Asset owners are hungry for data beyond performance analytics, spurring custodians to broaden their offerings and find another way to expand their revenue base.
Data requests no longer are just for benchmark-based performance analysis. Asset owners also want data to better pinpoint varieties of operational, systemic and headline risk; offer clear details on illiquid asset holdings; enhance information on electronic trading, particularly after trades are made; and improve asset owners' ability to conduct stress and scenario tests on their investment portfolios to determine how well they can withstand potentially large market losses in the future.
“The big data space isn't just about protecting assets; it's beyond that,” said Paul d'Ouville, senior vice president and global head of product management in Northern Trust Corp.'s corporate and institutional services unit, Chicago. “Companies like Wal-Mart analyze all sorts of data you wouldn't expect them to use to help run their business. Our clients are asking us to do similar things.”
There's a market for such information. According to a State Street Corp. survey of 400 institutional investors last month, 98% see obtaining data as a key strategic priority — but only 13% are confident they have the talent in place to advance their data strategy. Moreover, 34% said they need better risk tools with multiasset capabilities beyond stocks and fixed income.
That desire for more elaborate data has helped custodians find revenue at a time when income from traditional sources like securities lending and foreign-exchange trading is decreasing. Northern Trust, State Street and Bank of New York Mellon Corp. have dedicated businesses focusing on providing more detailed data to clients — particularly large institutional asset owners with more than $1 billion in assets, according to sources. While the service is an add-on for their existing global custody clients, the banks also are pushing their data capabilities when rebidding for business or seeking new clients via RFPs.
“Custodians are expanding their offerings to new services like big data,” said Kristen Doyle, associate partner and head of Aon Hewitt's trust services unit based in Lincolnshire, Ill. “It's attractive to large plans who need this increased information, plus it's a new revenue generator. It's also in response to the changing landscape in institutional investing to private equity, hedge funds and real estate.”
Among asset owners, the shift to illiquid alternative investments is feeding the need for data beyond what comes from traditional portfolio valuation, said Eric Nelson, chief risk and compliance officer at the Florida State Board of Administration, Tallahassee, which oversees $175.4 billion in assets. “As the fund gets bigger, we've branched out into alternatives,” Mr. Nelson said. “That's where the need is — information on illiquid, private-market investments. The move from public to private assets, toward commodities, timber, distressed debt. ... Once you bring in a new relationship (with an alternatives manager), you need the data to manage it.”
Additionally, Mr. Nelson said, FSBA has made a “big push” into risk management since December 2009 and has created a variety of risk reports. FSBA uses an internal accounting system and is not totally reliant on its global master custodian, BNY Mellon, although the firm performs trade settlement for the board and oversees the FSBA's accounting system.
At BNY Mellon, investors' change in asset allocation has meant a change in how the assets are analyzed, said Debra Baker, managing director and head of the New York-based global risk solutions investment analytics unit. “We're used to having assets in-house” when safekeeping assets, Ms. Baker said, “but now a lot of investors are looking to diversify in alternatives, and those assets tend not to be with the custodian. Now, we can view the assets away from our traditional safekeeping role.”
Assets not under custodians' direct purview are now viewed via third-party data aggregation. BNY Mellon has equity stakes in two such aggregators — HedgeMark International LLC and Investor Analytics — and from them BNY Mellon clients receive analysis on illiquid investments. “They get the information from the managers (that they use) to provide risk analytics and intellectual capital,” Ms. Baker said.
Also, Ms. Baker added, the custodial data trend is an outgrowth of how portfolio analytics has changed over the years to more forward-looking views from traditional historical investment analysis. “Forward-looking analysis is an added skill,” she said. “There'll always be a need for historical analysis. But now there's also stress tests, performance testing, anticipating scenarios. People want to be prepared for the next crisis.”