But funds’ appetite for data has grown as their investment strategies become more complex. Funds want more information about the performance of investment managers they appoint, in addition to financial markets analysis to inform their asset allocation decisions.
They want to know how major investment risks, such as Europe’s sovereign debt crisis, are affecting their investments each day. “They want to know if today is the day that it goes bad,” says Mark Kelley, who became head of J.P. Morgan’s Australian custody business in late 2011. “The real value of the custody business is curating information. It’s about how you can best manage and extract data on behalf of clients for their best benefit.”
Some funds, particularly those that manage money themselves, ask custodians for services that are usually provided to funds managers, such as investment analytics, data management and other middle-office tasks. Not all custodians are currently able to satisfy these requests.
“Custodians weren’t set up to meet the middle office needs of funds managers,” Vaughan says. “Now we see some super funds look like funds managers and they expect custodians to evolve.”
Funds expect this because each custodian has become a “rich repository” of investment information for its clients, says Daryl Crich, head of product and strategy at BNP Paribas. They should be able to present data in different ways.
“The ability to store, sort, massage and exchange data is what we are seeing more focus on,” says Pierre Jond, managing director of BNP Paribas Securities Services in Australia. One client’s hunger for data sees it exchange information more than 100 times each day with the custodian. But such a bespoke service usually comes at a cost. “There is always a trade-off between price, efficiency and timeliness,” Jond says.
In coming years, funds will become diversified financial services institutions that provide more customised investment portfolios for members, Hirt says. They will need custodians to provide immediate access to data about members’ investments. This illustrates the need for custodians to focus not only on making existing custodial services more efficient, but how they can support funds as they change, David says.
“Custodians need to be able see the writing on the wall and build capabilities ahead of need.”
Custody is a “dog” of a business, says a funds management salesman who formerly worked for a custodian.
Unlike investment managers, who develop distinct strategies and say that these can consistently beat a benchmark index, all custodians provide similar services. “How can you differentiate yourself from the competition?” the salesman asks.