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.
Citi looks for a growth edge with NAS agreement
NAB Asset Servicing’s (NAS) announcement that it would wind down its operations has the rest of the industry eyeing what’s left of its client book, which includes Equipsuper, Brighter Super and MLC, now part of Insignia Financial. But Citi Securities Services has struck an agreement with NAS to refer a number of its clients to them in what it hopes will be a part of a “focused, responsible growth strategy”.
“We’ve done a number of due diligence sessions where they’ve talked about the way they service their clients,” Mark England (pictured), head of Citi Securities Services in Australia, told ISN. “They’ve talked about processes are automated and where they are manual; they’ve talked about publication and activity points within a particular day, and it’s all done on a portfolio basis rather than a client-specific basis. But I think it’s been hugely beneficial for us to get that understanding.
“It’s a long way from what the RBC acquisition was and our expectations are very different. In my mind there’s no question that we can be more confident about this process because we’ve done RBC, but it’s not a replication of it; it’s not RBC 2.”
The relationship between NAB and Citi has developed “quite substantially” over the past eight years; Citi has been providing NAS and its clients with global custody services since 2015, while NAB acquired Citi’s Australian consumer banking business in 2022. Citi has been “respectfully” positioning itself with NAS’ clients as questions around their future grew during its on again, off again sale process and was keen to strike when NAS announced that it would wind down.
Under the agreement, NAS has been “proactively introducing” Citi to a set number of clients, with some more amenable than others. Mason Stevens, a former NAS client that went to Citi in May, was not among the group of clients that were referred to it. While all of NAS’ clients will run their own vendor assessment processes and make their own choices, Citi says that its experience transitioning the 26 RBC clients to its platform over 24 months – sans Perpetual – shows that it can ease the transition.
“I think investors globally are more focused on conversion risk now than they have been for quite some time,” England said. “Globally last year about 83 per cent of the global investors who went to tender stayed with their incumbents, and that’s a strong statement about the benefit of incumbency. In this instance, we have a domestic custodian that’s exiting; the incumbent is not going to retain anything.”
“In Q4 last year my sense was that many of these investors felt the need to move extremely quickly. But my sense is now that with a little bit of time passing that they’re all much more focused on making sure that they’re adhering to a robust process. My sense is that the NAS clients are for the most part are making sure they’re thinking strategically about what they want from their future. I haven’t seen any knee jerk desire to jump, but nobody wants to be there on the last day.”
England, who took over the role from Martin Carpenter last year, has spent the last 12 years in Hong Kong with regional oversight of custody and fund services sales. Over his career he’s seen the last domestically owned custodian/administrator disappear from multiple markets. NAS’ decision to wind down will have a “huge bearing” on the landscape for several years, but custody here – and everywhere else – is now a scale game; the raison d’etre for the RBC acquisition, and now for this.
“It’s become very much a global business in the last 25 years,” England said. “The number of credible global custodians and administrators has reduced significantly. There’s really a finite number of players, and that’s a greater trend. You’ve got to have scale; fee revenue has only gone in one direction, and probably will continue to.”
