November 2012

ASSET SERVICING: Right place, right time

FishermanTwo custodian banks have a lot to thank Allianz Global Investors and Pimco for in the first half of the year, says Nick Fitzpatrick.   Bond funds have been set on fire in recent months as yield hunger from investors, coupled with nervousness about equities, supported record inflows. As well as benefiting certain asset managers that offer bond funds, the inflows also advanced those custodian banks that count the biggest fixed income houses among their clients. Two custodians in particular stand out. State Street, the trust bank and asset manager based in Boston, in the US, saw the second-largest inflow of custody assets among custodians for the year ending August 31 through its State Street Bank Luxembourg operation. Coincidentally, or perhaps not, three of the top ten bond funds ranked by the size of their inflows were State Street clients in the same period. These included a US high yield fund of Allianz Global Investors (AGI), one of Europe’s largest managers. Brown Brothers Harriman (BBH) saw the largest inflow overall and more than half of it from Pimco, a bond specialist which had three of the top ten best-selling funds in the period. Pimco is part of AGI, and both are owned by Munich-based Allianz, a large financial services company. Specifically, it was Brown Brothers Harriman Trustee Services (Ireland), a BBH entity, that saw the €18.9 billion inflow. BBH acts as safekeeper for Pimco’s Global Investor Series (GIS), a fund range domiciled in Ireland and sold throughout Europe. Timing
The GIS range comprises more than 40 sub-funds with €82 billion in assets. Among these three top-selling funds was the largest bond fund in the world, the Total Return Fund managed by Bill Gross, which earlier this year was seen to pick up again after a difficult period. Their felicitous timing also saw State Street and BBH in the right place at the right time to receive inflows connected to other top ten bond funds. BBH provided custody to the AllianceBernstein American Income Portfolio fund, which is domiciled in Luxembourg and, according to the data from Morningstar, saw the second highest inflows. Meanwhile, State Street in Ireland had custody of the Muzinich Short Duration High Yield fund, which had the eighth best flows. Further, State Street Bank Luxembourg also provided custody to the fund with the largest inflows overall – the Allianz US High Yield fund. The AGI fund is notable, incidentally, because its US-based subsidiary, Pimco, is more identified with fixed income investing. So between them, State Street and BBH have the fixed income powerhouse of AGI carved up, not to mention most of the remaining top ten bond funds with the best inflows. So is this just good luck, or clever strategy by the two custodians? Sean Pairceir, a senior partner at BBH, says: “Our consistent strategy has been to align ourselves with the distribution objectives of the world’s significant asset gatherers and to ensure that the competencies that we have built function to further their objectives.” He adds: “We have been very fortunate to work with exemplary clients across all asset classes.” State Street did not respond to questions. The good fortunes of State Street in the bond arena were not accompanied by positive financial results in the second quarter. Assets under custody and administration fell 1.5% year-on-year from $22,762 billion to $22,423 billion. Revenue across the wider business for the same time frame were down 3% from $2.49 billion to $2.42 billion and earnings per share were also off 2% from $1 to $0.98. However, in its third quarter results the company reported $211 billion in new asset servicing mandates. Revenues across the business continued to decline, though, to $2.35 billion. Assets under custody and administration were up, to $23,441 billion. BBH’s 2011 annual report said the annual revenue growth rate of its investor services business for the previous ten years had exceeded the peer group average. Its 2010 report noted assets under custody had grown by 23% over the previous year and total revenues for investor services were up 20% over 2009. Figures were not given. Popular
Bond funds were the best sellers within the fund management industry this year. Bond funds led Ucits net sales in the first quarter with €49 billion of net inflows, according to figures from the European Fund and Asset Management Association (Efama). They also led sales in the second quarter with €42 billion of inflows. Efama said recently that in July bond funds attracted €23 billion of net inflows. This figure was also reflected by Lipper, a data provider, which reported €21.7 billion of inflows in July. According to Lipper, this was the largest one-month total in more than ten years. The high yield segment was once again among the most popular sectors with record-breaking inflows of €7.1 billion across different currencies. ©2012 funds europe

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