Increased sophistication in the services provided by global custodians is waking up the European investment market to the advantages of outsourcing its custody needs. The result is that the European custody market for the large global players has never looked brighter.
Mellon Trust, which picked up around $35bn of custody business in 1997 attributes a large part of its in-creasing business to significant in-roads made in Scandanavia through the company's recent consolidation agreement with Den Danske Bank in Denmark.
Simon Shapland, business development manager for Mellon in Europe, explains: This is certainly part of a consolidation trend being seen around Europe between global custodian banks and strong domestic custody providers. Den Danske decided it needed our global reach, as well as the value added services of on-line reporting and performance measurement it could not provide, so it ap-pointed Mellon as its sole global sub custodian."
Mellon, he says, now benefitted from wide custody access to the whole Nordic market as a result. Furthermore, the company has developed in-formal sub custodian relationships with banks in Spain and Portugal, whilst working closely with Midland Securities Services in the UK.
Significant mandate successes this year include the appointment to provide custody for the UK and related offshore assets of UK-based Rothschild Asset Management, worth around half of Rothschild's $31bn in assets managed worldwide.
Shapland says this award marked another recent trend in the market, particularly prevalent in the UK, to outsource back office administration into the hands of custodians.
Mark Kerns, managing director of international custody at Bank of New York says one of the trends over the last year, due to consolidation in the European banking sector, has been the selling off of banking custodian operations and the subsequent picking up of this business by global operators. He predicts "more to come" in the next year for this kind of sell off.
With increasing demand on a Eur-ope wide basis for more developed portfolio information on factors such as accounting, evaluation and performance measurement, Kerns says the hottest area of custody in the last year though has been in 'compliance monitoring'.
'We have seen good business coming from this kind of monitoring, which tracks the compliance of fund managers to the guidelines set out in the mandates they have won.
This includes factors such as geographical and industrial investment restrictions or credit and duration limits, and is part of an increased focus by trustees on managing risk in portfolios."
Advances in technology such as internet reporting and the introduction of brokerage capabilities are also driving a move by European funds to increasing custody outsourcing, he says.
Penny Biggs, head of sales and marketing at Northern Trust, London, says the company has seen most of its business in the last year coming from the large, sophisticated pension fund industries in Switzerland and Holland. "There has also been development amongst UK and US based multinationals with plans for consolidation in Europe, looking for global custody arrangements," she says.
Biggs believes this will continue to grow due to the increased globalisation of investment alongside the lowering of investment restrictions in around Europe. "More investment managers are needing to consolidate information on issues such as securities lending, as well as taking a more pro-active stance in stream lining administration and shifting it from their back offices to a custodian."
Deutsche Bank's Heiko Lotz, director of strategic business development, says the company has seen 'phenomenal growth" over the last year.
Of the $1.45trn managed by Deutsche, Lotz stresses less than 20% represents in-house assets, with the company's primary clients being institutional investors and mutual funds.
Despite pension funds and insurance companies 'lagging behind" in custodian use, Lotz believes these will provide lucrative future business as they follow trends in asset management such as performance measurement.
Indeed over the last year, he says, the company has captured several notable UK pension fund custody mandates, as well as becoming custodians to a number of German 'Spezialfonds'.
Deutsche has also been particularly strong in the German 'Master' custody product market, a requirement by law for German asset managers to have their fund administration and accounting performed externally. The company picked up 12 new mandates last year, representing more than 50% of new business in the field. Hugh Wheelan"