Custody today is a far cry from what it was in the 1980s. Kyle Ringrose, general manager of investment operations at the $27 billion QSuper, remembers when custodians reconciled scrip transactions and stored records on mainframe computers. This was in 1982, before the onset of capital gains tax and therefore the case for tax propagation, and long before private equity and hedge funds were part of superannuation fund portfolios. But one of the most remarkable aspects of custody in those days was that it was an absolutely free service, Ringrose says. Some aspects of the industry, however, haven’t changed: “If you’d told me back in the ’80s that people would still use HiPortfolio and faxed-messages almost 30 years into the future, I would have laughed,” he says.
Speaking at the 2010 Investment Administration Conference, presented by Investment Magazine, he described how a broad “split” had emerged in the offerings from custodians, “between those focusing on vanilla custody, and those that are branching out and offering more complex technical solutions to super funds”. These services, ranging from alternatives administration, collateral management and tax propagation, emerged as parts of full-service offerings to clients. But they are now being offered on a standalone basis, ‘unbundled’ from the suite of traditional master custody services. Some recent tender outcomes provide evidence of this: in 2010, the Queensland Investment Corporation awarded its middle office administration contract to Northern Trust, and Perpetual chose JPMorgan Worldwide Securities Services ( JPMorgan WSS) to manage the back-office processes of its new hedge fund-offunds.
Peter Curtis, senior manager of investments at the $37 billion AustralianSuper, told the conference that the ability of super funds to now select “best of breed” services from custodians had plenty of appeal. Michael Clavin at the $18 billion First State Super said this trend will continue as super funds gain more scale and aim to diversify their exposure to counterparties. “As these funds get larger, so will the amount of counterparty risk on balance with their custodian. I expect that funds will act on some of these risks and balance their counterparty exposures,” Clavin said. Looking further into the future, he said these growing funds will find it more economical to bring some custodial functions in-house, and will need assistance from custodians in doing this. But in the present day, it’s evident that most super funds still look to one provider to service their back-offices.