Master custodians face a big challenge in supporting their super fund clients’ moves into the direct funds management space, writes BRUCE RUSSELL of Shoreline.

A well-documented trend in the Australian market is the increased “internalisation” of investment management activities by superannuation funds. This is often driven by the desire to gain increased oversight and control over investment assets to ensure alignment with the overall risk and return objectives of the fund. Further, there is the belief that, when compared to the management fees paid away to external investment managers, significant cost savings can be achieved by developing internal capability. Whilst the investment business case for developing internal investment manufacture may be clear, the operational implications can often be significant and represent both a threat and an opportunity to custodians servicing these funds. Custodians who have a track record in servicing investment managers may believe that it’s a simple case of importing these services to super funds. This attitude is dangerous as it fails to recognise the key differences between investment managers and super funds. The following outlines Shoreline’s view of the key differences and the challenge and opportunities this presents to custodians.

1.Differing investment data requirements Investment managers are typically engaged to manage assets at an individual portfolio level in accordance with their particular investment or product mandate. Accordingly, there has historically been little need to view investment asset information from a total enterprise or ‘house’ view. Consequently, the portfolio data delivered by custodians is typically at an individual portfolio or product level with limited requirement to ‘roll up’ this data into consolidated structures to enable an overall view of portfolio positions. Further, many investment managers retain their own data repositories and are not dependent on their custodian for this information. Unlike investment managers, super funds are responsible for the management of the entire fund’s assets. Many of the investment activities in which the funds are involved, such as the implementation of tactical asset allocations or the equitisation of cash balances, require visibility of the entire fund’s assets, often down to a security level. Further, as this information is used to support investment management processes, the ability to ‘slice and dice’ this information to meet the specific needs of the investment professional is a key requirement. Systems historically deployed by custodians to provide investment reporting, such as investment accounting systems, are typically structured in terms of the ‘portfolio level’ view required by investment managers. Whilst this has been largely adequate to meet the requirements of investment managers, it is unlikely to be sufficient to address the data requirements of super funds and may require the deployment of more robust data management solutions, such as an enterprise data warehouse to deliver reporting and data to the super fund clients.

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