Asset Administration and Custody Review. A report on asset administration and custody issues faced by Australian asset owners and managers

Transcription

1 Asset Administration and Custody Review A report on asset administration and custody issues faced by Australian asset owners and managers

2 Table of contents

3 Table of contents Asset Administration and Custody Review 2014 The big picture: the issues that most concern asset owners and managers Operational issues of concern Getting to grips with risk management Other important issues: increased regulation means increased costs Some do not stress-test regularly How do you manage your risk analytics? What does the future hold? About this poll About BNP Paribas Securities Services

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5 Asset Administration and Custody Review

6 Welcome to BNP Paribas Securities Services Asset Administration and Custody Review 2014 BNP Paribas Securities Services is a strong believer in helping the industry and end investors by providing information and adding value. This report is part of this approach to deliver value. It is designed to provide Australian asset owners and managers with benchmark and comparative information on developments and trends in investment and superannuation asset administration and custody. The review found the top issue that keeps those in the industry awake at night is government regulation. It interrupts the sleep of two-thirds of respondents (67%). Almost nine in ten (87%) also report increased costs due to meeting those regulations, costs which cannot easily be passed on to end investors. The next greatest concern of Australian asset owners and managers is meeting performance targets, keeping almost half of them awake of a night (45%). Staff management and resourcing was another major concern, worrying a third (32%). The review also identified: The most concerning operational issue is risk management improving risk analytics and improving the risk-return profile of their portfolios worrying over two-thirds of respondents (67%) More than half (53%) want a better understanding of their investment risk, with two out of five (42%) not satisfied with their risk reporting Data management storage, access, quality, costs concerns a third of the industry (36%), while how to further reduce costs also worries a third (31%) Of concern, a fifth of respondents (20%) have never stress-tested despite regulatory requirements for superannuation funds to do so Several respondents reported that they are now concerned about more issues than ever before. We are partnering with some of these to help them overcome their challenges. We hope these results assist you and help identify potential solutions to reduce these concerns in your business. If you have any questions, or would like assistance, please let us know. Peter Baker Head of Australia and New Zealand BNP Paribas Securities Services Greg Bright Editor Investment Operations & Custody If you are interested in receiving future poll results please contact us at brand.communications@au.bnpparibas.com 6

7 The big picture: the issues that most concern asset owners and managers Keeping up with, and meeting, regulations of all sorts (local, global and both) and reporting to regulators when added together keeps two-thirds of respondents (67%) up at night. Some 87% report increases in their costs due to meeting those regulations. Several respondents reported that they were unable to pass those costs onto end investors. (Interestingly, two out of five found external custodians and administrators helped them reduce costs see page 12). The next greatest concern of Australian asset owners and managers is meeting performance targets, keeping almost half of them awake of a night (45%). This was followed by staff management and resourcing issues, which concerns almost a third of respondents (32%). Only 5% of respondents said nothing kept them awake of an evening. What keeps you awake the most at night? Meeting performance Staff management Asset allocation Keeping up with regulation Reducing costs Other investment Data management Reporting to management Improving risk return Other operational Meeting regulations locally Improving transparency Reporting to regulators Meeting regulations all Finding data sources Meetings regulations globally Other regulatory Nothing 7

8 Operational issues of concern In terms of operational issues, the most concerning are to do with risk management risk analytics and improving risk-return profiles of portfolios (67% more than one response was permitted). Improving risk returns (38%) was followed closely with improving risk analytics (29%) indicate that risk is a driving concern. The next most concerning issue was staff management and resourcing (which concerned 53% of respondents), followed by data management (36%). In relation to data, finding new data sources (17%) and data for alternative investments are also causing concern. Other operational issues include reducing costs (31%). Which operational issues concern you the most? Staff management How to improve risk return Data management Reducing costs Improving risk analytics Reporting to others Improving transparency Finding new data sources Data re alternatives Other (please specify) Other issues raised include general risk management, fraud, ESG issues, ensuring client satisfaction, post-retirement strategies and planning as well as regulatory levies. A number of asset owners and managers commented they are evaluating outsourcing aspects of their operational functions. Client reporting, for example, is increasingly being entrusted to third party providers. Several reported that by outsourcing non-core administrative functions they have been able to better focus on managing their investments and generating value for their stakeholders. Surprisingly, some 40% of respondents are not satisfied with their risk reporting, despite it being provided internally. 8

9 Getting to grips with risk management Risk is clearly identified as a major issue for asset owners and managers. Gaining a better understanding of investment risk is a priority for over half of respondents (53%). This is closely followed, by just under half of respondents (48%), wanting to improve the risk-return profile of their portfolio. A third seek to better understand their total business risk. (More than one answer was able to be selected). Overwhelmingly, the study has found that the majority of respondents are not satisfied with their risk reporting, with many relying upon internal models, teams and processes. We have seen greater explicit focus on risk from regulators globally, and the building of a stronger risk framework in Australia. For example, the Australian Prudential Regulation Authority (APRA) requires superannuation funds to place a quantitative value on risk associated with pension products, known as the Standard Risk Measure (SRM), and report to investors the risk-return trade-offs of their investments. Prudential Standard SPS530 requires stress testing, comprehensive liquidity management plans and generally enhanced investment oversight across all investment options. What do you require from risk analytics? Understand investment risk How to improve risk return Effective risk communication Understand business risk Meeting regulation risk reporting Support new investments How to reduce risk Stress testing Are you satisfied with your risk reporting? No Yes 9

10 Efficient and effective administration and custody of assets is important for Australia s asset owners and managers; with increased regulation, continued focus on cost reduction and a mounting need for more data and comprehensive analytics making these key areas to gain a competitive advantage. As a result, management is increasing attention on analytics; requiring immediacy of access to information and ability to act on that information. Not only is the breadth of reporting vital, but management is also looking for more detailed breakdowns of data. As a result, risk and analytics teams are producing many more ad-hoc, customised reports, with a large number of respondents still relying on spreadsheets and s to track and report. Senior management is paying attention Respondents note the focus on risk analytics is increasing, predominantly, due to a greater emphasis by management. Management themselves are facing pressure from regulators, requiring more granular insights into the exposures and risks of their strategies and how the institution is implementing an optimal risk management framework. There is a growing recognition of the need to integrate risk management into their business to match best practices of peers and improve decision-making at a senior management and board level. As such, risk and performance analytics is no longer an optional value-add for institutions, but a cornerstone requirement in all investment decision-making. Another key aspect of the focus on risk analytics is the need to monitor asset manager performance and the risks taken by the asset managers in delivering those returns. Some asset owners have largely been pursuing investment returns with very limited risk attribution analysis. Although returns may be high, it can be unclear as to the levels of risk being taken and whether they are being managed effectively. The review found respondents are planning to increase spending in risk and performance analytics as they seek to improve their capabilities in this area. This includes recruiting resources, building technology solutions, developing internal risk models and/or looking to external providers to bridge gaps. In terms of solutions, asset owners who place more emphasis on performance metrics than risk metrics typically select standard risk reporting as the most critical need. Conversely, respondents with a greater focus on risk metrics place a stronger emphasis on forecast risk reporting and complex scenario analysis. Big data Respondents also feel that the management data is one of the more difficult challenges to tackle, especially as investment strategies, associated indicators and benchmarks become more complex. For some asset owners, which invest through multiple fund managers and across many different asset classes the challenge of managing a plethora of data sources is seen as overwhelming. 10

11 They note the maintenance of large volumes of data is placing tremendous pressure on their information technology infrastructure, while contributing to spiralling maintenance costs. Custom reporting Respondents also reported an increased need for custom reporting, largely due to the different consumers of information they are beholden to, i.e. both internal (investment teams, operations, CEO, etc.) and external stake-holders such as end-investors and regulators. Best practice Overall, we identified that best-practice asset administration and custody requires: Dedicated and automated data management Integrated ex post and ex ante analytics ipad and online access to reports Integrated online workflow management, including a client contribution portal Performance and ex-post risk measurement Investment and portfolio reviews Performance attribution including fixed income specialisation Value-at-risk analysis Ex ante risk attribution Scenario analysis and stress testing Liquidity risk analysis, and Peer group analysis. 11

12 Other important issues: increased regulation means increased costs Some 87% of respondents reported they are incurring increased costs due to increased regulatory oversight. Of concern is that 8% are uncertain of the impact regulation has on their cost base. Over half of respondents are dealing with increases in regulation with their own resources and up skilling their teams. Two-fifths (41%) are using some sort of external support; with almost a quarter (23%) using external service providers, while 18% use consultants or advisers. Are you incurring increased costs as a result of increased regulatory oversight? Yes Uncertain No How are you dealing with changes in regulation? Working with our own people Work with external provider Work with advisor/other Up-skilling my internal teams 12

13 Some do not stress-test regularly Surprisingly, a fifth (20%) of respondents said they had never stress-tested, despite regulation SPS530 requiring it to be conducted regularly. Almost a third (30%) do not have adequate data and reporting on their illiquid investments, while 20% are not satisfied with what they have. Half also reported that, when it comes to alternative and illiquid investments, they do not have or are not satisfied with their performance and risk measurement and/or custody and administration. Have you stress-tested your investments against risk scenarios in the past: 6 months Not tested 1 year Over a year When it comes to your holdings of illiquid investments (direct property, direct infrastructure and/or private equity) do you have good and timely: Custody and administration Do not have Performance and risk Not satisfied with the above 13

14 How do you manage your risk analytics? A combination of greater complexity in investment profiles, more rigorous risk reporting requirements from regulators and heightened scrutiny from senior management and boards is driving respondents to enhance their risk analytics across a range of capabilities. Almost a third of respondents use an equal mix of internal and external analytics (31%), while just over a quarter (28%) doing it all in house, compared to just 4% relying purely on an external provider. External custody and administration helps two in five reduce costs. Capabilities tied to specific expertise were seen as the primary drivers to use external service providers, for example in the areas of liquidity risk, stress testing and risk attribution. What percentage of analytics is done in house v external? 50/50 All in-house More than 75% in-house Less than 25% in-house All external Has external custody and administration helped you reduce costs? Yes Uncertain No 14

15 What does the future hold? Going forward, asset owners believe the greatest impact on their organisation and operations will arise from the need to increase diversification in order to reduce volatility. They also reported they expect the low interest rate environment will continue to provide challenges, especially in terms of providing fixed income returns. Improving cost effectiveness and reducing costs continues to also remain a focus, as is the uncertainty created by regulatory change and its impact on long-term planning. Which asset class do you expect to grow the most this year for requiring more administration and custody support for your organisation? Hedge funds Infrastructure Shares Property Fixed income Private equity As asset owners and managers invest more into new asset classes, such as hedge funds, this will in turn raise operational challenges. For example, the popularity of investing in direct assets such as direct real estate, direct infrastructure and private equity raises other challenges such as these illiquid assets often being difficult to price thus raising the need for specific custodian support. Overall, strategic outsourcing is becoming the new norm for middle- and back-office functions. Several asset owners and managers said they outsourced these functions to specialist providers, such as custodians, so that they could focus on their core activities such as research, execution and investment management. They said this, as well as and protecting against the effects of the market and regulatory change, were significantly more important than short-term cost efficiency. Accordingly, a deciding factor in choosing a provider is not cost, but client service and product quality and how much value they add. 15

16 What do you think will be the market trends that will have the most impact on your organisation going forward? Asset class diversification Low interest rates Retailisation of pensions Improving cost efficiencies Improved risk management Member engagement Regulatory changes Global distribution Re-insourcing asset management About this poll Investment Strategy News magazine undertook the poll of Australian asset owners and managers in July 2014 and received 110 responses as to issues that concern them the most. The majority of respondents were asset managers (30%) and owners (pension funds 26%, endowments 5% and Sovereign Wealth Funds 3%) with 10% bank asset managers. Some 58% of respondents were CEOs, CIOs, COO, CFO or other c-suite management. 16

17 About BNP Paribas Securities Services BNP Paribas Securities Services ( a wholly owned subsidiary of the BNP Paribas Group, is a leading global custodian and securities services provider backed by a strong universal bank. It provides integrated solutions to all participants in the investment cycle including the buy side, sell side, corporates and issuers. Key figures as of 31 March 2014: US$9 trillion in assets under custody, US$1.9 trillion assets under administration, over 7,007 administered funds and 8,225 employees. 17

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20 Follow us on For more information, please visit securities.bnpparibas.com This report has been prepared by BNP Paribas Securities Services is incorporated in France as a Partnership Limited by Shares and is authorised and supervised by the ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the AMF (Autorité des Marchés Financiers). BNP Paribas Securities Services ARBN (AFSL No: ) has been registered in Australia as a foreign company under the Corporations Act 2001(Cth) and is a foreign ADI within the meaning of s 5(1) of the Banking Act The information contained within this document ( information ) is believed to be reliable but neither BNP Paribas Securities Services nor any of its related entities warrant its completeness or accuracy nor accept any responsibility to the extent that such information is relied upon by any party. Opinions and estimates contained herein constitute BNP Paribas Securities Services or its related entities judgment at the time of printing and are subject to change without notice. This document is not intended as an offer or solicitation for the purchase or sale of any financial product or service outside of Australia and is intended for wholesale clients only (as such term is defined in the Corporations Act 2001 (Cth)). The information contained in this document does not constitute financial advice, is general in nature and does not take into account your individual objectives, financial situation or needs. BNP Paribas Securities Services recommends that you obtain your own independent professional advice before making any decision in relation to this information. Printed on recycled paper by Edit overso Designed by the graphics department, corporate communications, BNP Paribas Securities Services August 2014