Northern Trust, the big global custodian bank and fund manager, has launched in Australia what it calls an ‘integrated trading solution’. The firm has produced a white paper which discusses the trading issues. It’s better to outsource, they say.
The paper makes the case for outsourcing securities trading, as well as other aspects of value-add Capital Markets services, ironically, at a time when big super funds are tending to insource their investments and other processes. Super funds and fund managers should at least take note of the global trend.
At seminars in Sydney and Melbourne earlier this month (see other reports this edition), overseen by Penelope Biggs, an executive vice president and the chief strategy officer for Corporate & Institutional Services at Northern Trust, based in London, it became clear how the integration of various securities services and capital markets offerings can benefit super funds.
Biggs said that the alignment of outsourced trading, which was clearly an advantage for fund managers and super funds, with other services such as transition management, securities lending and foreign exchange, meant that client funds benefited from the maximum savings, efficiency and optimal delivery that a provider such as Northern Trust could deliver.
Integrated Trading Solutions
According to Gary Paulin, the global head of Integrated Trading Solutions (ITS), the advantages of an outsourced service, such as Northern Trust’s, include enhanced transparency, improved operational efficiencies and lower costs, for the fund manager.
Speaking about broader industry trends, Paulin said that fund flows tended to favour the lowest-cost providers, in recent years. He said, for instance, that the top-two manager providers took 58 per cent of the flows in 2018. However, he said, that was the first year since 2008 that there was a decrease in the total assets under management for the industry.
He cited BCG who predicted that asset management margins would continue to contract, perhaps by another 10 per cent in the next year or two.
In that sort of environment, also with a probable reduced beta return, super funds and other investors should pay extra attention to their operational efficiencies, Paulin said.
Transition management: who should do it?
According to Penelope Biggs from Northern Trust, fund managers, as well as big pension funds, are often using transition management specialists because they recognise what the benefits could be, particularly from an agency execution basis.
With transition management, the fund has the choice between an agency model, which Northern Trust offers, alongside big advisory firms, such as Mercer – the largest in this space – and Deloitte, or a big investment bank such as Citi or UBS, which will execute as broker. The investment bankers, tantalisingly, will often offer the service for ‘free’.
Ben Jenkins, Northern Trust’s global head of transition management, told the seminars that transition management added value with asset allocation and also tended to reduce costs. “It provides operating efficiency and actually puts it all together,” he said.”
Northern Trust trades about $US80 billion a year in transition management and sees increased event complexity, Jenkins says. “We did a transition last year that involved 41 managers,” he said.
Penelope Biggs said that she had seen that fund managers often used transition managers because they recognised that they were not specialists in the field. They genuinely added value, she said.
With respect to securities lending, Mark Snowdon, Northern Trust’s head of Capital Markets, Asia Pacific, said that within the lending market, roughly 50 per cent tended to be super or pension funds and 50 per cent fund managers. The total global lending market was about US$20 trillion, he said. The borrowers were mainly banks and brokers, acting on behalf of clients or as principals.
Snowdon said that Northern Trust had been looking at a new program allowing clients to lend directly to hedge funds, bypassing the prime brokers. “Lending to hedge funds is one of a number of front office solutions we are working on to help clients optimise their Investment returns. This new programme will automatically increase the value in the transaction for the lenders,” he said. Northern Trust indemnifies the lender, which means the counter-party risk is against Northern Trust, the big global bank that it is, rather than a small hedge fund.
If there is one area in investment management which will be disrupted due to technology, as it has already been, it’s the currency asset class. “We’re at an inflection point,” said Kia Oboudiyat, relationship manager for foreign exchange at Northern Trust. “Our recent acquisition of BEx LLC and strategic partnership with Lumint underscore Northern Trust’s commitment to providing innovative solutions that provide greater transparency and best-in-class foreign exchange services to our clients.”
There was a number of key client challenges which were driving market trends, he said. Clients were facing increasing complexity in managing their currency exposure. These included:
- Regulation, requiring compliance with increasingly complex local and global rules
- Transparency, for consistent, clear and transparent pricing, for instance, coupled with reporting and analytics for oversight
- Cost pressure, leading to a search for competitive pricing and efficient FX execution
- Risk reduction, to mitigate exposure by dealing with the strongest counter-parties and outsourcing operational risk
- Liquidity, to allow access to a deep and high-quality market, and
- Technology, to improve both efficiency and transparency through innovative solutions.