In the faddy world of management theory, the in-house successor has an automatic query after their name? Are they the soft option - was there really no one else out there for the group to chose?
Luckily, the issue is one that can never be fully resolved, so the gurus can be left to one side arguing the point, as each new chief goes out to answer the question in practice and to prove that they were the right choice in the only way possible - under fire.
David Spina, a long timer with State Street has assumed Marsh Carter’s mantle after a time of extraordinary growth, when assets under custody by the bank rose from $489bn to $6.1trn and assets under management by SSGA moved from $84bn to $729bn. During his reign, the share price has multiplied 14-times.
“State Street has enjoyed enormous success. With a transition in the leadership of the company that we are going through, now is not an occasion for radical change,” says Spina. Acknowledging that his style is different and that we live in a world where it is not possible to step into the same river twice, he says: “What we have is a fundamentally similar focus.” And that’s the old rallying cry of using the bank’s experience and technology base “to help investors around the world succeed”. That is to continue, he says.
State Street is not a bank that needs fixing. It has been so successful in its drive to expand the definition of custody into investor services, an area still set to grow exponentially, that it has confounded its own targets. So it’s more of the same, but with some differences.
The bank has been trying hard to lose its American accent. “We are still at 75/25 US versus non domestic business. We want the non US portion to be much larger than that.” But the US equity boom has made this much more difficult. “We have been growing faster outside of the US than inside, but we have not moved the needle that far because of the US market development.” Such an embarrassment of riches is a nice problem to have, he agrees. “Our view is that growth will happen more in Europe than Asia, than in the US, though by no means are we out of opportunity there.”
Can he be sure that one of the branches he is sitting on is not being sawed away? In five year’s time, could State Street be out of pain vanilla custody? “I could imagine that, but I am not sure it is going to happen in that time frame,” says Spina. “I think some of the industry’s utilities, the Euroclears and depositary trust companies will have a bigger role to play in fundamental settlement and custody functions.” The bank is in the information business to inform investors and certainly being in custody does position it well to capture the information. “When the cash and the security show up at the same time in the same place and you are able to capture that data correctly, that’s important.
Whether you do this on a net settlement inside a depositary company or as a delivery versus payment on your own system, may not make that much difference in the future. The essential thing is to be there at the beginning when the securities position is born - at that very keystroke.”
As the bank’s former chief financial officer, he knows about margins and he takes issue with the view that that the bank’s two major asset areas of custodial services and passive management are low margin business - set to go lower. He argues that the historically financial groups are perceived to have wide margins in the areas of lending, investment banking and similar areas, which have high levels of price or asset risks requiring substantial capital and wide margins as a consequence. “Our part of the financial world does not require enormous capital, as we are not taking big positions in relation to principal. I would argue the characterisation that we are in low margin business compared to someone who is lending a lot of money.” Supermarket chains would love to have State Street’s margins, he adds. “Yes, in the financial world we are perceived as having low margins but in fact we have an excellent RoE and are achieving excellent growth. So long as we can continue do that we can provide shareholder value.”
Future growth is not an issue either in his book. As even though the bank already has 10% of the world’s assets under custody, he does not see any diminution in demand for the group’s services. “We don’t start our strategic planning process wondering where our growth is going to come from. We have a number of opportunities and we are fortunate that our job in management is to select from among these.” As long as the public in most countries hand their savings over to professionals to invest, the bank will be in business. “We have a community of 17,000 people in the bank able to provide services for these professionals.”
He points to the servicing of investment funds world wide, whether talking about mutual funds, unit trusts, Oiecs, Sicavs, FCPs and so on. “This remains a growth business for us, for example, a few weeks ago Merrill Lynch in the US decided to stop doing its own accounting and servicing of funds and is turning over 300 people and their operations in New Jersey to us.” And e-finance is bringing the bank into areas it never thought it would be able to enter such as the trade execution because of the capital levels required. “But now with electronic trading mechanisms, we are employing our skills and strategic positioning to become a major player in this area. We are spending a lot of time discussing how to provide platforms for investment managers for trade executions and decision support tools for these earlier phases of the investment process before they make the investment decision.”
Living in an era where “passive is massive”, as he puts it, has powered growth at SSGA. “But the harder we pushed on transforming the manager from being a passive quant operation into a fuller array of investment strategies, the more we have been dwarfed by what is going on in passive. And the market for passive is growing.”
When it comes to where the group is pumping money to fuel the expansion, Europe is the number one choice. “Europe is where we will have the largest growth opportunity in the next several years,” says Spina. Over the next five years, he sees the continent and the UK being the main drivers, with Asia and Japan coming on stream over a four to seven years’ time horizon. “Change begets opportunity and I think the fundamentals for change in retirement systems are closer to becoming realities in Europe than in Asia and Japan. We are adding people in all these areas, but more systems and more money going Europe’s way.” The UK is undergoing a growth spurt, but the other countries with well developed retirement systems such as Netherlandsa dn Switzerland, are as well. We are hopeful about growth in Germany.”
He does not underestimate the challenge from the local players with their grip on their markets, and what the bank has to do to make an impact. “Our biggest strategic challenge is more in the area of investment servicing than investment management and that is to penetrate the heart of Europe, particularly Germany, France, Italy and Spain, as these are the countries with bulk of population.” But it is not just the state of development of the group “partly it is our ability to have State Street as well known and respected in these markets as in Boston or New York. I still spend quite a bit of my time explaining who we are. I may not have to say it in Munich or Frankfurt, but when I get to Salzburg or Wolfsburg I do.”
But it is not just knocking on European doors directly, as some of their US multinational clients are already in Europe, with small to medium sized pension funds in their local subsidiaries. With these groups having both the investment services and management operation together has been critical. “Where we can do custody and asset management for their plan it becomes a more profitable proposition than doing just one.”
As the defined contribution(DC) approach spreads in Europe, Spina does not think that one model is going to dominate. “DC is country specific.” He adds: “We can provide consulting and asset management for DC type plans, but investment servicing is going to be harder. At this point, on issues such as employee choice, it is not clear how the structure is going to emerge. But there is clearly a limit on the amount of money that can be justified in building a system to support an idiosyncratic system in a small population country. But we are not ignoring that there may be internet solutions with simpler service models - that may be the way to square the circle.”
Spina has done the rounds of the European capitals as part of the bank’s sponsorship of the Rebuilding Pensions initiative, run in conjunction with Brussels firm Pragma Consulting. This involved meeting with a high level cross-section of political, business and governmental leaders. “I learnt a broader meaning of the word ‘solidarity’ than in the US, where the system is more dominated by the corporate side. So the active participation of organised labour and other employer associations was refreshing and constructive. I was impressed by the vigour of the professionals and practitioners approaching the subject, be they government, tax or regulatory experts, who participated, along with the heads of pensions associations, cororaton representatives, and ministers from the relevant departments. There is widespread recognition that the first pillar, fundamental to the social and political development of Europe, needs some strengthening, as it cannot take the demographic strain that has been put on them.”
As to what the bank might do on a similar front as the pensions debate moves into a new phase once the draft directive has been issued by Brussels, Spina says, has not been decided. “It is part of our credo at State Street that we participate actively in the governmental process. Some say we should not do this, but I beleieve we should since we have the knowledge.” But he adds, the group is a service organisation and not policy making body, and is prepared to provide services within whatever models a country decides to adopt.
In the US, his predecessor Carter co -authored a book on US social security reforms along with another State Street executive Bill Shipman, which helped kick start the debate that surfaced as part of the US presidential contest this year. “We aim to play a constructive role. The most recent thing we have done in the debate is to prepare a white paper of a technical nature for a congressional committee on the cost of servicing individual accounts, if the policymakers want to include some degree of choice.”
But he agrees that you will get reaction. “Anytime, you go over some line and enter into policy debate, you are going to get discussion coming from all directions. We put our views up on our website and receieved letters from people who disagreed with the policy direction we were arguing. Where do you draw the line about such involvement?”
But such political brushes are not likely to be the severest of the challenges facing Spina on the road ahead. With a fast changing financial panorama, as evidenced by the Chase JP Morgan encounter, where capitulation was within a matter of days, can State Street keep its own independence? It has shown itself able to fight off the determined challenge of the Bank of New York, but that was in yesterday’s world.
“Our value to our customers and stockholders is as an independent organisation far exceeds that of a different structure. We are aware of the global conglomeration that is going on - but it’s a little tribal, because if we were part of one of these families, would the other families do business with us? This is a dialogue, we have directly in our face,” says Spina. “Our lack of affiliation actually helps us.”
The benefit of focus must not be overlooked, he adds. “Any combination with anyone else would diffuse the focus. Much of our success is because we have built an organisation with people who are excited by this focus and the winning that comes with that. But we have to produce - that is the requirement for continued independence. We accept that responsibility readily and are determined to make it happen.”

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