The year kicked off with good news for Australia’s asset servicing industry when ACSA revealed the value of assets under custody for both Australian and foreign investors rebounded over the final six months of 2020
Australia’s institutional investment industry continues to grow on the back of mandatory contributions from workers to their superannuation (pension) funds, a strong bounce back in market valuations, and the ongoing attractiveness of Australia as an investment destination for overseas investors.
Underpinning all of these factors is confidence in the stability and efficiency of Australia’s financial system.
The year kicked off with good news for Australia’s asset servicing industry when the Australian Custodial Services Association (ACSA) revealed the value of assets under custody for both Australian and foreign investors rebounded over the final six months of 2020 on the back of the global market performance. This was primarily due to the strong rebound in equities markets.
As of 31 December 2020, the Australian asset servicing industry held over $4 trillion (AUD) in assets under custody — 14 times larger than in 1996 when ACSA began collecting statistics.
Business conditions in Australia rebounded quickly in the second half of 2020, underpinned by government economic support and the perceived relatively strong management of the COVID-19 virus — both of which resulted in a strong market economy backed by local and foreign interests.
Experts observe this market confidence contributed to significant stock market returns, where the S&P 500 rose from 2,498.08 in April to close the year with a gain of 50.70 per cent without dividends.
Meanwhile, the ASX 200 rose from 5,076.80 at the end of March to 6,587.10 at the end of December — a 29.75 per cent gain exclusive of dividends.
According to FRS, this market confidence also attracted strong investment in Australia as well as strong customer confidence levels.
Having reached a low in March 2020, country data from March 2021 showed that consumer confidence in Australia had increased by approximately 27 per cent, compared to the US which experienced an increase in consumer confidence by approximately 12 per cent over the same period.
Over the past 25 years, ACSA says change has been constant over this period of growth, in terms of client mix, average client size, service roster and of course regulation.
According to the association, asset allocation has continued a steady global path. In 1996 around 15 per cent of total assets for Australian clients were invested offshore. That figure is now well over 30 per cent.
Asset type continues to be dominated by traded markets, although private assets are increasing as the institutional investors grow beyond the Australian listed market and look to other markets for assets.
Meanwhile, efficiency in custody and investment administration has been achieved through the innovation of ACSA member firms, and collaborative systemic focus on standards and common practice. Never before have so many assets been serviced by so few.
A story of growth
Superannuation fund consolidation is gaining significant momentum in Australia, and experts believe this is only going to continue to grow.
In the 2019/2020 financial year, Australia saw five major merger announcements. The average transfer of funds under management (FUM) was AUD $22.7 billion. Since 30 June 2020, a further seven mergers have been announced and experts believe the amount of merger activity is only going to continue to increase.
“As funds grow in size, there is a need for collaborative focus on common standards and increased digital connectivity between funds, managers and their service providers,” comments Lewis Moreline, head of fund services product, securities services, Australia and New Zealand, J.P.Morgan.
Experts say successor fund transfers are being announced at breakneck speed, placing custodians under pressure to be nimble through transition and to protect their businesses while decisions around their assets under administration (AuA) are being made without their input.
According to Matthew Baldwin, global business development at FRS, this has resulted in some material shifts in the market in terms of custody arrangements and the emergence of ‘master custodians’, and these changes will continue as the trend for super fund consolidation shows no signs of abating.
Aside from this growth trend, industry participants in Australia are also seeing increased interest and adoption of exchange-traded funds (ETFs). Martin Carpenter, head of securities services at Citi Australia, says this trend is significant with Citi’s asset management and wealth platform clients.
Carpenter observes: “In the case of asset managers we are seeing a notable increase in interest in launching active ETFs a trend we expect will continue to gain momentum and with wealth platforms, the allocation to ETFs has continued its impressive growth trajectory.”
Elsewhere in Australia, there is an increased focus on tax, tax governance and the operational effectiveness of tax control frameworks.
“Tax efficiency is also a major contributor to investment performance, and superannuation fund regulations such as Your Future, Your Super put a further spotlight on tax in relation to returns for members,” comments Moreline.
The long and short of it
Although Australia’s asset servicing industry has seen considerable growth over the years, it has never had to deal with the likes of the pandemic that struck the world in 2020. In terms of Australia’s custody sector, experts say COVID-19 disruption continues to impact the way the industry works, and the way the industry thinks about work.
In the short term, Robert Brown, CEO of ACSA, says: “Flexibility is essential, but often taken for granted as highly regulated and process intensive businesses adapt to lockdowns.”
“Although services are highly automated, there remain challenges in weeding out residual manual processes like wet-ink signatures, faxes and paper-based cheques.”
ACSA’s CEO also identifies several other short and long term trends:
Short term
Regulation continues to dominate the industry landscape. Regulatory compliance is adding complexity and cost
Questions from investors and regulators about environmental, social and governance (ESG) towards asset owners and fund managers continue to drive more requirements for more granular and richer data
Proxy voting process improvement, with ACSA leading industry and government consultation on the adoption of a true entitlement date to remove ambiguity and improve transparency for institutional investors and listed companies
Long term
Crypto assets and distributed ledger technology, while they are capable of so much, ongoing work is required to ensure they are safely deployed and regulatory aware
Consolidation — fewer and larger superannuation (pension) funds, and as a consequence the potential for more specialisation in service provision including component outsourcing
Challenges for funds as they put in place the necessary governance and resources for multi-vendor solutions
Carpenter says: “Citi’s asset owner customers are already used to dealing with constant change, both locally and around the world.”
“These changes can relate to regulation, taxation and investment strategy, as well as black swan events like the COVID-19 pandemic. In such an environment, asset owners lean on global entities like Citi for its significant resources and experience managing the changes and challenges trustees face.”
At Northern Trust, head of client services for asset servicing and head of Sydney office, Sally Surgeon, suggests the past 12 months have accelerated some ongoing trends that have been underway for a few years. This includes scale and efficiency considerations that will result in changing operating models and continued outsourcing.
According to Surgeon, institutional investors are realising great value in outsourcing their back, middle and select front office functions such as institutional brokerage to service providers like Northern Trust who have a global operating model, innovative technology solutions, as well as proven scale and experience to meet the ongoing needs of sophisticated institutional investors.Additionally, Northern Trust expects data demands to continue in the face of changing market dynamics and increased regulation.
“During the onset of the COVID-19 pandemic, asset servicing providers were processing and reporting unprecedented volumes of transaction activity as institutional investors responded to the evolving market volatility,” Surgeon states.
During this time, the role of asset servicing providers in maintaining consistent servicing and providing up-to-date portfolio information has never been more important.
Weighing in on regulatory changes, FRS’ Baldwin highlights: “Because regulatory changes now stipulate that accountability for the management of investor funds is no longer the sole responsibility of custodians, the custodians’ clients are now placing increased scrutiny on the oversight solutions deployed to manage their end clients’ investments. This is to ensure that they are able to safely and effectively service their own members and account holders.”
However, this adds an extra layer of accountability for custodians that needs to be implemented and managed, which means that they are acutely aware that legacy technology creates unacceptable risk in a distributed model.
“As a result, we are having more frequent conversations with custodians operating in the Australian market who are looking for better ways to decrease investor and regulator risk and increase operational efficiencies,” comments Baldwin.
There has also been a renewed focus on the optimisation of next generation technologies to further automate operational processes, including the use of machine learning and robotics.
Citi’s Carpenter adds: “This strongly positions Citi given the continued investment and focus on this key priority for the firm. There has also been an even greater assessment of the contingency plans within our own operating environment, including between processing hubs but also in respect to external suppliers and vendors.”
Keep an eye out for issue 270 of Asset Servicing Times for part two of the Australia country profile, which will dive into the technological trends in Australia.
