Information and technological bells and whistles were as important as safekeeping in evaluating and selecting a custodian by a large state pension fund.
The North Carolina Department of the State Treasurer, with $53 billion in pension assets, selected State Street Corp., Boston, to provide custodial services that also include a broad range of asset and investment related services. Also, the $39 billion Minnesota State Board of Investment, St. Paul, renewed its contract with State Street to provide custodial services for the pension plan and another $14 billion in treasury assets.
Public plans are looking to global custodians for more than just custody and transaction processing. Custodians are being used more for custody of information than physical assets. These services come under the broad umbrella of custody but also include a long list of bundled services such as performance measurement and attribution, analytics, accounting, record keeping and foreign exchange processing.
"The technology and services provided by the custodian are vital," said Steven R. Eubanks, investment administrator for the North Carolina treasurer's office in Raleigh. "We were looking for more information about the portfolio, more timely information. That was a big reason for bringing in a master custodian - data generation."
Industry experts agree that staffing shortages at many public plans, along with growth in assets and investment diversification, mean public plan sponsors must rely on custodians for more than just custody.
Custodians increasingly are viewed as providers of information and technology unavailable to many public plans, and the focal point in consolidating data from multiple sources and portfolio information.
"The bottom line is that custody is a technology business now, not just a physical paper business," said Howard Bicker, executive director of the $53 billion Minnesota State Board of Investment.
Public funds "often don't have huge in-house staffing, but they have a lot of assets and information needs," said Stacy Scapino, senior consultant and head of global custody and asset administration group at Mercer Investment Consulting, London. Consequently, she said, they look outside to fulfill their data requirements. "Pension funds are using their custodians more effectively now, particularly in this down market. Many public funds want better management information, and leverage the staff and resources of their custodians."
Ms. Scapino said public plans are more diversified and have experienced substantial asset growth in recent years, making custodial services crucial.
Mr. Eubanks said his department hired State Street to speed the delivery of portfolio information and reporting, which had been handled by multiple custodians utilized by its outside investment managers.
"We had been using a variety of custodians through our investment managers," said Mr. Eubanks. "It had worked fine, but we wanted to have daily reporting and more timely information in terms of performance. And since we invest globally, we wanted to know our exposures daily by regions of the world. By selecting a single custodian we can see our exposure and view performance daily if we need to," he said.
"We have a very small staff and we've gotten more quantitative in the last two years. In the past, a lot of our statistical and quantitative measures were literally taken off an Excel spreadsheet," said Mr. Eubanks. And for portfolio management and tracking "that gets into a time lag."
Using information and reporting from custodians selected by its money managers "often meant we had to wait for monthly or even quarterly" reporting. Using State Street's Internet-based custody platform means custom reports can be obtained overnight from a single source, he said.
In addition to its quantitative orientation, said Mr. Eubanks, North Carolina is looking at possibly increasing its equity exposure and investing in real estate and other alternatives. "These would increase the burden on our staff and was a big reason for bringing in a master custodian to assist in portfolio data generation. If you bring in more managers and new asset classes you have to spend more time looking at your assets and conducting due diligence and it was important to us to have someone like State Street generating the necessary data," he said.
Minnesota, which hired State Street in 1983, was one of the Boston bank's first public plan custody clients. Since then, the relationship has expanded to include global custody, securities lending, performance measurement, commission recapture and foreign exchange trading for the $53 billion portfolio.
Mr. Bicker said the industry has changed during the 20-year relationship with State Street and is more technology-driven than in the 1980s.
"We are in new asset classes and some of us are investment boards (that manage other state assets besides pension funds) and are required to do certain things, and to do that you need asset allocation and accounting services and you need someone like State Street who offers not just custody but technology services," said Mr. Bicker.
Large public funds are starting to invest in non-traditional and alternative asset classes that require additional analytic tools, said William F. Wechsler, vice president at Greenwich Associates. According to Greenwich data, about 30% of public funds said they use private equity in 2001, up from 24% in 2000. Approximately 5% of public funds invest in hedge funds, up from 3% the year before, according to Greenwich.
"Public funds, especially at the larger end, are becoming more sophisticated and are starting to use these tools more often," he said. Public plan sponsors are more comfortable using analytic tools and the Internet, he said. In 2001, approximately 53% of public plan sponsors said they use the Internet for performance and analytic information, Mr. Wechsler said.