As Custodians Search for Profits and the EU Regulates, Prices Rise

With higher-margin services on the decline, European custodians have started to raise basic rates, and the trend is expected to continue if proposed depository rules are enacted.

(September 24, 2009) – European custodians, following a drop-off in high-margin services such as securities lending, are raising prices for pension schemes.

According to Financial News (FN), this rise in prices—up to a 30% increase, according to sources—is the first in 20 years. According to a consultant interviewed by FN, this is a result of “bankers scrambl(ing) to make good a loss of income from add-on services that clients no longer want.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Previously, custodians kept basic fees low by enticing asset owners to use high-margin services; however, following severe losses related to securities lending and other such services, their use has declined markedly. With these services being used less, custodians have turned to raising basic fees to make up for lost revenue.

According to FN, this trend may accelerate if proposed European Union depository rules are enacted. These rules—under the Alternative Investment Fund Managers Directive—would impose stringent liability of custodians, which could cause costs to rise.

The Directive has been widely panned across the continent. According to European Voice, Sharon Bowles—the chair of the European Parliament’s economic and monetary affairs committee—is warning that increased regulation will cause investors to move elsewhere. “Every time you add an expense (through regulation), you are dropping the yield for the European investor,” she is quoted as saying.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

SWF transparency often is thought of as a universal positive. However, some within the asset management business are quite vocally starting to state otherwise

(September 24, 2009) – While many have called for sovereign wealth funds (SWFs) to increase transparency in governance and investments, a few quiet voices are warning that such a move might have the unintended consequence of shortening their investment horizons.

SWF funds, increasingly prominent on the international investment scene, often have extremely long-term investment horizons due to their often explicit goal of creating a store of wealth for when natural resources eventually are depleted. This often can allow them (at least in theory) to capture an illiquidity premium—essentially gaining excess returns in exchange for holding hard-to-sell assets. While some SWFs are open as to their investment strategies, holdings, and governance, others have been lambasted for their lack of transparency.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Two prominent critics of the lack of SWF transparency have been New York-based RGE Monitor’s Rachel Ziemba and the Council on Foreign Relations’ Brad Setser. “At its most basic, the investment vehicles of the Gulf can do as they please as long as their sovereign approves,” Ziemba said in an interview with ai5000 in March, lamenting the lack of transparency and accountability of SWF—and the massive Gulf funds in particular—with regard to their investment process and success.

However, at least one prominent industry veteran disagrees. “SWFs are under greater scrutiny than ever before, not least from their domestic audiences,” John Nugee, head of official institutions at State Street Global Advisors, recently told Reuters. “The level and tone of some of the criticism by national media for high-profile losses on selected headline acquisitions might even jeopardize their ability to take the long-term investment positions that have given them such a comparative advantage.”

Gary Smith, head of central bank, supranational, and SWF business at BNP Paribas Investment Partners, warns that an excessive push for transparency, coupled with recent poor performance, could lower the risk appetite of SWFs and encourage them to favor safer instruments such as bonds. “Following the whole push toward transparency, funds opened themselves up for a monitoring process that did not exist,” Smith said. “We have transparency problems for them. The consequences are that these guys are being marked to market on a daily basis by domestic constituents.”

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>