Asset owners seeking more integrated models
Large institutional investors are moving to update their operational set-ups in line with greater internationalisation of their portfolios, with a growing number looking for an integrated model across asset classes across the region or even the globe.
This is a growing trend even in less developed markets in Asia, where there was little or no demand for international services in the past, said Margaret Harwood-Jones, global head of securities services at Standard Chartered Bank.
“If you look at a market like Indonesia, it used to be a completely domestic asset pool and profile,” she noted. “Now institutions there have a propensity to invest part of their portfolio into foreign securities.”
This is partly for diversification reasons, but above all because returns on domestic investment are not as high as in the past in many markets.
Chinese insurance firms represent a good example of this trend. They have been investing steadily more in offshore assets in recent years, especially as yields and asset quality have been declining onshore, noted Harwood-Jones.
And mainland insurers have a great deal more to do on this front. Chinese insurers can invest up 15% of their AUM offshore, but as of end-2016 only $49.2 billion was in overseas assets, representing 2.33% of their investable capital.
The biggest such firm, China Life, has said it aims ultimately to hit the 15% limit, and others are making similar moves, notably Ping An.
Insourcing trend
Another reason asset owners are revamping models is a growing shift for many to seek to manage more of their investments in-house. They are often seeking performance attribution and related data analytics on a daily basis, like asset managers, rather than monthly or weekly, noted Peter Jordan, Asia-Pacific head of global fund services at Northern Trust, in November.
And this is, in turn, forcing service providers to change the way they approach institutional investors.
To develop a more integrated international model, such asset owners need efficiency, a consolidated approach and a broader range of solutions, including for investing in emerging markets, noted Harwood-Jones.
‘Follow-the-sun’ model
An early adopter of a global ‘follow-the-sun’ operating model in Asia Pacific was Australia’s QBE Insurance, a firm with operations worldwide. In early 2015 the firm was looking to implement a model with fully reconciled and audited trade data across time zones.
This was a challenge, even for the three big global service providers that QBE invited to pitch for the business, said Joe Prsa, chief operating officer of the insurer’s investment arm, at the time. “We are stretching their existing service capabilities,” he added, declining to name the companies in question.
The biggest international providers of such services include the likes of BNY Mellon, Citi, HSBC, JP Morgan, Northern Trust and State Street.
Two years on, such firms have no doubt upped their game on this front, just as clients’ requirements have expanded.
In markets such as Indonesia this trend has led to a change in requirements for institutions that are not used to investing offshore and now need to manage outbound flows, noted Harwood-Jones.
“They are changing their operating models,” she said. “Clients are first and foremost looking for help with understanding how to do cross-border transactions and settlement, to give themselves an edge over purely domestic players.”