The publication of the Myners Report into the UK investment industry in March 2001 continues to have a significant impact on pension funds, investment managers and custodians. Many pension funds that previously left custodial arrangements to their investment managers are now issuing mandates to global custodians.
The Myners Report proposed a legal requirement that in making an investment decision, trustees should be able to do so with “the skill and prudence of someone familiar with the issues concerned, as is the case in the US”. Moreover, trustees should also have a greater understanding of portfolio transaction costs and commissions.
The UK government has left it up to the industry to address Myners’ recommendations, but is planning to review the progress made some time this year. The move by pension funds to appoint global custodians for a range of services would indicate that the industry is addressing the issues raised by the Myners report.
“The ability of pension funds to understand trading and their portfolios is a big theme in the UK,” says Benjie Fraser, managing director, Bank of New York in London. “Myners articulated the need for greater transparency and pension funds are looking at where they get data from that can deliver information about what the fund is doing at every level, including trade cost analysis.” During the next few years custodians will be called upon not just to provide information, says Fraser, but also to summarise that information in a user friendly way.
The demand for information, and more timely delivery of that information, is a trend identified by Jeff Conway, senior vice-president and head of State Street’s Investor Services business in the UK. This has been driven not only by Myners, but also by the move away from defined benefit to defined contribution pension schemes and the changing distribution landscape. “This has all led to a real need for custodians to take a consultative approach to working with investment managers and pension funds in evaluating their service models and re-engineering in order for them to achieve best practice to create better efficiencies,” he says.
Another significant issue in the UK market is a trend towards multi-manager products. Dean Handley, sales manager for UK and Ireland at ABN Amro Mellon Global Securities Services, says there is a trend towards more specialist investment manager mandates. “Pension funds that in the past might have had one or two large plans under one or two fund managers are now moving towards smaller, specialised mandates.” An increasing number of investment managers will put pressure on pension fund trustees to gather data for accounting, reconciliation and review. Pension funds are beginning to see the benefit of a global custodian in not only providing safekeeping but also consolidating information from their investment managers and delivering that back to the client.
You don’t have to talk to a custodian for very long before the subject of outsourcing is raised. Custodians have been ploughing this furrow for the past four or five years, with the rationale for outsourcing evolving as the market fails to rush for such services. However, that hasn’t stopped custodians talking up the concept. “There is a serious level of interest in outsourcing this year, from a variety of institutional types,” says Conway.
David Bilbé, head of Brown Brothers Harriman’s Investor Services unit in London, agrees that some serious structural reviews are taking place in the market.
However, the major change in the outsourcing trend, he says, is that firms are no longer looking to outsource entire blocks of business, but are looking at components they can outsource – “we are seeing a sharp scalpel approach, rather than a waving scythe”, he says.
BNY’s Fraser does not believe there are any hard and fast rules about outsourcing, rather the scenario changes from case to case. However, he does agree that custodians are seeing much more outsourcing from pension funds in the UK. “We are seeing a big shift in the market from pension funds taking quarterly portfolio information from fund managers and putting that on to an Excel spreadsheet to wanting this information on a more frequent basis. Whereas previously they may have done investment accounting and performance measurement themselves, they now want custodians to provide those services.”
Conway says customers are looking for a higher level of performance and risk management from their custodians. “The complexity of funds two years ago versus today is very much different. Now we are looking at multi-manager, multi-asset class funds that require daily net asset valuations and integration with myriad systems– not just web-based delivery to the desktop. The entire custody marketplace has racheted up to meet customer demands.”
Bilbe describes an ideal package of services as a blend of custodial services and fund accounting supplemented with treasury and securities lending capabilities and BBH’s Infomediary service, a data management solution that includes straight through processing, service provider connectivity, data aggregation and information management.
For Handley, pension funds and investment managers are no longer looking just for a services provider. “Clients are looking for a more sustainable business relationship from their services provider. They want to get more than a standard package of services, a vanilla custody product. They now want fund accounting and services that come off the back of that.”
Despite the continued market downturn, which some observers do believe may have turned a corner – Bilbé quips that he is meeting “more optimists than pessimists” now – business remains good for UK custodians. He believes the most effective and valuable approach to the market will be to package services in order to meet the needs of individual clients.
Conway says these are interesting times for custodians as the UK market is position for business growth. “My message for custodians would be don’t box in your services. Instead, provide a broad range of services because customers are looking for a partnership with a custodian that has the ability to deliver services at a time of need.”
Bank of New York’s strategy is to provide a set of services around the investment lifecycle, including not only the investment decision, but the execution of that, such as trade execution services, foreign exchange and decision support products. “As investment strategies become increasingly complex, we will see more outsourcing and the better custodians will see that there is more they can do than just custody.”

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