The Australian Custodial Services Association turned 25 this year. It is one of those behind-the-scenes organisations which work away for the benefit of the whole industry without seeking much limelight. Well, it shone at the AIST’s ASI conference last week.
In a “special interest” session at the conference, Rob Brown, ACSA’s chief executive, supported by two industry stalwarts, gave an insight into the “custodian of the future”. Custodians have always been good at technology and spent a truck load of money on it, globally and in Australia. This is the era when technology is delivering new and tangible returns across the business universe, both disrupting and enhancing traditional business models, including those of super funds and managers.
The two stalwarts were Bryan Gray, a managing director and head of sales and relationships management at J.P. Morgan Securities Services in Australia and New Zealand, and Sally Surgeon, a senior vice president and head of client services for Australia and New Zealand at Northern Trust Asset Servicing. Like Brown, they both said that asset servicing is increasingly about much more than the provision of custody, although this remained a core service.
In the new world, custodians are going from safe and efficient record keeping of investments (the modern equivalent of share certificates in a vault) through reliable accounting and valuation across assets and mandates, robust tax accounting and pricing, insightful performance and risk analytics, and enabling through fast and flexible data gathering, storage and analysis from the backoffice through the middle office to the front office.
Introducing the topic, Brown, who has been a senior executive at State Street, HSBC and chief executive of NAB’s Ausmaq, said that funds and managers would be looking to engage more with issues and members through investment options, not one single fund strategy. “This will accelerate,” he said. Another differentiator was the response to regulation. “For example, not everyone is affected equally by regulation. Compliance is an operational risk, but how different funds respond may have additional benefits.”
The four major trends within the custodians’ world are: increasing internationalisation of investments, increasing internalisation of investment management, increasing investments in real assets and increasing concern about the provision of pension-type strategies and products. In commenting on these mega trends, Brown said “These trends are driven by the focus, scale and demographics of funds as a major client segment. Reinvented custodians of the future may not be all things to all people.”
Within the internationalisation trend is an increasing allocation to developing markets: frontier as well as emerging.
There’s an old joke that goes: A funds management BDM strides back into the office and gushes that he has just sold a $500 million mandate to a big fund. The head of operations, sitting nearby, says: “That’s nothing. We just settled a trade in India.”
But there is a little bit of Back to the Future on the horizon too. Bryan Gray spoke about the increasing institutional interest in investing on physical gold, for instance. “We have a couple of clients that have held gold at the Perth Mint,” he said. “The Perth Mint has never heard of a custodian. You could turn up and ask for the gold and they’d give it to you.”
Another example of new real assets gaining interest with big funds is water rights. That challenge for the custodian is that the entitlements tend to reside with state-based registries. “The next one I’m expecting although we haven’t seen it yet in Australia is crypto currency,” Gray said. “With the custody aspect, we might go back to the old days of putting the crypto keys, which control access, into a physical vault.”
On a more positive note, Gray said that the J.P. Morgan head office in New York tends to think of Australia as “the Silicon Valley of the custody market”. He said Australian funds tended to be more adventurous with their investments, more international, and early entrants into new asset classes. “They are quick to engage in new opportunities,” he said.
Sally Surgeon said that innovation in asset servicing was made possible primarily through technology. “We are moving up the chain into the middle office and into the front office… One of our challenges for the custodian is to right-size its service model for the individual client. No two clients are the same.”
Brown also, in his introductory remarks, grappled with the age-old question of nomenclature. Does this part of the industry continue to use the word ‘custody’ as a sort-of omnibus description of their services? “In our bit of the industry, ‘custody’ is used as shorthand for a whole range of services,” he said. “It’s actually a small part of what we do, yet it is a fundamental building block and provides critical services and risk reduction to fund clients.”
There are 11 full members of ACSA, each of which provides traditional custody, and 19 associate members, which are mainly technology-oriented and supportive companies.