CUSTODY: a bigger slice of pie

BNP Paribas' win of a large hedge fund mandate from a prime broker is a sign that custodians can now compete in earnest for the hedge fund market. Nick Fitzpatrick looks back at twelve months of business wins and losses...

pie.jpgIt takes a brave person within an asset management business to stick their neck out and claim outsourcing operations like fund administration represent a long-term, strategic way to lower costs and increase efficiencies. Once the deal is done, they are walking with a target painted on their back.

Nevertheless, asset managers have still sought outsourcing opportunities during the last year of uncertainty.

BNP Paribas Securities Services says it has won a major hedge fund outsourcing contract. The win is seen as a sign of how hedge funds are more critical about commingling custody with their prime brokers.

Margaret Harwood-Jones, head of institutional investors at the securities servicing firm, declined to name the fund, but said the assets won numbered in the billions of pounds.

The fund previously used a prime broker as its custodian. Harwood-Jones says: “Historically we would not have seen hedge funds looking for global custodians, but we are now because they want to segregate their assets and know where their money is.”

She said BNP Paribas has picked up a “dozen or so” hedge fund mandates relatively recently.

This year the firm also won a non-hedge fund securities servicing mandate from London-based Henderson Global Investors and has integrated the long-only business of Henderson’s recent acquisition, New Star Asset Management.
New Star’s previous provider was HSBC.

New Star’s hedge fund business remains with HSBC for the time being, while Henderson’s hedge business is with JP Morgan Worldwide Securities Services.

State Street, the global custodian and asset management firm, has also seen some success in the realm of complex instruments. M&G Investments, the UK and European investment arm of the Prudential Group with £141bn (€160bn) of assets, appointed State Street earlier this year to provide investment services for £5.8bn in assets.

The custodian will provide share pricing and fund accounting for a number of M&G funds that have the ability to invest in complex bonds and OTC derivatives. Previously, the functions were carried out in-house.

“State Street was the clear choice in our detailed search for a servicing partner,” said Martin Lewis, chief operating officer of M&G Investments.  “State Street stood above the rest because of its ability to support the complexity of M&G’s investment parameters.”

ETF market
The burgeoning market for exchange-traded funds (ETFs) is also yielding business for custodians. BNY Mellon Asset Servicing and JP Morgan Worldwide Securities Services have both announced wins in this sector.

Credit Suisse Asset Management (CSAM) appointed BNY Mellon to provide custody and other services including accounting and transfer agency to support the launch of CSAM’s first Irish ETFs.

The ETFs are Ucits products and are based on broad market equity and fixed income indices. The funds will be marketed under the ‘Xmtch’ ETF brand and will trade initially on the Swiss Stock Exchange with multiple cross listings across Europe.

Ross Whitehill, head of offshore management at BNY Mellon Asset Servicing, said the win was a continuation of a global and longstanding relationship with CSAM.

Over the last ten years, BNY Mellon’s ETF services business has grown to exceed US$100bn (€70.1bn) in ETF assets under custody worldwide.

Proshares, part of Profunds Group, appointed JP Morgan Worldwide Securities Services to service eight newly launched international ETFs. JP Morgan already provided custody, fund accounting and fund administration for 64 of ProShares’ equity and fixed income ETFs with total assets of $25bn. 

JP Morgan also saw success with OTC derivatives. In June, Schroder Investment Management, which had £103.1bn of assets under management at 31 March, appointed JP Morgan Worldwide Securities Services to provide fund accounting, OTC derivatives services and compliance reporting for its UK range of retail funds.

JP Morgan already provided custody, accounting, OTC derivative compliance reporting, securities lending, trust & fiduciary, cash and foreign exchange services to Schroders, and it services the company from Australia, Hong Kong, Luxembourg, the US and the UK.

Markus Ruetimann, group chief operating officer at Schroders, said: “We maintain an extensive global operational footprint with JP Morgan across many products and locations. Consolidating custody and UK fund accounting services with one provider makes sense as it reduces operating expenditure and increases operational efficiencies for both parties.”

Further for JP Morgan, in January the firm said UBS Global Asset Management had appointed it to provide fund accounting and global derivatives services for UK funds, which have $20bn under management.

The appointment is an extension of the services JP Morgan already provided for UBS Global Asset Management in the UK, which include custody and related services. UBS Global Asset Management will continue to provide fund accounting for its funds in other markets.

High standards
Matthew Stemp, head of UBS Global Asset Management in the UK, said: “Our decision to appoint JP Morgan as the service provider for our UK fund range was based on a desire to select a partner who could best meet our demands for the highest quality standards. We believe JP Morgan is best placed to deliver this.” 

In April this year, Société Générale Securities Services (SGSS) said that through 2008 it increased assets under administration in Germany by 20% with nine mandates wins. SSGS Kag, SGSS’s German business, won seven master Kag mandates and two outsourcing contracts. The new mandates brought the total of assets under administration for SGSS in Germany to €55bn.

A master Kag involves the integration of all assets of an institutional investor into one legal vehicle (called a spezialfond) administered by a German Investment Company (Kag) in order to centralise and streamline accounting, reporting and risk management.

SGSS Kag was created as a result of the custodian’s acquisition of Pioneer Investments’ middle and back office capabilities in 2008.

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