anecdotal evidence locally suggests the figure for large funds may be on the low side. Assuming, then, at least $100 billion in cash, if funds were to move back towards an average strategic allocation to cash of 2 per cent – say they are cautious and go back to about 5 per cent – they can be expected to allocate new mandates totalling at least $50 billion this year. Another survey, by US management consultant Casey Quirk, puts that into perspective.
Casey Quirk recently surveyed 60 asset consultants to US pension funds and discovered that they expected about $US200 billion in mandates to be awarded this year, up about 15 per cent on last year.
The US pension fund market is about seven times the size of the Australian market. So, the level of mandate activity in Australia this year is likely to be at least twice that of the US, adjusted for market size and currency. Of course custodians, as arms of large banks, also benefitted last year from the guarantees and capital injections from governments around the world, even if they didn’t need them in some cases.
Gray says that this is one of the areas where ACSA liaised with government last year, following the initial announcement that only deposits at Australian bank branches would receive the guarantee. “We worked with AFMA (Australian Financial Markets Association), and made our own submission which broadly endorsed the AFMA position, which the Government accepted,” he says.
The Association also held discussions with the Reserve Bank of Australia following the short-selling bans to look at better disclosure when the bans were lifted. “We looked at ‘tagging’, for instance, and discovered there was a lot of confusion between securities lending and short selling,” Gray says – not all lending being to satisfy short seller demand. “We came out with an explanation and showed that shorting, in any case, is a legitimate activity.
This will be something that is likely to continue.” The three largest custodians – NAB, JP Morgan and State Street – are also the largest lenders of securities on behalf of clients. (NAB’s head of custody, Leigh Watson, will chair an investor panel on shorting and securities lending – “What’s a Fund To Do?” – at the March 3 conference.)
ACSA endorsed the letter from the Investment and Financial Services Association which was in favour of lifting the shorting ban after initially expressing no firm opinion, in a joint response by IFSA and the Australian Council of Superannuation Investors, when the ban was first imposed. ACSA also recently made a submission to the Board of Taxation over managed investment trusts and withholding tax. The Board is reviewing collective investment vehicles and an ACSA group, chaired by NAB’s Ray Lester, is following the progress.
One of the biggest initiatives for the association last year was on the education front, with ACSA looking to establish the ACSA Learning Institute to produce an accredited training program for people who work in asset servicing. “There was no specific industry training, so we pulled together our own programs,” Gray says. “We wanted a qualification that people could aspire to. It’s an initiative that will raise the bar and provide benefits and a recognised career path for individuals.”
ACSA selected Financial Education Professionals to design and deliver the program, with the first course getting underway in April. The program initially offers two accreditation options: ACSA Certificate IV in Financial Services (Custody); and ACSA Diploma in Financial Services (Custody).
ACSA also sought to enhance the image of the custody part of the industry and its own image, with a revamped logo and website aimed to encourage greater member participation. The new website was scheduled to go live just prior to the conference.
The ACSA Achievement Awards make a return at the conference dinner, after a redesign of the nomination process to make them more accessible to a wider group of participants in the industry. ACSA has also revamped its statistics gathering (see table) and presentation to present a clearer picture of the state of the market.
The separate category for master custody was removed, as the lines between custodians’ expanding service offerings become more blurred, and assets split simply between Australian and international. “The survey is much more detailed now and should better tell a story,” Gray says. “I expect the next one will show that assets have dropped and transaction volumes have gone up.”