A central, if often overlooked feature of Australia’s super funds is that they have, for a very long time, worked closely with external service providers in their pursuit of world best practice. In relation to custody and securities services, this is a very sensible approach. The scale, geographic reach, and massive investment in technology of the leading custodian banks mean that they are well placed to ensure that servicing of securities held by super funds and other institutional investors.
Although the technology that is used by the custodian banks is typically sourced overseas, the solutions are often developed specifically to address the needs of Australian superannuation funds. Says Roger Fishwick, director at consultancy Thomas Murray, “Australia is an important and influential contributor to ideas about how cutting-edge solutions are developed. This is partly because of the sophistication of the overall organised-savings industry in the country (and the super funds in particular). It is also because of the continuing inflows to the super funds, thanks to the Superannuation Guarantee (SG) levy.”
In short, when the super funds want something from the custodians, they usually get it. This often means the solutions that are provided to the Australian super funds must recognise requirements that are unique to the country. Notes Marian Azer, head of global fund services product with JP Morgan Worldwide Securities Services (WSS) for Australia and New Zealand, “Super in Australia is portable, meaning that individual investors can, and do, move their money between funds and products. This suggests that many super funds in this country need to consider the management of liquidity, asset allocation, reporting of performance and fees more frequently, and to a greater extent, than their defined-benefit-style pension fund peers in other countries.”
Mobility changes the information game
This begs the question: what are the general themes that will matter most in the joint search for world best practice? Pierre Jond, pictured right, managing director of BNP Paribas Securities Services in Australia and New Zealand, observes that since the global financial crisis, risk has become a key focus for both regulators and clients. “In order to manage risk, we are seeing a demand for greater transparency and access to data in all locations. Solvency II in the European Union and Stronger Super in Australia are just two examples of the regulatory demand for this.”
As the keepers of information, custodians are often best placed to provide this critical data to clients and to enable them in turn to meet the needs of the regulators. “Mobile technology is the modern-day equivalent of the web reporting developments in the early 2000s,” Jond adds. “The demand for information is increasing in terms of detail, timeliness and accessibility.”
Observes Benjie Fraser, managing director and global pensions executive of investor services at JP Morgan WSS, “Bringing technology to the boardroom will be a key priority in 2013. Clients take it for granted that custodians and securities services providers deliver and maintain the infrastructure that underpins the entire financial system. Now the clients are looking for solutions that recognise their particular needs and which help them to deliver better governance.”
Executive director and head of e-solutions at JP Morgan WSS, Will Fraser, is more explicit. “The further development of smart phones, and the proliferation of tablets, over the last two years means that, increasingly, clients are demanding access to the information on a 24/7-basis and from anywhere.”
If technology provides new opportunities, regulation imposes new requirements on super funds and the custodians and providers of securities services with whom they work. In this respect, Australia is broadly similar to other countries. “The Australian Securities and Investments Commission (ASIC) requires greater transparency of holdings. The Stronger Super reforms of the Australian Prudential Regulation Authority (APRA) are broadly consistent with the European Union’s Solvency II regime,” Fraser, pictured right, says. “Changes such as these mean that superannuation funds (and other institutional investors) have greater need for access to information about their portfolios on an ad-hoc basis.”
According to Paul Khoury, chief operating officer of State Street Australia, regulations are boosting demand for enhanced reporting and investment analytics. Enhanced reporting “involves more timely, detailed and specific reporting, to enable regulators and investors to substantiate that super funds and investment schemes are conforming to their investment guidelines.”
A challenge for the custodian banks and the super funds is that APRA would like its new regime for enhanced reporting to take effect from July 1, 2013.
“In practice, there is a significant amount of work required to scope, build and test the new data extracts, so discussions are underway with the regulator to consider a phased introduction through until early 2014”, adds Khoury.
BNP Paribas’ Jond – who is also chairman of the Australian Custodial Services Association – notes that this is a challenge the entire industry is facing, as “look-through reporting” impacts the investment managers who manage assets for super fund investors. “If we don’t get this right at an industry level, the added cost to administer and deliver the reporting will be significant – countering the initiatives under SuperStream to reduce costs to super funds,” says Jond.
More, grainier data
Many commentators emphasise the general shift towards more detailed and specific information about super funds’ portfolios. Christine Bartlett, executive general manager at National Australia Bank Asset Servicing, notes that bank “is launching both asset-allocation and counter-party exposure reporting in order to provide more granular information to clients on their portfolios.”
Investment analytics, by contrast, allow super fund trustees and sponsors to test portfolios for shocks and to see what would happen under different scenarios. Jeremy Hester, senior vice president at Northern Trust, notes that that bank offers “multiple perspectives using a comprehensive array of sophisticated analytical techniques, as no one measure provides a complete view of risk and performance”.
Daryl Crich, head of product management at BNP Paribas, says one area where the industry has been pushed increasingly by regulators is to move from before-tax performance management and reporting to doing this on an aftertax basis. “There are many approaches to achieve optimal after-tax returns for investors and members, from both a fund and investment strategy approach,” he says. “Again, custodians are in a to have access to all of a funds’ assets as well as tax-lot information for individual investment manager mandates within the fund. The challenge is to integrate these two levels to achieve the optimal outcome for members.”
How would you like your data?
Of course, processing data is one part of the challenge, delivery to the client, another. “Because access to information is critical to risk management, our Mobile Passport innovation via Blackberries and iPhones is generating high interest,” says Hester.
For its part, State Street delivers information through the my.statestreet.com portal, which can provide both standard and highly customised reports for clients. “This portal includes an investment-analytics workstation which, in turn, has several elements,” says Khoury. “One element provides comprehensive performance and attribution data on investments. A second element is the risk engine, which enables risk to be assessed on both an ex-post and ex-ante basis. A third element is built around compliance, allowing investment managers to monitor mandates and ensure that their managers are not in breach of their investment guidelines.”
State Street recently launched Springboard, an iPad version of my.statestreet.com, which is available to Australian clients. The users can, at a glance, see all details of investment portfolios, including risk exposures, net asset value summaries and fund flows: reports are tailored to the user’s needs.
BNP Paribas has also seen the growing demand for mobile solutions. “Three years ago we introduced our desktop performance and analytics tool to give clients greater access to the underlying investment performance data and tools to allow detailed analysis. In 2012 we launched an iPad application to deliver the same information and functionality to clients’ mobile devices – allowing even greater flexibility,” explains Jond.
Cost consciousness, outsourcing
As ever, the way in which the super funds and the organisations that serve them seek to achieve world-best practice is shaped by economics. “The investment management industry is undergoing a transformation with changing buying behaviour of asset owners, stagnating growth of managed assets and increasing demand for multiproduct, multi-jurisdictional solutions,” notes Northern Trust’s Hester. As a result, there is “significant pressure on business and operating models”.
In responding to that pressure, investment managers are outsourcing middle-office activities to the custodians.
Says David Travers, head of Asia-Pacific at RBC Investor Services, pictured right: “Institutional investors are focusing more than ever on cost management in order to lower expense ratios to supplement performance – in particular, trading fixed costs for variable costs.
“Outsourcing non-core activities remains one of the best ways of achieving that objective, in particular in respect of middle-office services.”
In 2012, State Street launched a new investment-servicing solution that supports small and middle-sized asset managers with their investment-operation needs. According to the Sate Street, the service “includes transaction management, recordkeeping, corporate-action processing, data management, reconciliation, pricing and information delivery. The service solution’s short implementation timeline – four to six months – may lead to “lower project cost and faster time to market for investment managers. Maintenance of system infrastructure and software is handled by State Street, and is further optimised by its scalable servicing model”.
In essence, investment managers have an incentive to concentrate on what they do best. “When middle-office solutions are properly delivered to fund managers, the result is a streamlined back and middle-office staffing layer focused on exception management and supplier-front office liaison. For the fund manager, personnel can focus on adding value by concentrating on sales and marketing, distribution, product innovation and investment performance,” notes Travers.
BNP Paribas’ Crich points out that the lines between the traditional roles of asset owners and investment managers is blurring, with many large asset owners, including superannuation funds, developing in-house investment management capabilities. “This is something quite common in many of the larger overseas assets owners, in particular sovereign wealth funds. Middle-office servicing used to be an offering restricted to investment managers, but now we are starting to see demand from funds themselves.”
Services on offer
The development of these capabilities by custodians is likely to contract the middle offices within investment managers and super funds. “Due to our scale, we are well placed to deliver middle-office services providing significant cost savings to fund managers and, ultimately, benefit members”, says NAB Asset Servicing’s Bartlett.
In this area, NAB Asset Servicing has joined forces with Eagle Investment Systems as a part of its best-of-breed strategy. “The partnership will provide us with a core middle-office capability to support clients via a suite of data management, performance measurement and risk solutions. We are also using Eagle’s data mart for enhanced client access to data for investment decisionmaking”, she adds.
BNP Paribas is seeing demand for “dealing services”, where a fund manager can outsource its trading desk. “We have seen a lot of interest in this service in Europe and rolled it out in the Asia- Pacific in late 2012. It enables clients to receive best-practice execution and, as it is a broker-neutral offering, clients can maintain critical relationships with their brokers, including access to broker research” explains Jond.
The expanding remit of custody
As we explain in the side bar on page 22, the general move by super funds towards greater investment in alternative assets has a number of implications for the custodians. New and improved solutions are being demanded of the custodians. In fact, the role that custodians play in helping super funds to manage risk is changing. Custodians are contributing directly to facilitate the management of risk, rather than just reporting on it.
During 2013, there may be greater appreciation of risks associated with subcustodians. “If an institutional investor has a global/master custody relationship, it is exposed to the operational issues of the sub-custodians with which the global/master custodian is working,” says David Russell, regional head of Asia Pacific securities and fund services at Citi Transaction Services. “We believe that there will be greater awareness of this. At Citi, our physical custody presence in 62 countries around the world means that we can service about 99 per cent of the securities and derivatives that an institutional investor could consider, without recourse to external service providers. We have solutions that enable institutional investors to look directly at the individual assets that they are holding throughout the Citi network worldwide, and to talk to Citi’s in-country personnel.”
As we explain in side bar on page 24, it is possible to identify a number of specific innovations that the custodians will be offering to their super fund clients in Australia in 2013. Some of these innovations have been tailored to meet the requirements of the Australian super funds. As JP Morgan WSS’ Azer notes, “in the world of custody and securities services, if not at the United Nations, Australia has a permanent seat at the top table”. According to Citi’s Russell, “China and Australia are the two national markets in the Asia-Pacific in which demand for securities and fund services will grow and change the most over the next year or so.”