The custody industry is continuing to experience growth alongside the superannuation industry, and has its basic model in place – a model super funds wanted five years ago. However, the needs have evolved and custodians are yet to meet those needs, particularly in relation to data and analytics.
Custodians have now got the basic model working pretty well, according to Peter Curtis, head of investment operations at AustralianSuper. They are doing some safe keeping, moving cash around to wherever it needs to go, and they give a range of services around unit pricing, tax, performance and compliance.
The sector grew by 7.7 per cent in the first half of 2015, with total assets under custody approaching $2.8 trillion, according to the Australian Custodial Services Association (ACSA).
In the six months to June 30, 2015 (the latest figures available at time of going to press), total assets under custody for Australian investors grew to $2.78 trillion.
Of this amount, $1.93 trillion is Australian assets, with the remainder of $853 billion in foreign assets.
“But we are now at a point, as super funds have grown, where you have a plethora of platforms or services required from the custodians and a lot of them are struggling with the breadth of things we are now after,” said Curtis.
The reason, in his assessment, is because the Australian market is very different from other pension funds globally.
Depending on the strategy, super funds can be a cross between a 401K-type plan – because they are offering different options to members – and a fund manager, if they are doing anything internally.
Because of this, super funds are seeing custodians as the book of records and platform for consolidation. But rather than pre-empting the needs of the market, custodians are having to be led by super funds.
One of the biggest areas relates to data and analytics.
“From my perspective the custodians are not handling the data very well,” Curtis said.
“A number of them probably say ‘We’ve got this data. Come and grab it if you want it’. Rather than seeing it as a core service.”
This is an issue for super funds, as data has become a very valuable commodity, because it provides crucial insights into their portfolios.
“We need it integrated and delivered to us, so that we can pull together what the portfolio looks like and be able to cut it by our investment options,” Curtis said.
“We want to see so we can look at our risk exposures. We can get a very accurate picture of what our currency exposure is and, hence, how we are going to manage those important areas across the portfolio.”
David Knights is the chair of Australian Custodial Services (ACSA) Australia, as well as the acting executive general manager of NAB Asset Servicing, and a non-executive director of the Traditional Credit Union.
He echoed Curtis, saying there has been a much stronger drive from super funds for post trade analytics, such as performance reporting, risk attribution and compliance mandate monitoring, so that they can better comply with the SPS 530 regulatory guidelines.
“There are pressures from the super funds not just to provide custody and investment administration, but also investment analytics as well,” Knights said.
He added custodians were aware of the issue and focused on which emerging technologies could drive efficiencies for them and their clients.
“Some of the larger [custodians] in the market are now dealing with a million lines of data on a quarterly basis. There’s a lot involved with the infrastructure of that.”
BNP Paribas, which has $344 billion in assets under custody, expects this technology to be used to develop more personalised distribution and investor engagement.
Additionally, they say four out of five superannuation trustees (83 per cent) expect to personalise each member’s fund experience by 2025, through the use of data.
“We see ourselves as a custodian of data, sitting in the middle of a fund’s data, from accounting to tax data to analytic reporting data,” a spokesman for BNP Paribas said.
One reason that super funds need analytics is the industry investment trend of around 30 per cent of domestic investments now flowing offshore.
This is due to a couple of reasons. One is limited domestic opportunities, leading to a growth in global markets, partly to diversify and partly to seek differentiated returns. And the second is a flow into alternatives to manage risk and seek returns.
“With that, a custodian with global capability and reach is critical for success,” Knights said.
According to BNP Paribas, the next phase will see super funds located and trading offshore. This means that asset owners will need services— custody, administration, trading, middle and back
office services— based on a follow-the sun model (a type of global workflow in which tasks are passed on to the next time zones, so that they are continuously worked on).
This increased global footprint again elevates the need to be able to analyse data, so that the fund can properly manage the risks.
Peter Curtis and David Knights will be speaking at the Investment Operations Conference at the Sheraton on the Park, Sydney, on February 24, 2016. To register click here.