State Street’s investment analytics gave it an advantage over NAB as the two custodians vied for the Sunsuper mandate, and its global reach attracted REST.
Now that super funds are asking for more than “core” custody services like fund accounting and tax and performance reporting, “NAB and J.P. Morgan have been caught a little bit flat-footed,” says Geoff O’Callaghan, a Melbourne-based associate at boutique consultancy Shoreline and a former head of ANZ’s custody business.
They have met tougher opponents in fund tenders. “Clients are not happy to stay where they are,” says Lounarda David, regional head of Mercer Sentinel, a custody consultant. “They have been testing the market to go to an alternative custodian or improve existing arrangements.”
The flow of custody tenders that began in 2010 is expected to continue this year. Hostplus, a client of J.P. Morgan’s for 14 years, is considering offers from custodians, while QSuper is assessing providers in a review of its current relationship with NAB.
Because mandates can last for five years, deals won or lost by each custodian in 2012 will shape their market share in coming years. “If you win a few big ones, the market dynamics can change very quickly,” O’Callaghan says.
“Tenders don’t come around too often, so you need to give it your best shot when they do.” Large funds, such as QSuper, are changing their business structures and investment strategies as they grow. Others, such as J.P. Morgan client AustralianSuper, which merged with two smaller funds in 2011, are dealing with the effects of consolidation.
NAB and J.P. Morgan “should listen” to these clients as they change, O’Callaghan says, particularly since decisions by some funds to replace incumbents can motivate others to go to tender. “Custodians should get very close to clients and give them no reason to look,” he says.
The vulnerability of NAB and JP Morgan is “very good” for funds because it broadens the range of custodians they can choose from, Vaughan says. “There are six substantial suppliers in this market that are offering very reliable services at competitive pricing.”
But NAB and J.P. Morgan “will come back hard” as State Street, BNP Paribas, Northern Trust and others compete for custody mandates held by the big two, says David Edwards, the Sydney-based head of custody sales at Citi.
“Custody was once like the family car: a necessity but an absolute pain if it broke down,” says Wayne Hirt, partner at KPMG Superannuation Services. Those were the days when custodians provided fund accounting, tax reporting and corporate actions as part of a “commodity service,” he says.