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.
New-look Citi ready for top-tier competition
On the first weekend of December, Citi Securities Services went live on the last of 26 former RBC Treasury & Investor Services clients, putting an exclamation point behind one of the biggest and most complex of backoffice transitions.
The RBC clients, predominantly fund managers and wealth platforms, are adding about $100 billion in assets under custody and 150 staff across Citi’s Australian business service offices in Sydney, Melbourne and Kuala Lumpur.
What the additional people and clients add up to, importantly, is a new level of scale which will give Citi greater advantage in the intense competition expected next year to follow the big super fund mergers currently underway.
RBC, which started its almost-20-year journey in Australia in 2001 with the purchase of Perpetual Fund Services, had elected to concentrate on the funds management market in the Australasian region, as it had done elsewhere outside of its home country of Canada rather than super or pension funds.
Citi, like the other major custody banks, offers its services to super funds, insurers and other institutional investors as well. Two of its major super fund clients are the Commonwealth Bank staff fund and the HostPlus industry fund.
Martin Carpenter, a Citi managing director and the head of securities services for Australasia, said last week (December 8) that his firm’s strategic objective for its deal with RBC, announced in March 2020, was to boost its scale to the “top-tier” category to better compete for the bigger mandates. “We’ve now achieved this,” he said.
Most, but not every fund, came across to Citi. They required convincing by the sales and relationships staff, the former led by head of sales Kevin Degabriele, due to the clients’ fiduciary responsibilities.
The notable exception was the manager which started it all, Perpetual, going to tender in 2020 and deciding on State Street for its Australian-based funds management business. Its two new US managers were not included in the arrangement.
Citi, which was already digesting an expansion of the asset servicing requirements by its big life insurer client AIA from the second half of 2020, has said previously it was happy not to contest the Perpetual mandate.
Carpenter believes that the efforts to accommodate all of RBC’s effected staff, by both Citi and RBC, was an important reason for the high take-up rate by clients.
But he said: “There were also two other important factors in the client decision-making. One was the attraction of Citi’s in-house transfer agency capabilities, which have been developed over several years to provide a fully digitised investor and adviser on boarding and transactional capability. This enables fund managers to expand their product distribution and target new direct market segments, such as SMSFs.
“Another important aspect was Citi’s ‘whole-of-bank’ proposition where custody services are combined with other products, including execution and ETF support, in the offer to clients.”
The additional services were important requirements for incoming clients such as ETF provider BetaShares, multi-affiliate manager Pinnacle, and platforms AMP North and Netwealth, he said.
There were no extra requirements for the 26th and last client transferred, the Melbourne-based Yarra Capital Management, except that management would have been grateful for the additional time since they were in the process of bringing in the Australian arm of Nikko AM following an acquisition which was announced in March this year.
The former Nikko AM Australian business, which uses BNP Paribas for asset servicing and whose equities arm has already been re-branded as Tyndall, is expected to follow suit and transfer to Citi in 2022.
The total new assets under custody through the RBC deal will push third-placed Citi to a neck-and-neck position with second-placed Northern Trust on the ACSA market share figures to be calculated at December 31. J.P. Morgan is currently a comfortable leader, with NAB Asset Servicing fourth, State Street fifth and BNP Paribas sixth as at June 30. Citi had $673 billion of Australian assets under custody as of June 30.
On where Citi was headed with its new-found impetus, Kevin Degabriele said: “We have worked to harness all that Citi has to offer and provide clients with solutions that will meet the challenges they face in their own disrupted markets. The high client take-up has validated our approach, and coupled with the added scale, we believe it will present us with further opportunities to grow in the segments we service.”
Carpenter believes the firm is now at a high point in terms of differentiation, as are the other major banks, because custodians have responded to new technologies and various new market and client drivers in different ways.
There were differences, for example, with regards to data and ESG solutions and a range of alternative investment administration services, he said.
“Also, the role of thought leadership has never been more important as clients’ look to leverage the full scope of what their custodian and their broader banking arms can offer.
“With innovation continuing at a pace and with the increasing number of applications associated with the likes of distributed ledger technology, there will continue to be opportunities for custodians to evolve in unique ways.”
An existing service in which Citi has had a leading position in the market for years, securities lending, would be able to be offered to end investors for super funds, managers and wealth platforms. Carpenter says this service, ‘Securities Lending Access’, was a great example of business teams working with their technology partners.
“We’re capitalising on the broader organisation’s investment in new technologies and innovation programs for our clients and our clients’ clients,” he said.
Citi also expected to see the adoption of more industry-wide platforms to improve the way things such as collateral management and private equity admin were processed.
The new ASX settlement platform using ‘distributed ledger technology’ (DLT), now due for launch in April 2023, presented “an exciting change for the market”, he said. “Longer term, it will be great to see fixed income and even managed funds incorporated onto the same settlement system.”
