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Impact Investing

IPE special report May 2018

Sections

Relationship custody

The Swiss custody market is a hard nut to crack – new mandates are rare as most corporates already use global custodians and existing mandates rarely change hands as funds put much more store in the relationship than in product or cost. Unlike the Anglo Saxon model, where mandates come up for review on a regular basis, a review will usually only take place in Switzerland if the client is not happy with the service it is receiving.
Swiss banks continue to dominate securities services provision, at the expense of the larger US custodians who have cut a swathe elsewhere in Europe. The four main local players – Pictet, UBS, Credit Suisse and Julius Baer – all place great emphasis on relationships with their clients. When each wins a new mandate, it is more often than not a client of one of the other three locals.
Kurt Jud, managing director of the wealth management and business banking division of UBS, says when it comes to custody, Swiss banks can tap on existing strong relationships. “The big universal banks like UBS and Credit Suisse do not provide just custody to their clients – they have strong business relationships in various fields including corporate finance, lending, brokerage, asset management and advisory. Very often, if a client is satisfied with the service in these areas, it will not feel any need to open up a different banking relationship to buy custody from a third-party provider. Most often, clients are convinced that it makes sense to buy the entire value chain from one provider.”
Swiss pension funds tend to be more impressed by quality and the prospects of a long-term relationship than they are with a product oriented approach, says Richard Humes head of global custody at Pictet, Switzerland’s longest established custodian. “There are cultural differences from the rest of Europe in the way Swiss institutions view custody. After sales support is an important part of the relationship and includes reporting and analysis. We would go to the client in person and help them to interpret how their investments are supporting their strategy and how their asset managers are contributing to overall performance.”

As in other countries, increasing regulatory pressure is driving a demand for greater reporting and a need to monitor compliance in a more dynamic fashion. Reporting has become an important element within the custody offering. UBS provides an investment reporting product that encompasses performance measurement, attribution and various risk analysis models. Jud says a compliance monitoring tool provides the flexibility to adapt to individual portfolio rules. “We can monitor investments against a portfolio and if a rule is broken - such as no investment in certain industries, companies, markets or instrument types - we can alert the client and the investment manager immediately and will monitor that until investments come back within the boundaries set by the client.”
The private banking world has a strong influence on Switzerland’s custody market and may explain why local banks have staved off outside competition. Christian Broger, director and head of global investment reporting at Credit Suisse Asset Management (CSAM), says Swiss banks have a long history of providing custody type services for high net worth individuals and family trusts that hold international securities.
The private client sector, says Jud, is becoming increasingly institutional in character. “Ultra high net worth clients or family offices need a bank that can report on a consolidated basis and they have similar requirements to a pension fund. Privacy remains a very important consideration for them,” he says.
Alternative investments are proving popular in the private sector and are likely to be picked up by pension funds as well. “Five years ago there was zero interest in alternatives such as hedge funds,” says Humes. “Half of our custody business is family offices – some of which are as big as institutions – and these are already heavily into hedge funds. Some of our clients can be 100% in alternatives because they have a much more entrepreneurial view of the world.”
Patrik Frieden, vice-president and head of marketing global investment reporting at CSAM says while institutions remain quite traditional in their investments, opting mainly for bonds, equities and some real estate, alternative investments are increasing. “In the past four quarters, according to our pension fund index, investment in alternatives such as hedge funds has increased from 1% of the total to 1.8%. This is still a small proportion, but there is a clear trend among pension funds to increase that.”
There is some discomfort among pension funds about the underlying assets of hedge funds. This lack of transparency has led to reticence among some institutions to invest in alternatives, says Humes.
Broger agrees: “Getting an insight into alternative instruments is not that easy. Some hedge funds publish information only quarterly or monthly, so it can be a struggle to get enough information on the investment. There is also an element of secrecy, as some hedge funds do not want to provide very much information, whereas we want to provide state of the art analytics and measurement tools to our clients. If we cannot report properly on 1.8% of our clients’ assets, that is a problem.”
Another trend Humes believes will gain currency is for corporates to adopt a mutual fund structure in order to gain greater efficiencies from investment and asset management. “Many Swiss corporates run several pension schemes that cater to local and foreign employees. Normally, if a company is running say four pension funds, it would have to find different asset managers to handle different instruments and would have to manage four separate accounts and reporting structures. In mutual funds, managers are pooled and each fund can then adjust its asset allocation according to its own liability modelling. This structure can be much easier to administer than having separate pension funds.”
Switzerland operates a highly efficient clearing and settlement structure – the Swiss Value Chain – which consists of SWX Swiss Exchange, SIS SegaIntersettle the central securities depository, and Telekurs, which operates the Swiss interbank clearing payment system. The structure allows for the full automation and real time integration of trade, settlement and payment flows involving central bank money.
SIS also provides custody services, but unlike elsewhere in Europe where agent banks have raised questions about the dual role of international central securities depositories as custodians, Swiss banks are more laid back in their attitude towards SIS. Says Frieden: “Using SIS makes sense for small banks that want to get direct access into the Swiss market, or for very large banks that are already highly automated. But if you are a bank somewhere in the middle, the local Swiss banks can offer a more efficient solution than SIS. Connecting to SIS costs quite a lot and updates are required twice a year, which can add to those costs.”
Frieden is confident that Switzerland’s global custodians can offer more value-added than the plain vanilla services SIS provides. “SIS’s main job is streamlining the procedures used in the core services of clearing and settlement.”
Jud describes UBS’s relationship with SIS as one of “co-opetition”. As the biggest client of the CSD, it relies very much on SIS’s services, he says. “In certain aspects, we also compete with SIS. Clients, often small- and mid-sized banks with less requirements for sophisticated added value services, may consider having a custody relationship with SIS. However, if the demand goes beyond the standard core services (dedicated account management, risk reporting, cash management, tax reclamation and proxy voting) clients come to the conclusion that it is better to rely on a fully fledged global custodian bank. More and more of these banks and asset managers look for outsouring solutions to reduce their fixed costs.”

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