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Custodians are providing increasingly complex services to fund managers struggling to compensate for pension shortfalls.
Explosive" and "expansive" are words not often used to describe the market for providing securities-custody services to pension funds. Until now.
Pension scheme managers, increasingly struggling with underfunded plans as the world's population ages, are adopting more-aggressive investment philosophies aimed at meeting future liabilities rather than beating indexes or other benchmarks. And custodian banks, which process completed transactions and safeguard plan sponsors' assets, are responding in kind. These firms are offering a barrage of new products that allow for settlement of complex financial instruments such as credit default swaps and other derivatives.
"All traditional long-only managers are moving quickly into alternatives," says Margaret Harwood-Jones, who heads the institutional investor group at BNP Paribas's securities services unit in London, adding that clients are looking to do more around hedge funds and derivatives. "We now support a larger and more complex range of investment instruments."
Pension managers are especially interested in playing the derivatives markets to boost returns. The volume of derivatives trades processed at the custody unit of Northern Trust Corp., for instance, has grown by 30 percent a year for the past three years, according to senior vice president Ray Carney, who is based in Chicago.
Accommodating the evolving needs of plan sponsors as they move into riskier assets is one way that custodian banks are increasing their assets under management. The industry's biggest players have seen significant growth in the past year, according to this magazine's annual...