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.
Inside State Street’s ‘transformational’ Challenger win
Last week, State Street announced that it had been appointed custodian and administrator for the entire Challenger group, with the firm also becoming one of the largest investment managers in the region to deploy Alpha, State Street’s front-to-back asset servicing platform.
The win has a chunky headline number attached to it – Challenger presides over $127 billion of assets across its slate of businesses and investment management affiliates – but a more interesting number (and perhaps the bigger story) sits at the bottom of the press release that hit inboxes last Thursday afternoon.
That’s because as part of the deal, State Street intends to take on approximately 100 employees, including David Mackaway, the current CEO of Artega – a cloud-based front-to-back investment operations platform majority-owned by Challenger – which will see an influx of expertise that will boost State Street’s Alpha-focused business strategy in the land down under.
“It complements our strategy,” State Street Australia country head Tim Helyar tells ISN. “We get to move the business on to our Alpha platform and we get access to a hundred people that enable the execution. We can take carriage of that business and hit the ground running. Our number one priority is to make sure that we continue to service our existing clients in a seamless fashion, but at the same time, if we’ve got an opportunity to grow in an inorganic way – there’s not too many opportunities like that out there in the market.”
“It’s pretty transformational for us. We have a number of Alpha clients already, but this is a very big investment manager client using (the whole platform); from that perspective it’s a really important cornerstone client for us, and helps us continue to invest in the needs of the Australian market when it comes to front- and middle-office.”
The win will, of course, lift State Street’s assets under custody and administration, and will no doubt look good when the Australian Custodial Services Association tables are next updated – but “that’s not why we’re doing it”, Helyar says.
“We’re doing it to propel our strategy in this market, which is the heavy investment that we’ve made in Alpha. Getting investment into our business here locally doesn’t just benefit us – it benefits our existing clients. Where you’ve got a client that’s already taking some or all of Alpha, where you’ve got a big new client on it like a Challenger, a rising tide lifts all boats.
“Investing into the nuances of this market – whether it’s the superannuation structures, whether it’s some of the tax nuances of this market, all of that – a dollar spent would be a dollar that benefits multiple clients. The early Alpha adopters should see a benefit from getting another really big Alpha adopter because it will lift our capability.”
The win comes towards the expected end of what has been a period of unusually high RFP activity following NAB Asset Servicing’s (NAS) decision to withdraw from the market.
“It’s an interesting time; we’ll finish our NAS transitions by the end of this year, and that’s why this opportunity was quite appealing,” Helyar says. “We’ve got capability going into next year to be looking at something this big. Outside of that, the market will probably take a deep breath.
“I don’t expect that there’ll be a wave of opportunities like that we’ve seen over the last few years with NAS exiting and RBC exiting – but who knows? I think there’s a period of consolidation and bedding in before we go back to the old days of large opportunities coming to market semi-regularly rather than the waves we’ve seen recently.”
