The Australian custody market will top $4 trillion by 2025, according to a report on that part of the funds management industry by Rice Warner Actuaries. But all is not good news for the custodians.
The report outlines several trends which are likely to impact either custodians and/or their clients over the next few years, including:
. Further consolidation of the next five years: there will be a continuing of the winding up of corporate funds, which totaled 169 at June 2010; an estimated 45 industry funds to remain (against 68 as of last year); rationalizing of many small public sector funds (37 last year); and the merger of commercial funds largely due to product rationalization.
. Tightening profit margins: sustained downward pressure on custodian profit margins likely to be a key issue around the globe. Consequences include increased difficulty in funding investments, especially in technology, and continued pressure on consolidation among custodians.
. Outsourcing: a trend to use multiple custodians for different tasks in order to reduce counterparty risk and a trend to some services being brought back inhouse as funds grow.
. Technology, standardization and automation: about 30 per cent of revenue is invested globally by custodians in technology. While more than half of the super funds which responded to the Rice Warner survey thought their custodians were investing sufficiently, the report says this proportion will decrease with reduced profit margins. Custodians could improve margins through a variety of initiatives on standardization and automation, such as standardized unit pricing or crediting rate processes.
. Service innovations: including increased data demands and frequency of data feeds, increased focus on after-tax performance and the establishment of niche providers or specialized, tailored or very complex services and reports.
. Globalisation: the easing of trade barriers, the hunt for risk-adjusted alpha and rise of emerging markets likely to continue. Custodians will expand their global reach and extend their sub-custody networks.
As a result of some of these trends, particularly tightening margins, the report foresees the emergence of contract structures which mutually benefit custodians and clients.
“For example, formal longer-term contracts in return for short-term competitive prices and built-in mechanisms for maintaining price competitiveness through ongoing price benchmarking.”