The technology revolution roundtable
Part 1: Super custodians and administrators contest their share
Part 2: How does technology impact custody mandates?
Part 3: What is driving change in the custodian/administrator space?
Part 4: The impact of currency hedging
Part 5: The cost of Stronger Super
Part 6: What will technological change bring to superannuation?
The onward march of technology, multiple sources of data, asset diversification and new standards of transparency have meant custodians and administrators are both cooperating over and contesting each other’s turf. A Super Review roundtable assesses the impact of rapid technological and regulatory change.
Mike Taylor, managing editor, Super Review: Welcome to the Super Review/Simcorp Roundtable. As you know we’re talking here today about technology and the way in which super funds are implementing it.
Not so much from the point of view of administration, although that is an important element of everybody’s function these days, but in terms of custody.
I’m going to kick things off by basically starting with Peter Curtis: what’s the general approach in terms of super funds and technology?
Is there a capacity to insource a lot of this function, or is it something you think is best left as an outsource, and something that requires the sort of investment that’s external to a fund?
Peter Curtis, head of investment operations, AustralianSuper: We look at the whole technology and systems within the perspective of what we want to be doing within the fund – specifically within the investment department within my remit – and what don’t we want to do.
That is all driven to us by where we have scale to do things; where we believe we can add some value to the process if we do it in-house or bring the technology in-house; or where we can actually leverage someone else who’s got the capability, the systems, the technology to get the end result we’re after.
So we always look at it from those sort of angles and in that regard we’re happy to bring in technology in relation to how we manage the systems – portfolio management systems, information systems, research-type systems.
We’re not terribly interested in bringing in-house technology that relates to processing accounting records, those sorts of areas.
So we look for other people for us to partner with to do those sorts of functions where we believe it’s very much a scale game, and it’s very much – especially where we’re going – something that’s needs to be done globally and it’s not an area where we think we can add value or play to our strengths in that area.
Mike Taylor, Super Review: David Mackaway, you come at it from a slightly different perspective in that Challenger has its established focus out there and its own actual technological backup – where do you come from on it?
David Mackaway, general manager of operations, Challenger: I support Peter’s comments as well. I think it’s important for every organisation to think about what works specifically for them, and so I don’t think it’s as much about whether you should insource or outsource.
I think you need to look at it very specifically for your organisation – and in one respect the bespoke level at which you’re having to manage assets.
Certainly, in our scenario, we have taken a different tack to what some of the super funds have done, where we have effectively our own in-house administration platform and we couple with a third party custodian to provide the custodial and final execution component to our environment.
But for us with our particular model – where we’re servicing a life company and then effectively 11 bespoke boutique investment managers – we found when we looked at the outsourcing capabilities that were potentially available to us, that they didn’t quite fit the mark for our particular business.
So we found that we needed something above and beyond what was available in the marketplace from an outsourcing perspective – and for us the only place that we could find it was to go with a third party software provider to help us then build out our own administration capability.
Peter Baker, head of client strategy communications, BNP Paribas: Are we allowed to pitch in?
Mike Taylor, Super Review: Yeah, by all means feel free to have the conversation as a debate, if you wish. And I take it from that that you do.
Peter Baker, BNP Paribas: Yeah I do. So, David in the context of that decision-making, is it because of what you felt that you saw, at least in the custody industry at large – that you couldn’t get a solution that was personalised enough to meet the demands of what you need to report to your own investors?
David Mackaway, Challenger: Yeah, it was a couple of things. And I’ll be honest: we actually looked at it further than just the administration.
We sat there and asked ourselves actually should we – you know we’re doing the administration, and I’ll talk about that in a minute – but should we even go further and actually extend into self custody?
And we came to the conclusion there that that didn’t make sense. Certainly that is an area where I do believe global presence, global scale is the right answer there.
But for us, in the nature of our investment managers, if I think about the broader strategy we’ve taken as a business – our managers are bespoke, they’re sort of quite high alpha.
They don’t sort of sit in the middle as a traditional beta-only type manager. And therefore they come with pretty unique assets – and investment approaches – that they’re trying to run.
So when we looked at the capabilities from an external outsourcing perspective, there was some potential limitations around that.
We also looked at it purely from a cost perspective, and to be honest in our situation it was effectively cost neutral under either model. Now that’s not going to be true in all cases, but it certainly was in ours.
Peter Hill, managing director, SimCorp: And the cost issue is an interesting one because I’m not sure today it’s about insource versus outsource.
I think if you listen to what Peter was really saying there, it’s inevitable you’re going to have both. You’re going to have some asset classes in-house and you’re going to be using some external fund managers as well.
And what that’s going to drive, inevitably, is complexity, because you’re going to be dealing with multiple asset classes with multiple managers.
Nevertheless you’re trying to bring together a sort of consistent view. I guess the super industry in this country is in a unique position because some of it is now sort of green fields. They’re moving into bringing things in-house, and as they do that they’ve got the ability or the potential to do it in a cost-effective manner.
So the issue becomes how to bring together the data from those multiple systems and really get yourself a sort of a holistic view across all of your different asset classes. Because the alternative is you end up with these multiple systems.
You then get people inevitably trying to reconcile data across the different systems, and frankly the more people you end up with trying to reconcile data, inevitably that’s just driving additional costs into your equations.
So I think the fundamental issue is, ‘how do I come up with that holistic view of my total book and yet do it in a cost-effective manner?’
I guess one of the propositions that you’ve put today is whether it is practical for the custodians – my peers on my left and right here – is it practical for the custodians to be able to offer that sort of holistic solution, because they’re offering investment administration today to the super funds.
Is there a Nirvana whereby they can offer that sort of holistic end-to-end solution?
Peter Baker, BNP Paribas: I think that and that’s an interesting question, because you’re talking a little bit around consolidation of data for a lot of your parties, but the second phase to this then is what are you doing with that data? How is it being mined?
You think about whether you’re looking at data from an asset management perspective or from a super perspective: there are different demands on trustees, on funds versus asset managers.
You know – performance, attribution, risk management (from an asset manager perspective), and how to navigate regulatory change from a super perspective.
Not only how you’re consolidating from multiple parties, but how valuable that data is: is it deep-rooted, is it meaningful, is it accurate, is it timely, does it give you the ability to model multiple things from within that data warehouse?
David Braga, managing director, J.P Morgan WSS: It depends on the legacy of the organisation that it’s come from.
Often a fund will have come from a background of being quite technology-light internally. I want to only insource the things that are really going to be high value-add to me and critical to the immediate mission of that particular fund.
Compared that to a fund that may be part of a wider financial services franchise, that comes from a culture of expecting to be doing more heavy lifting, if you want to use that sort of expression, internally and as a different expectation.
And then the boundary point can get set much more based on how you manage your total cost – because if you don’t get enough from another provider maybe you can’t decommission internal systems to a point that you’re achieving the return that you would need to accomplish that.
And then, Peter, I think the challenge we have as custodians is supporting the breadth of assets that are represented in the room.
We need specialist capability and specialist functions, which means we use the global reach, the global capabilities which is not just systems, it’s also talent.
You also need to have the people who know what they’re doing to be able to drive those outcomes, to be able to support the funds with what they’re doing now. I think that’s got to be part of the consideration – and then the value proposition is where you get the people who actually know how to do that really well too.