Small institutional investors are shunning major international custodians in favour of domestic firms, according to research from Germany.

The client base for non-domestic global custodians such as BNP Paribas, State Street, JP Morgan, BNY Mellon and HSBC has shrunk, according to a survey conducted by German rating agency Telos. However, assets under custody have continued to increase.

Only 38% of institutional investors surveyed used a global custodian in 2017, compared to 60% in 2016. According to the Telos analysts this denoted a “small shift in paradigm”.

“Apart from the large institutional investors which have to buy specialised services offered by global custodians, e.g. in the field of ratings or derivatives, it is possible that smaller and medium-sized investors do not want to use these services anymore,” Telos noted in its newest report on the Master KVG market in Germany.

The study is available in German here.

When they were created in 2001, Master KVGs were intended as service providers for institutional investors. They are the primary structure for institutional investment funds (“Spezialfonds”) in Germany.

Over the years Master KVGs have significantly widened their range of services to include more complex investments such as structured products or other alternatives.

The growth of the market has meant that German institutional investors no longer have to turn to international providers for custody services as local providers can offer many services under their KVG model  – unless they need specific international expertise, want to invest in particularly complex alternative structures or have exceeded a certain size.

“Higher sensitivity regarding costs could be a trigger” for the shift to domestic providers, Telos said.

Half of all surveyed Master KVGs thought there would be a convergence in the range of services offered by global custodians and Master KVGs, Telos found. The year before only 25% had agreed with this statement.

According to German law the custodian for an institutional portfolio has to be a separate entity from the administrator. Given the increased range of services provided by Master KVGs, more investors selected domestic providers like DZ Bank, Deka Bank, LBBW or Helaba for pure custody.

However, according to Telos, the international global custodians still make up the top five providers in the German market according to size comprising over €1.2trn in assets under custody.

This is mainly because large institutional investors still have to use global custodians because of their size, the complexity of their investments or a need for international expertise.

The next ranks among the top 10 are taken up by German providers comprising €300bn in assets under custody.

The Telos study also reported a blurring of lines between asset managers and Master KVGs.

“It is surprising that the investors are basically switching from the so far steady commitment to clearly separate the Master KVG from pure asset management,” Telos’ analysts said. “This opens new scope for Master KVGs with an integrated asset manager.”

Overall, Telos predicted “a broad range of sources” for further business for Master KVGs, such as the integration of direct investments including real estate investments, or increased demand for overlay managements.

However, the rating agency also predicted “tough negotiation rounds when it comes to costs”.