To understand the future is to understand the past. At the pointy end of the investment process, the story of the evolution of asset servicing can provide an important guide to the future, especially in the rapidly developing Asia Pacific region. In this regard, Northern Trust is a valuable case study.
When Steven Fradkin joined Northern Trust Corporation 28 years ago it was a Chicago-based bank. A big business trip for him was to travel to Florida. Today, as president of corporate and institutional services, he travels the world with the company and has spent a lot of time developing the business in this region.
Asset servicing has changed and grown exponentially, the APAC region has changed and grown exponentially, and technology has changed and its importance has grown exponentially.
On a visit to Australia, from Chicago, last week, Fradkin said that global cross-border investing, as measured by the Northern asset servicing arm, had grown about 50 per cent compound annually since 1990. But that is not to say it’s a boom business without its challenges for those providing the services. Northern’s entry to Australia is interesting. It took nearly 20 years.
Fradkin came to Australia in the early 1990s to scope out the provision of global asset servicing for the burgeoning super funds. He discovered a very competitive market, which did not faze him, but he also discovered a complex tax system and a cohort of potential clients who wanted global – that is, US – pricing for servicing while requiring about twice the amount of work from their service provider. Northern decided not to proceed with an Australian office at that stage.
And this is where the changes in what custodians do and the advances in technology come into play. The changes are that custody is no longer about safe-keeping; it’s about the provision of information, every day, to make a fund run better. On the technology side, it is now possible to work off a global platform, with reasonably cost-effective local market adjustments.
Fradkin says: “ We loved the Australian market (in the early 1990s) – the growth rate, the size and the fact that things were speeding up. What we didn’t like was the tax accounting. We’d built a business all over the world based on our platform, with adjustments for the locals. Australia was the first time we thought it was too difficult to customize what we did… We thought if we can’t do a quality job and get paid enough for it then we shouldn’t be there. That decision has been vindicated.”
Since then, advances in technology sped up, particularly due to internet development, which has enabled Northern and major other custodians to do a quality job more cheaply. While fees have continued to go down and the complexity of the custodian’s work has gone up, so has the breadth of the service offering.
“Today, it’s a global information management business,” Fradkin says.
Northern won two very big clients in the region, NZ Super and Australia’s Future Fund, which justified the firm’s decision in 2006 to establish a presence in Melbourne. Subsequently, having come to terms with Australia’s tax system, it has picked up the full-service business of the CSC (formerly ARIA), and the middle office of QIC – all very big funds.
Northern recently was appointed to provide custody services, too, to about $2.6 billion of funds for the global manager Magellan Asset Management. This has had the additional benefit of refuting a view that the company was only interested in very big funds, according to Rohan Singh, the Australia and New Zealand head.
Singh says the main two tenets of the Northern offering are: to provide a global operating model which drives value and to adapt parts of it when this is not relevant; and to form partnerships with a value mechanism that resonates. He says he is very happy to talk to smaller super funds.
It has long been a problem for custodians to differentiate what they do on anything other than price. Custody has been an area of investment management that people have not been too concerned about unless there’s a problem. With the increased sophistication of funds and managers, this has also changed. Custodians are now actively involved, for instance, in the latest trends for funds, such as the provision of SMSF-style platforms under their umbrellas.
Fradkin believes that asset servicing fees have bottomed. With a decline in other revenues, from cash handling to FX, the players which have remained in the game are a lot larger and better able to prove cost-efficient services. He says this is the same story in the UK, US and Canada.
Northern has offices, now, in Tokyo, Beijing, Hong Kong, Singapore, and Bangalore, as well as Melbourne. It plans to open another office in SE Asia within the next year.