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.
ACSA traces evolution of custody: long and important
When Laurence Bailey, then head of Chase Manhattan (now J.P. Morgan) in Australasia, backed the embryonic Australian Custodial Services Association, formed by a former National Australia Bank asset services manager, John Gall, in 1996, he had some big aspirations. Gall was the first secretary of the nascent organisation and Bailey decided custodians deserved to make a bigger mark in the world. They subsequently have.
Gall was the first ‘Lifetime Achievement’ ACSA award winner, in 2007. Bailey was promoted to run J.P. Morgan across the Asia Pacific region and has recently retired, now dividing his time between California and Hong Kong. A lot of water has passed under the asset servicing bridge in the past 30-odd years. It has been a fiercely competitive battleground between big banks for much of that time. And still is.
For instance, NAB, backed by the impressive figure of its then-CEO, Don Argus, decided to take on the American “intruders” – mainly State Street and J.P. Morgan, in the 1980s. NAB, after nearly 10 years of trench warfare, came out on top, claiming the mantle as the largest master custodian in Australia – a title it held for about another 10 years. But, in the swings and roundabouts of funds management and banking manoeuvres, J.P. Morgan is again on top, at least for now. NAB has slipped back to second but is the sole remaining Australian-owned custodian.
The important thing, though, is that during all of the years of competitive in-fighting, the asset servicing industry has continued to develop an array of sophisticated services for its super funds and funds management clients. The management of data and specialist information has replaced simple record-keeping and safe-keeping as the main interest for investor clients. Asset servicing is all about the collection, management and analysis of information.
Against that backdrop, ACSA last week published a position paper which analyses the evolution of custodians in Australia’s institutional landscape. ACSA is chaired by David Knights, the general manager, strategy and transformation, at NAB Asset Servicing. The paper, ‘Institutional Investor Services’ examines the sector, which is, at $3.7 trillion, actually 50 per cent larger than the whole of the Australian super sector, helped by some double counting, and larger still than the Australian sharemarket. In addition to super, custodians also service managed funds, insurance companies, wealth platforms, government entities like the Future Fund, university endowments and big charities.
According to Rob Brown, ACSA’s chief executive, and himself a former senior asset servicing executive, said: “Custodians are continuously evolving through their focus on operational efficiency and in support of the growth and sophistication of key client sectors. Supporting the efficient implementation of regulatory change, client access to new markets and ways of investing, plus keeping up with necessary market infrastructure like the ASX-CHESS replacement make for a dynamic landscape”.
The paper describes key industry trends including:
- Larger and more complex funds
- Internalisation of investment management
- Demand for data in investment decision making, risk control and more efficient operations
- Support for ESG considerations in portfolio construction, reporting and member engagement
- Use of new technologies, with distributed ledger technology an operational reality.
The paper updates an earlier version by the organisation published in 2010. Brown said: “It is interesting to reflect on the level of change the industry has experienced in the past decade. One of the most significant trends has been growing demand for data, along with a growing awareness by clients that one size does not fit all. A simple example is how asset valuation from the custodian provides an independent basis for comparing investment performance, enables fund fiduciaries to monitor risk, and underpins the calculation of individual member account balances. The key is to recognise that each data set requires different controls, classification and enrichment to be fit for purpose.”
– G.B.
