Asset servicing firms offer strategic advice to fund managers about running their businesses more efficiently. But here Tim Keaney tells Nick Fitzpatrick how BNY Mellon has adapted its own servicing business to the tougher environment
Custody bankers were never expected to be rocket scientists, but at The Bank of New York Mellon, they could use a few. Trying to find a way to use physical oil rather than oil-based futures to back exchange-traded funds (ETFs) linked to oil, has so far flummoxed BNY’s stock of intellectual capitalists.
Whenever real oil was tested as a physical base for oil ETFs, the darn fuel just kept evaporating.
“We found a way to have gold ETFs backed by physical gold rather than gold futures,” says Tim Keaney, CEO of BNY Mellon Asset Servicing. “The only thing that stopped us doing the same with oil was that physical oil evaporates as it is transported, so it always loses some of its volume and we couldn’t work out how to price for that!”
The search to be able to use real oil in oil-linked ETFs is a small part of a push by BNY Mellon to broaden its product offering. Providers of investment services like BNY Mellon are always under pressure to keep up with client needs, but the tougher economic environment has increased the need to innovate. The custody bank – and its asset management sister operation – is expecting a long period of slow growth.
Nevertheless, Keaney, who is also Emea chairman for BNY Mellon’s combined servicing and asset management business, says that opportunities for the custody half to provide services to investors have occurred even in mature markets where the company already has an established presence. The driver for it is, in some cases, regulation, perhaps proving that one man’s burden is another man’s treasure.
New growth opportunities
“Canada, the US and to some extent the UK are large mature markets for us, but slow growth markets too,” says Keaney.
“However, regulatory changes offer us clear opportunities in these markets. A great deal of our discretionary spend in 2010 has been on regulatory compliance.”
For example, BNY Mellon built a new tool for stress testing that came out of US money market fund regulations. These required funds to have an average maturity and certain percentage of fund liquidity.
The situation is similar now in Ireland, Keaney says. “We find that whenever there is a new money market fund that needs to be stress tested, they turn to us. The more that the European regulatory bodies adopt approaches similar to the US, we find we have something to offer the market.”
Finding new avenues of growth like these in established markets has been important, even to the largest custody bank in the world. BNY Mellon’s assets under custody and administration stood at $24.4trn (€17.9trn) at the end to the third quarter 2010.
For custodians, the economic downturn has seen a decline in earnings from key generators, such as FX spreads on client transactions, and from interest rate spreads earned through financing services.
Yet the downturn has been sufficiently benign for BNY Mellon’s asset servicing business to make acquisitions that have extended its reach within alternatives and European asset servicing. The acquisitions were of PNC Global Investment Servicing and Germany’s BHF Asset Servicing.
“Our margins went from the low 30s to the high 20s. However, at the same time our market share went up,” says Keaney, adding that the firm is now the sixth largest bank in Belgium and the second largest securities servicing provider in Germany. Since BHF and Mellon came together, the company has picked up 3.5% market share in the German depot-banking space.
When State Street, BNY Mellon’s big rival, went on the acquisition path in Europe, it looked further south and bought Italy’s Intesa Sanpaolo’s securities services business, completed in March. But strategically Keaney is more interested in Northern Europe.
“We go where the money is. For pension schemes, the Nordics have some of the largest plans in the world. When you look at some other European markets, at best it is still early days as far as pensions are concerned.”
However, he notes that financial institutions such as asset managers and insurers are to be found in greater numbers in the Italian market, as well as in the French market where Keaney admits it has been tougher to build presence due to stiff competition there from domestic names.
“Breaking into France has been a challenge. There is some very strong entrenched competition,” he says, though he adds: “Many investors are more comfortable being offshore in Ireland and Luxembourg. Look at Pioneer – it took €10bn from Italian-domiciled funds five years ago, put them in Luxembourg and delivered them back into Italy with tax advantages.
“One needs to be mindful of changing dynamics in fund management, and they are often driven by tax treaties and other regulation. People do not need to be in Italy or Spain anymore. Manufacturers see that it can be costly to establish outposts in Italy and Spain so they go to Luxembourg instead.”
Another changing dynamic, though possibly just temporary, has been the rise of ETFs at the expense of more traditional passive and active funds.
“Apart from ETFs, there have not been that many new funds. Over the past year there has been more consolidation in fund ranges rather than launches, but we are starting to see more net inflows,” Keaney says.
“As for ETFs we’ve seen numerous launches. I do not understand why in Europe core equities and core bonds are not indexed more often via ETFs. Why pay 15 to 20 bps when you can pay five?”
Indeed, and why have oil futures when you can have real oil – or can’t, as the case may be. Any suggestions about how to price oil ETFs backed by evaporating oil would presumably be appreciated at BNY Mellon, where the intellect of its staff has become a prized asset.
According to Keaney, if you want to work in asset servicing these days, you’ve got to be clever, particularly in client-facing roles.
“Before [the crisis], in client-facing roles you did not have to know how stuff worked. But today, they have to be the brightest people. The range of things our people in client-facing roles have to know about is enormous.”
He adds: “Our relationship managers in asset servicing have a lot more knowledge of our firm to deliver to the client. Relationship managers are key to our business now, because clients are today solutions-oriented and products these days are bought, not sold.”
Wringing out expenses
Borrowing a phrase coined by Pimco’s William Gross, there are two other important factors in how BNY Mellon does business in the “new normal”.
“We have spent more management time wringing expenses out of the system and increasing efficiencies. In our business you have to spend significantly on technology, yet we have managed to spend the same amount on technology in 2010 as in 2007 [$600m] even with the completely dire state of the markets we are witnessing,” Keaney says.
The other is the role played by BNY Mellon’s client advisory boards, where many product and service ideas come from.
“Additionally, we’ve used our client advisory boards – made up of 40 to 50 of our more sophisticated clients – to talk to plan sponsors and financial institutions. We see what they want, then go away and build it.”
The Holy Grail is to keep servicing clients to a high standard, wring out efficiencies, and launch meaningful products in a timely fashion, Keaney says. Though people may have to wait a little longer yet for ETFs backed by real oil.