As domestic and cross-border investment flows gather volume and momentum in the Asia-Pacific region, the world’s largest custodians are competing to grab a lucrative slice of fund servicing business from both local and global asset managers.
RBC Dexia Investor Services, with $2900bn (€1875bn) of assets under custody worldwide, is one such player looking to expand its fund administration presence in the region. Already active in Hong Kong, Singapore and Australia, its sights are set on the fast-growing markets of Korea, Taiwan and mainland China.
Scott McLaren, MD, Hong Kong at RBC Dexia, maintains that while, for instance, a global asset manager with operations in a number of Asian markets might want a fund administrator who can act as a one-stop shop, in reality no single service-provider in the region can fulfill that role.
He says: “No provider can offer every product in every market. You really have to seek out those asset managers that match well with your own footprint. What we look for are good strategic, cultural and operating fits, where for example, the client might be investing in Europe plus three markets in Asia. Then we try to get as much of that fund administration business as we can.”
Standard Chartered Bank, one of the region’s three dominant providers of sub-custody and clearing, ventured into the securities services arena about three years ago, although it still regards itself as a new kid on the block. Where the historical focus for Standard Chartered as a sub-custodian was on inbound investing, the fund services business is aimed at diversifying revenue streams by capturing a chunk of the outbound investment flows from the region. The bank is targeting mutual funds, hedge funds and discretionary portfolios in Hong Kong, Thailand, Indonesia, Malaysia and Singapore.
According to Neil Daswani, Standard Chartered’s global head of securities services, not only are these asset management markets growing substantially in domestic terms but they are also starting to liberalise and invest internationally. While fund managers have tended to insource administration in their home markets, as they invest cross-border, they are typically hampered by legacy systems in being able to account for international securities so they are forced to look to global fund administrators who have that transaction processing capability.
Global asset managers seeking to establish a presence in local Asian markets offer another business opportunity for securities services providers.
“They want to establish themselves in the market without having to set up a middle and back office which is not their core competency. As these international asset managers roll out in a number of markets they are looking for consistency of service delivery. So if a fund administrator has a consistent technology platform across all the markets they operate in and that can perhaps provide consolidated reporting, the asset manager client is going to view that as a value-added service,” says Mr Daswani.
Premium-priced services
Value-added services is really the name of the game for fund administrators in the region. While eager to capitalize on the new custody and fund accounting business opportunities created by increasing cross-border activity, the big prize is mandates for premium-priced services such as performance attribution and risk reporting, foreign exchange, cash management and securities lending.
“Everyone wants to include value-added services around the custody offering which is a commodity product,” says Mr McLaren.
He points, however, to an education challenge around presenting services such as performance monitoring to fund managers as an “automated solution”.
“I have not seen a high level of sophistication in that market yet. These calculations are being done in-house using Excel spreadsheets. It is a classic outsourcing argument.”
Demand for securities lending is being fuelled by the growth of the hedge fund industry. Also demand is being driven by large institutional investors who want to gain an enhanced return on their portfolios by lending out their assets. “Four years ago, there just wasn’t that comfort level [around securities lending] but now we are exploring securities lending opportunities in our fund services business,” says Mr Daswani.
As yet, not all Asian markets permit securities lending; China, for example, has no regulations governing the activity.
TA OF REAL VALUE
It is “unfortunate” that transfer agency is not perceived as a high-value service, says Scott McLaren, MD, Hong Kong at RBC Dexia Investor Services.
Due to a lack of automation in Asia-Pacific countries, he notes that transfer agency can be a labour-intensive and high-risk activity because distributors are sending in faxes and back-office teams are processing up to 1000 transactions a day.“There is little or no automation in the main centres of Singapore and Hong Kong but Taiwan is making a concerted effort through using SWIFTnet funds,” he adds.
RBC Dexia provides transfer agency services for fund managers in Australia and Singapore, and to support foreign fund managers in their distribution efforts into Asia for Ucits funds.Transfer agency, he says, is seen increasingly as a complex business which requires investment in systems and people. Australia is moving more to outsourcing of transfer agency as custodians bring new transfer agency products to the market, where previously it was insourced due to lack of alternatives.
Claiming that transfer agency is a profitable business for RBC Dexia, Mr McLaren says the service is better bundled with custody and fund accounting to exploit more efficiencies internally. “TA is the hard piece that many administrators shy away from if it is high volume business. You need to be brave and ready to tackle the retail end of this business, but a good transfer agent can make the investor experience so much better.”
