Competition heats up in custody

A range of factors have given rise to a significant increase in the competitive tensions in the Australian custody industry and, as Mike Taylor reports, much of the competition is being generated by changing super fund requirements. 

For around a little over five or six months of 2014, many eyes in the Australian superannuation industry were turned towards the nation’s largest custodian by market share – NAB Asset Servicing because of an announcement it made to the Australian Securities Exchange (ASX). 

The essence of that announcement, made in early July, was that National Australia Bank (NAB) was considering the future of its custody business – something which gave rise to immediate speculation around which global player might see fit to make an acquisition and at what price. 

By November, however, NAB Asset Servicing was regarded as being off the market with relatively new chief executive, Andrew Thorburn, stating the company was committed to the business. By February, NAB had announced that Christine Bartlett was being replaced by former Citi executive, Matt Brown. 

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To say that the period between July and November 2014 proved problematic for NAB Asset Servicing is probably an understatement. It is broadly accepted that the July announcement prompted a number of long-standing custody clients to reassess their positions and some actually opted to change providers. 

UniSuper opted to go with BNP Paribas Securities Services and and Victoria Funds Management Corporation took its business to State Street. 

However, it is a measure of the durability of the NAB Asset Servicing business – Australia’s sole remaining domestic custodian – that it continues to dominate the market in terms of Australian assets under custody for Australian investors. 

According to data compiled by the Australian Custodial Services Association, NAB Asset Servicing held $692 billion, followed by J.P. Morgan with $478.58 billion, BNP Paribas with $352.92 billion, Citigroup with $270.98 billion, and State Street with $211.71 billion. 

But while NAB Asset Servicing has held ground despite the events of 2014, there are signs that the Australian custody market is undergoing change, with a number of custody mandates coming to market. 

According to J.P. Morgan’s head of product, Investor Services, Marian Azer, the past 18 months has proved unusually busy and competitive. 

“The past 18 months have been a little abnormal and represent the most competitive landscape I’ve ever seen,” she said. 

Azer said she believed that the activity had been prompted in part by super fund attitudes in the wake of the global financial crisis but also by the entry of new players in the market with asset managers actively pushing their services at super funds, all of which was impacting price. 

But if new players have generated an upturn in competition in the custody space, then so too has the willingness of superannuation funds to increasingly bring elements such as investment and asset allocation in-house. 

BNP Paribas Securities Services Australian head, David Braga, is amongst those who believe that companies which can bring a global perspective and, more importantly, a diverse globally-developed product suite to market will be amongst those to prosper in the current, competitive environment. 

He discussed the role of the modern custodian as being about more than just custody and about being about strategic partnership. 

In Braga’s view, superannuation fund clients making decisions about custodian selection need to look beyond today’s pricing towards how things will evolve over three to five years and whether they’ve got a good partner with the ability to provide them with the support that they need . 

Northern Trust’s recently-appointed head of Australia and New Zealand, Madeleine Senior, substantially agrees with Braga that the challenge for custodians operating in Australia is about far more than delivering custodial services and much about delivering a partnership. 

What is more, she believes that clients are looking for custodians to be much more of a one stop shop for a range of services than has been the case in the past. 

Like Azer, Senior has noted the upturn in activity giving rise to potential movement in the Australian industry and attributes this to a number of factors coming together to prompt super funds to review their service providers. 

She believes that, by and large, clients are looking for a broader service offering, and that global players such as Northern Trust are well-positioned to deliver on that requirement.