Custodians are never slow to pick up on market trends. The eighties were all about unit trusts and insurance companies. The nineties were dominated by pension funds. But the next 10 years look likely to belong to European mutual funds, and the custodians have read the writing on the wall. They have also read the growing evidence about the potentially explosive growth of this market.
Inflows to European equity funds in the first two months of this year were five times higher than for the same period in 1999. According to Lipper, a fund industry analysis service, the size of the European investment fund market is expected to reach e3trn during 2000, and e8trn by 2005.
For many of the biggest custodians, pension funds are yesterday’s news. Mandates are thin on the ground, and the opportunity to sell value-added services is often limited. But mutual funds – which, in Europe, are becoming a proxy for private pension provision in the absence of government action – offer huge scope.
No-one is more aware of this than Chase. Through its Global Investor Services business, Chase has recently launched a $20m (E20m) joint venture with Investia, an e-commerce technology company. This joint venture company, FundsHub, will create Europe’s first outsourced fund supermarket, which will be targeted at banks, insurers and new entrants into the financial services industry seeking to exploit the rapidly growing online investment market. FundsHub will allow these companies instantly to offer their customers thousands of high-performing investment funds, unit trusts and mutual funds.
What is a custodian doing in the fund distribution business? According to Mark Tennant, head of Global Funds Services in Europe for Chase, the answer is straightforward. “As a leading global custodian and mutual fund service provider in Europe, Chase continues to focus on growth opportunities in the New Economy,” he says. “The creation of FundsHub revolutionises European mutual funds distribution, leveraging state-of-the-art technology to offer the market new and more efficient ways of doing business while underscoring Global Investor Services’ commitment to e-enable our service offerings.” Chase is not alone in moving in this direction. In fact, Mellon Trust was there first. In March this year it was appointed as administrator for the UK’s first internet-based funds supermarket, which was launched by egg, the banking subsidiary of Britain’s Prudential Corporation. Mellon’s tasks include taking deal instructions electronically from the fund supermarket web site, aggregating them and forwarding them to fund managers, settling all the deals and handling the reconciliation of all units/shares, cash and dividends.
Even the purest pension fund custodians are starting to nibble at the mutual fund pie. Northern Trust, for example, has recently agreed to buy Ulster Bank Investment Services (UBIS), an International Financial Services Centre licensed custody and fund administration subsidiary, from Ulster Bank Group. Northern’s Steven Fradkin, head of the international and global fund services group, says: “This capabilities-based acquisition is an integral step in Northern Trust’s international business strategy. It expands our current global custody services to add a full package of offshore fund services to our investment manager and institutional clients, which includes trustee, fund administration, fund accounting, and transfer agency services.”
The perennial problem for the custodians has been this: as they start to move up the value chain, who replaces them? Custodians really don’t want to spent a lot of time on settlement and safekeeping, but they haven’t been able to shed those tasks because there weren’t viable alternative suppliers – but that may be about to change. At the beginning of April, Euroclear announced plans for an internet-based service, called FundSettle, that will centralise fund order processing and custody operations. Euroclear says that FundSettle will integrate order and custody processing on a dedicated fund platform, streamlining communications and reducing errors, costs and risks. When it goes live at the end of this year, it will provide a single access point for fund distributors, fund management companies and fund transfer agents. Euroclear, of course, still has to resolve its relationship with Clearstream, but the smart money is saying that a merger is inevitable.
A single European clearing and settlement hub – for which industry players like Tom Perna at The Bank of New York have long been arguing – would release the custodians to concentrate on the sharper end of the mutual fund business. Although they do not like to say so publicly, a few custodians have already reached the stage where they just don’t want to take on any more custody mandates. Instead, they want to do fund accounting, pricing, administration and transfer agency. If custody comes as part of the deal, they will do it. But their approach to the mutual fund business suggests that they are becoming highly selective about the type of clients they want, and the services they will offer. To a great extent, the same has happened with the pension fund sector.
History, as always, is repeating itself.