The role of custodians in providing value-added services like performance measurement, risk analysis and portfolio attribution is becoming more significant across Europe. These services are now core products for the custody providers, who in some countries are taking business from more traditional providers.
“All across Europe clients are looking more and more to custodians as providers of services such as performance measurement and risk analysis,” says Lucille Knapp, European business development manager at Northern Trust in London. “These services are becoming very important for institutional clients as pension funds are increasing their equity exposure across borders.”
This trend is affecting all custodians, who have been busy developing the right tools to satisfy the growing demand from their clients. State Street has developed a series of online performance and analytics applications to meet the most complex performance evaluation reporting, with options for accessing and manipulating information. It has also launched a risk service specifically designed to identify and assess risk across all asset classes which compares the relative risk of different security groups, measuring the impact of currency risk and structuring asset allocation guidelines.
Chase is also using technology developments and its expertise in the custody arena to extent its services further. “Historically in the UK the typical providers have been companies like WM and Caps,” says David Webb, head of the EAME consulting group at Chase Global Investors Services in London. “But now we see an increasing trend to moving towards the custodians who have the ability to provide this information,” he says. According to Webb the reason behind this is the fact that custodians hold all the portfolio information needed for evaluating performance and risk of institutional portfolios, while non-custodian providers need to re-enter all this data before they can actually offer these services. “Through our custody and accounting relationship with our clients we get all the information we need to provide performance and risk analysis services,” he says.
Webb believes that using performance measurement and risk related services from custodians can be especially useful for large pension funds trying to consolidate all the performance reports they get from different investment managers: “If you think of large pension funds which may have several investment managers, custodians can provide all the information they need in one consolidated reporting package, through electronic means or as a hard copy performance report.”
Custodians are now offering the possibility of access information on performance measurement at asset class, country and even stock level. “At Chase we are actually taking the information right down to stock level giving much more flexibility than the traditional performance measurers’ hard copy reports can provide,” Webb says. Clients can also obtain the data they need related to countries or economic sectors or even security level returns and characteristics.
“We also offer risk analysis services using MPT – modern portfolio theory – statistics, including betas, tracking error and information ratio,” he says. Other products include value at risk, portfolio optimisation and asset liability analysis. In some cases, custody houses are also breaking into areas which until now have been dominated by investment consultants such as asset-liability studies and managers selection. “We have some clients within Europe and the Middle East that are already using us for investment manager searches – in the UK these services are still mainly being provided by consultants,” Webb says.
However, this trend towards custodians offering performance and risk analysis is not new in the US and some countries in Continental Europe. “UK is quite unique. Companies like WM and CAPS have been controlling the market of performance measurement services for a long time, but in other countries, like Switzerland for instance, this has been traditionally provided by custodians,” he says.
Although some clients seeking information on their portfolio performance remain faithful to consultancy companies, the trend among institutional investors towards using one-stop shop services from custodians is becoming important. What has long been considered as complementary services are now becoming an integral part of the custodians’ relationship with their clients. IPE