Never sit back and relax
Once the custodian has been appointed, you may think you can sit back and relax, but this is not the case. It is true that a custodian does not need to monitored in as much depth as investment managers. However, some monitoring by the fund is encouraged to ensure that it is performing its functions at the required level. Especially as more and more functions are automated, it is important to ensure that information is not simply disappearing into a black hole, and that if something does go wrong, the fund finds out about it before it becomes a major problem.
A master custodian’s regular reports usually provide a pension fund with ample information each month or quarter to enable it to monitor performance. However, sifting through the detail in regular reports to extract the required information is a time consuming task. Instead, it is sensible to request the custodian to produce a separate monitoring report which summarises the relevant information in a form that enables the fund to see at a glance whether performance has been satisfactory or not. A key to ensuring the fund can assess performance is to include a benchmark of expected performance for comparison with actual performance. Some items a pension fund might monitor include:
q were reports received on time?
q what was the trade settlement experience in each market?
q were dividends and income received on time?
q what rate of interest was paid by the custodian on idle cash holdings?
q did any investment managers cause their custodian accounts to incur overdraft interest?
q what do the investment managers think of the service provided by the custodian?
Custodian performance monitoring reports give funds comfort that investment operations are being performed satisfactorily or where improvements are required. They also identify whether proposed improvements have been effective. Over time, they identify to the fund what aspects should be examined in a more detailed review.