State Street's CEO on Asia, AIFM and middle-office services

In the second part of a two-part Q&A, Jay Hooley, Boston-based chief executive of State Street, outlines his concerns about the proposed AIFM directive and why he’s optimistic about Asia.
State Street's CEO on Asia, AIFM and middle-office services

Joseph ‘Jay’ Hooley has been chief executive of State Street Corporation since March 1 and president since April 2008. He was named chief operating officer in April 2008, before which he had been an executive vice president since 2000. Hooley joined State Street in 1986, and before that he had worked at companies including telecoms firm AT&T and International Financial Data Services.

AsianInvestor spoke to him when he visited Hong Kong in late July. Readers can click here to read the first part of this interview, where Hooley commented on the likely effect on his business of the recently signed US financial reforms, among other things.

Do you see Asia as the region offering the most growth potential for State Street in the coming years?
Jay Hooley: Yes, both in terms of asset servicing and asset management, for the obvious reasons. For one-, three- and five-year periods, we’ve seen two to three times the growth in terms of assets outside the US compared to inside. Asia is growing faster than Europe, and at three times the rate of the US. And the US is not flat; it’s grown well.  

We already have 41% of our revenues outside the US and 44% of our 28,000 staff outside the US, so we’re pretty diversified geographically.

I became CEO in March and set a handful of high-level goals, the first being to double our non-US revenues over the next five years. And when I think about Asian markets like China, where there is inherent growth – through the development of pension schemes, the evolution of capital markets etcetera – clearly the opportunity is going to be there.

What do you see as the biggest obstacles to further expansion in Asia?
As I look at the Asian markets, our starting point is strong – we’ve been in Hong Kong for 28 years, Japan and Australia for over 20. We’ve got some history, and we have made the transition to local management; we have indigenous management teams that have been around, seen the markets, understand the nuances of Asia.

We like a lot of the geography here. Obviously there’s China, where we have good history; we have 1,000 people there, mostly around a technology centre. But China is also a source for outsourcing some of our business processes. We’re in the process of getting our branch licence in Beijing and we have a rep office in Shanghai.

And I point to some of those things as a means to say that in our asset management and asset servicing we have good business, but importantly we also have knowledge and experience.

In China, two of our senior executives, KK Tse and Sau Kwan, led the Foreign Expert Committee on open-ended funds, which advised the China Securities Regulatory Commission in launching the first open-ended mutual fund in China.

We think it’s important to be involved, and to understand how markets work as a precursor to good commerce.

You mentioned Europe earlier. Let’s talk about the alternative investment fund manager directive. How concerned are you about the proposal that custodians be held liable for their clients’ assets?
Our role as custodians is to safekeep assets and value securities, and if the legislators impose such stringent rules on custodians, the effect will be to burden the product structures. While the proposed legislation is just about alternative investments, similar provisions could be eventually applied to Ucits and things like that, which require healthy custodian relationships to maintain the transparency and independence I spoke of before.

Those rules aren’t set yet, and we’ve put our two cents in. My concern here is less about State Street or the other custodians, but more about making sure the product continues to thrive.

Can you give a bit more detail about the kind of problems you think the rules would cause?
If you look at what’s happened in the past 20 years, some pretty effective structures have been put in place – Ucits being one of them – which allow funds to be passported across geographies, which creates efficiencies that ultimately get passed on to the consumer. If you start putting in place rules that are onerous or prohibitive, it’s just going to build cost into that system. Someone will have to absorb that cost, and my fear is that it will be the end consumer, which is not healthy for the industry or for generating the savings needed to fund the retirement needs of an ageing population.

The regulators must do what they need to do to protect the industry, but if taken too far it can create an adverse effect on what is a pretty good product structure.

Can you talk about any services or products or likely hires that State Street is likely to make?
On the asset-management side of our business, we think the ETF structure is a great structure, and we’re continually looking at how to create exchange-based access to different strategies. We think there’s a whole range of strategies that can be introduced and tailored by market. [State Street is the largest provider of ETFs by volume in Asia.]

On the asset-servicing side, I want to mention a couple of things. In terms of alternatives administration – hedge funds, private equity, real estate – we’ve really just scratched the surface in Asia, and we’ve got plans under way to make that a bigger part of our servicing business.

Another area concerns outsourcing. Custody has been outsourced, but we’re seeing more pressure on pension funds and investment managers, which are outsourcing more and more work to us.

How about other areas of the business?
One big product segment we’re focused on is the middle office or investment operations. We were an early innovator of that with [US asset manager] Pimco back in 2000. Today we service over $7 trillion in middle-office assets. We’re the market share leader with over 50% of the market, servicing some of the most sophisticated and biggest investment managers.

That trend, if anything, is accelerating. Why are we seeing more demand there? One obvious factor is that fund managers in many parts of the world have been struggling to generate good returns, so there’s pressure on their costs.

Another factor is that – whether due to new regulation or product design – fund managers are investing in their infrastructure, and they want to invest in the front office, not the middle office. As demands for higher levels of risk management and compliance are being imposed on fund managers, the last thing they want to do is make investments in the middle office.

So we’ve built out a comprehensive, scalable middle office; we can continue to invest in it and ensure that as new regulations come out, it’s fully compliant with new rules. If you use us as a provider, you don’t worry about that investment – we worry about it. We see significant demand for these services across Asia particularly in Japan, and also in Europe and across the US.

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