Northern Trust 'cracks' mutual funds
Established some three years ago, Northern Trust’s global fund services (GFS) division has in recent months extended its remit to cover a number of key new business areas. In July the bank entered the UK fund accounting business in what Jeremy Hester, head of European GFS Business Development, described as a “progressive evolution” designed to capitalise on the synergies that “naturally exist” between the custody and fund accounting businesses.
Then, in September, it signed a landmark deal with Folksam which saw it become the sole global custodian for all the Swedish insurance giant’s insurance assets and mutual funds, totaling some $17bn (e13.1bn). Moreover, Northern will also be providing trustee services to Folksam via a new agreement with Swedish trustee Svenska Handelsbanken – the first time that a non-Swedish bank will be providing custody and related services to a Swedish mutual fund.
Factor in the new Luxembourg office it opened back in January to complement its existing operation in Dublin – acquired from Ulster Bank in 2000 – along with plans to establish a depotbank business in Germany, and it is clear that GFS is in the midst of a major push to win the hearts and minds of Continental asset managers and pension funds.
“Over the years Northern built up not only a large pension fund clientbase but also increasingly relationships with what were third-party fund managers which we converted to direct fund manager relationships,” says Penny Biggs, who in April took over as head of Northern’s institutional custody, fund administration and asset servicing businesses within the EMEA region. “Over the past 10 years that has allowed us to build up our US fund administration business, and more recently as we built critical mass here in the UK we began to import some of those US practices.”
Since 2001 the UK GFS team has expanded from having a mere two or three clients to servicing close on 100. “All those relationships have come from our third-party investment manager base,” says Biggs. “Initially the bulk of what we did for them was custody, but the Ulster Bank acquisition saw us moving into fund administration – and after a bedding down period, that has became the catalyst for a number of other developments.”
These included the aforementioned Luxembourg venture and new UK fund accounting offering, which Biggs reports has just signed up its first two clients (at the time of writing their identities remained under wraps). “The UK fund accounting sector is mature, so as a new entrant it was always going to be a challenge to prise business away from existing players,” says Biggs.
“That said, it helped our cause that – although people might not automatically think we are in the fund administration business – we actually have $530bn of assets under administration in some 2000 funds and we already strike close to 40,000 NAVs each month. So when it comes to packaging fund administration for prospective clients, we can point to those assets as well as our various offshore locations, and it then becomes an extension to our service rather than a fundamentally new activity that we are embarking upon.”
Northern has also been working to ensure that all new fund administration or back/middle office outsourcing clients would be able to take advantage of the bank’s ‘single-window’ Web-based reporting application, Northern Trust Passport. “We obviously don’t want a whole bunch of diverse systems, so we have taken some time to ensure Passport is linked into every other part of our offering,” says Biggs. In the same vein, the bank is also using SunGard Investment Management Systems’ INVEST ONE fund accounting engine to support the new UK operation: “INVEST ONE is already fully integrated with our custody system, we already use it in the US and it will also be used across Europe,” she adds.
There are also plans to enhance the limited hedge fund administration offering currently being run out of Dublin. “We are looking to make it that much more scaleable,” says Biggs. “While it is robust, it is an area where we would like to have more assets and expertise.” The bank is currently looking into buying an existing administrator – “it obviously means you are faster to market” – but Biggs confirms it also has an internal build project underway. “We are not wholly confident we will find something that is the right cultural fit or will provide us with the right level of expertise,” she says. “However, if we do end up making an acquisition, then that capability will not go to waste as it will be a useful supplement.”
Germany obviously looms large in Northern’s Continental strategy. The market may have become more liberalised, but it still presents a huge challenge, Biggs admits. “Nonetheless it is vital we are there – we are seeing a blurring of the lines between client types, whereby our multi-national pension fund clients want us to custody their plans in all domiciles, Germany included,” says Biggs.
The attraction of Sweden and the other Nordic markets stems from the proliferation of pension fund clients that are managing large pools of assets in-house. “When you look for that synergy the Nordics are top of the list,” says Biggs. “Institutions in the region are extremely sophisticated and are very open-minded – they want everything we do and value everything we are good at, so it is not just a matter of requiring us to pump through huge volumes on their behalf as is so often the case.” That sense of adventure even extends to the regulators, with whom Northern worked closely in order to alter Sweden’s mutual fund act to accommodate the new servicing model being pioneered with Folksam. “We feel we have cracked a template that can now be applied to other key markets – indeed, we are in the process of exporting a similar mutual fund model to a big insurance/pension company in Norway,” says Biggs.