Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Brown Brothers succumbs to sale pressure
The last of the independently owned asset servicing firms, Brown Brothers Harriman & Co, has succumbed to persistent overtures and will be acquired by State Street for US$3.5 billion.
The deal announced last week (September 7), will undoubtedly reignite State Street’s own rumours of the past 18 months about a separation of its increasingly successful asset servicing arm from its more glamorous asset management business, State Street Global Advisors.
BBH has US$5.4 trillion under custody to be added to State Street’s $31.9 trillion under custody at June 30. State Street currently goes neck and neck with Bank of New York Mellon for the mantle of world’s largest asset servicing company, with totals of just over $40 trillion under custody and administration apiece. State Street will become the clear leader once the cash transaction is completed.
But BBH, a privately held partnership dating back to 1818, has a very different culture to that of any of its listed competitors. It operates in 90 countries and is headquartered in New York but has an extra strong presence in Asia and parts of South America.
The ‘Global Custodian’ news service reported this July that both Northern Trust and BNP Paribas had made approaches to BBH in the past 12 months. But within a few days the attention switched to State Street.
Ron O’Hanley, State Street chair and chief executive, said the asset servicing industry enjoyed strong fundamentals as worldwide growth in financial assets drove industry revenues. “This combination with BBH Investor Services helps us consolidate our position as the industry innovator and leader,” he said.
In the State Street statement, the Boston-based company said: “BBH Investor Services brings innovative data connectivity tools to the broad marketplace that will be additive to State Street’s product suite and provides a toolset that represents an important enhancement to its service offering. BBH Investor Services’ Infomediary platform, which facilitates data transmission and integration among buy-side and sell-side systems, will also support the State Street ‘AlphaSM’ platform and facilitate integration of clients onto the platform while mitigating future development cost.
“Adding BBH Investor Services’ list of premier clients to State Street will also expand the base of potential users of State Street Alpha. The addition of BBH Investor Services will further State Street’s strategic goal of expanding and deepening its presence in key non-US markets, including developed markets such as Japan, Luxembourg, and Ireland, as well as Latin America, which State Street has targeted for growth.”
In late 2020 and early 2021 it was widely reported on Wall Street that State Street Corporation had appointed Goldman Sachs to advise on a possible restructure of the organisation. The most popular rumour at the time was that the company would either spin off asset management or forge a joint venture with another major house to lift the firm’s scale.
Since then, the rumour mill has gone quiet, but the fortunes of the asset servicing business have continued to improve, notwithstanding the difficult environment of low interest rates. Interest income is an important component of asset servicing company revenues.
The continuing tail winds for front-to-back services from the major custodians has been a feature of their growth, as fund managers, under increasing fee pressure, look to outsource more of their middle and front-office operations and increasingly prefer a single provider to oversee them.
