Pinning down the European market has always proved difficult for custodians. Despite the best efforts of Brussels, Europe stubbornly refuses to present itself as a homogeneous market with common characteristics, conventions and customs, forcing the custodians to pursue country-specific strategies that map client behaviour.
But there are now strong signs of convergence between European investment markets, and custodians are beginning to sense a greater degree of overlap, and a sharing of objectives, which they feel will open up previously closed doors. “We see three major trends across Europe,” says James Cassidy, who handles European sales and relationship management for Deutsche Bank’s custody services business. “First, there’s the liberalisation of savings regulations, which has led to more securities investment and cross-border activity. Second, there is the widespread privatisation of pension provision. And third, we’re witnessing significant changes in market infrastructures, with both exchanges and depositories reviewing the way they do business.”
The result of these trends, according to Cassidy, is that investors are taking a fresh look at how they are served. “The shift from a purely domestic to an international focus means that investors are looking for best of breed suppliers,” he maintains.
Richard Humes, senior vice president in charge of custody at Pictet & Cie, agrees. “Whilst continental Europe may lag behind the US and the UK in its adoption of global custody,” he says, “it is now growing at a very rapid rate, and client demands are at a very sophisticated level. This gives the established custodians an advantage over the local banks who simply haven’t geared up in time for this global custody revolution.”
Custodians have long argued that they are really in the information business, and it now seems as if this contention is coming true. “Pension funds in Europe have become much more aware of the opportunity to receive better information,” says Lucille Knapp, who is in charge of European business development for the custody business at Northern Trust. “They know that the big global custodians have the technological power to deliver improved risk management data, and they need that data both for internal purposes and, increasingly, to satisfy the regulators.” To support this point, Knapp gives the example of the Netherlands, where the Dutch Insurance Chamber now requires quarterly, rather than annual, reporting, with reports having to include an element of performance analysis.
Custodians have rarely been so bullish about Europe, but even the normally conservative Swiss are getting excited. “For global custodians, Europe is booming,” Humes says. “The growing interest in global and master custody services shows that Europe is increasingly convinced that the Anglo-Saxon model for administering assets in the most appropriate and cost-effective solution.”
Humes sees European clients falling into two broad categories. “There are those large institutions, like insurance companies, often managing most of the assets in-house, who are looking to custodians to provide core services but, most importantly, to interface directly with their own accounting and reporting systems,” he says. “Most institutions, however, prefer to leverage off the accounting systems and analytical capabilities of the global custodian, and focus much more on the added value that the custodian’s technology can deliver.”
Nadine Chakar, managing director of ABN AMRO Mellon Global Securities Services, agrees. “Clients are looking to us for full support for the investment process,” she says. “Especially amongst multinational corporations, there’s a big push to get a better handle on information about their pension investments worldwide. They’re asking their custodians to help them with this, through real-time reporting, multicurrency accounting, master recordkeeping and performance analysis.”
Understandably, some pension funds are taking their time in making decisions about the structure of their custody arrangements. International consultants, Towers Perrin which has one of the larger custody consulting practices, is a keen observer of buyer behaviour. “There are obvious concerns over industry consolidation,” says Christine Larmer, a custody consultant at Towers Perrin. “Clients want to be sure that their custodian isn’t going to disappear, and they worry about the disruption of a merger or acquisition.”
According to Larmer, the expansion in cross-border investment activity has an inevitable effect. “As soon as pension funds look beyond their domestic market, they are going to need to strengthen their custody support,” she says. “We can help them to benchmark custodian performance and to track best practice, but we always advise them to try and fix any problems with their existing suppliers before they consider moving.”
At the very top of the tree, the global custodians are enjoying a move by many multinational corporations to rationalise their fund management and administration arrangements and introduce regional or global structures. Companies such as Unilever and Ford have recently been through major reviews, and BP Amoco is reported to be undertaking a study. “A number of multinationals are definitely looking to implement global strategies,” confirms Larmer. Knapp of Northern points out that industry consolidation is also having a major effect on these reviews: “In certain sectors, like telecoms and pharmaceuticals, there are huge mergers and acquisitions taking place,” she says. “One of the big issues within these deals is the attention to costs, and senior management worries a lot about the cost of pensions benefits. Getting the right custody structure in place can help to manage these costs in the most effective manner.”
One custody service that continues to burn slowly in Europe is securities lending. “We are seeing a lot more interest from institutions, some of which have been very conservative in the past,” says Deutsche Bank’s Cassidy, “but it is taking a long time to get lending programmes up and running.” Chakar of ABN AMRO Mellon thinks this will change: “As pension funds begin to diversify their holdings, they will end up holding some very lendable issues, and they’ll be willing to assume the risk to build better portfolio returns,” she believes.
Ultimately, the big question about global custody in Europe is whether the continental banks can compete with the Americans and the British. Deutsche’s acquisition of Bankers Trust will make it a force to be reckoned with globally, and Pictet continues to be ranked as one of the best custodians in the world by its clients. Apart from these, however, there is no obvious continental contender. As Pictet’s Humes notes: “Incredibly, with the exception of Pictet, a niche custodian based in Geneva, no continental European custodian even features in European industry surveys on global custody.”
What is certain is that the antiquated European practice of leaving custody of all the assets with the fund manager is dead and buried. Simple demographics and economics have seen to that, if somewhat belatedly. In the search for higher returns, and better risk management, it looks as if European pension funds will have to learn to live with the Anglo-Saxon model of investment management and administration, whether they like it or not.