Once upon a time, in the dark and not-so-distant past, pension fund trustees were mainly concerned with performance, not security. A few well-publicised alarms later, investors and trustees have recognised that custody services are no longer a luxury.
Growing public concern throughout Europe about pensions issues places trustees and boards under increasing pressure to strike a balance between security and performance. Their duty to seek the best return for their investors is also leading funds into an ever more bewildering array of strategies and markets. This has meant increased emphasis on the need for accurate information about the status of transactions and the whereabouts of assets and collateral.
Accordingly trustees have to seek out the services of specialist custody providers, providing another layer of security when compared with that offered by a bank in the fund manager's own group. Specialist providers have also been investing massive sums in information technology, to help keep track of settlements and assets.
This has meant that in addition to the core custody operation of tracing stocks and shares and valuation for accounting purposes, performance management, and legal and mandate monitoring, custodians are now acting as the back office for the investment manager, as well as moving into the execution part of the trading operation.
Naturally all this comes at a cost, but here again the appointment of a specialist custodian can also make it simpler to trace exactly what that is. Where the investment manager's group provides the service it is often difficult to see how much the custody fee represents. A single separate custodian agreement, in which the trustee board can see custody obligations set out in a single contract alleviates that problem.
No matter what the actual fee, trustees will necessarily look for the added value that the custodian offers. This will be most significant where a global custodian is appointed. Larger providers that have invested heavily in new technology will probably baulk at a single manager fund with less than $100m in assets, because they will be unable to show any real added value.
Sue Curtis, head of pension custody for Chase Global Investor Services, which is custodian for $4.7trn in assets worldwide (including $1.8trn of non-US domestics), believes information provision is the key added value. Where there is a broad array of managers with wide-ranging investment mandates, a global custodian is appropriate. The board is then dealing with one contractual relationship, instead of having to trawl through a number of portfolios."
Curtis points to the on-line services available, such as full multi-currency portfolio accounting, including average and specified lot accounting, performance management and a full securities lending service.
"We can also provide micro management through the database too. For example, because we are extracting information from each manager, it is clear for each transaction which broker has been used, enabling commission recapture services to be extended where appropriate," she says.
The improvements in the area of client reporting are emphasised by leading custody providers. Previously electronic banking services provided balances but little of the information available today. In particular the introduction of browser technology for use on secure "intranets" allows clients to check information without downloading onto their own systems.
In marked contrast to the move to independent global custodians in Britain, across Europe trustees are still inclined toward the universal provider. Brian Hill, senior investment consultant at Watson Wyatt, explains, "There is a greater use of a single group providing both the fund manager and the custody services, but often this is because only domestic assets are involved. Indeed in some countries, such as Belgium, the legislator insists on a domestic custodian. This is in clear violation of both the treaties of Rome and Maastricht, and although legislation to remove this anomaly has been formulated by the Belgium parliament, it has still not received royal assent."
Hill points out, however, that despite this banks such as ABN AMRO, Deutsche, the Santander group and Credit Lyonnais all provide global custody services. "The dominant position of the American banks probably stems from the fact that historically they have been better placed to provide such services, since in the US custodians have to be separate from the fund manager.""