State Street CEO sees custody 'arms race'

Global custody firms are engaged in a data analytics “arms race,” with the battle likely to favor those that can give clients an edge in managing their investment portfolios, says Joseph L. “Jay” Hooley, chairman and CEO of Boston-based State Street Corp.

Success will go to “those that can extract insights on a real-time basis” from the trillions of dollars of assets they oversee globally, “to help inform client judgments about investment management, risk management and compliance,” Mr. Hooley said in a March 30 interview in Singapore.

The 30-year industry veteran said the decadeslong morphing of global custody from a transactional business to a data and analytics business has effectively “redefined the audience we're talking to: it used to be back office to back office, and now it's back office to front office, as the information inherent to what we do becomes more interesting to portfolio managers and risk managers.”

It's “redefining where the value is created in the value chain,” he added.

For industry heavyweights such as State Street and Bank of New York Mellon Investment Services, which oversee more than $29 trillion apiece in global custody assets, a precondition to making the most of that opportunity is gaining digital access to all data on the assets they oversee.

State Street's “Beacon” program — a 10-year, billion-dollar effort, more than half complete this year, to digitally interconnect all of the company's systems — will allow all of the company's global client data to be taken in digitally, pass “all the way through our system ... without human touch,” and create real-time data on the other side, said Mr. Hooley.

Francis J.G. Braeckevelt, a Singapore-based managing director and chief operating officer with BNY Mellon Investment Services, in a separate interview, said his globe-spanning firm has likewise made “great strides” in digitalizing everything it does, laying the foundation for designing and offering more powerful data analytics tools to meet client needs.

Every big custody player has figured out that “this is where the puck is going,” said Mr. Hooley.

The only question now is “who can execute,” helping clients sift through an avalanche of data to glean real-time insights that can guide their investment and risk management decisions, he said.

“Once you achieve that state” of seamless digitalization, “then for the information we hold on behalf of our clients, we're giving them real time data inputs ... overlaid by different analytic models — some of which we hope to provide — which will inform the future of investment management and, frankly, the business,” predicted Mr. Hooley.

It will be the “solutions you build on the back of that” digitalization that “differentiate you from the rest,” agreed Mr. Braeckevelt.

The BNY Mellon veteran pointed to the “Liquidity Plus” dashboard his firm began offering clients a few years back as one recent solution to meet the needs of clients, many of whom faced challenges during the global financial crisis in ensuring they had sufficient liquidity at “the right time, at the right place.” The product gives clients the ability to monitor and analyze their liquidity positions, allowing them to make shifts where needed in a cost-effective way, he said.

Mr. Hooley cited an app for risk managers called Pharos — under development at State Street since 2016 - as an example of the company's continuing efforts to help investors better digest the deluge of data overwhelming them now.

The app connects news at a global level to a client's portfolio holdings. In a hypothetical example, Mr. Hooley said news of an explosion at a big South African copper mine would prompt an alert on the phone of a chief risk officer with concentrated holdings of Apple stock, due to the heavy copper content of iPhones.

As another recent example, Kevin Wong, senior managing director and head of sector solutions, for State Street's global markets and global services business in the Asia-Pacific region, pointed to a six-year collaboration between State Street and Cambridge, Mass.-based PriceStats — nicknamed the “billion price project” — to track online global price data retail goods, which can yield consumer price inflation data a month or more ahead of official CPI announcements.

“We've been rolling that project out,” garnering interest from clients especially sensitive to inflation movements, including fixed-income managers and a number of central banks, said Mr. Wong.

Other examples Mr. Hooley cited of State Street leveraging its back office muscle to create investment products include: a private equity beta vehicle and the firm's SHE exchange-traded fund, based on an index of U.S. large-cap companies ranked among the highest in their sector in terms of gender diversity within senior leadership positions — both introduced last year.

As “the largest provider of services to the private equity world,” State Street “went out to clients that we serve in the back office and said would you be willing to make your data available in order for us to create a PE benchmark,” and they agreed, said Mr. Hooley. Based on the resulting PE benchmark, State Street launched an investment vehicle offering synthetic exposure to PE beta returns, which will let asset owners looking to ramp up allocations to that asset class in coming years capture a portion of those returns as they go about the time consuming process of picking specific PE managers, he said.

He pointed to State Street's SHE ETF, meanwhile, as part of a broader opportunity for the firm to use its prowess in data analytics to bring out products in the growing environmental, social and governance space. State Street was able to confirm a positive correlation between firms that had good gender diversity characteristics among senior leadership and investment returns to create an investment product “that represents a theme” of growing interest now, he said.

To better focus on that data analytics imperative — which Mr. Hooley termed “the next growth engine of this business” — State Street launched its Global Exchange division three years ago, the company's fourth division following its Global Service trust and custody business, its Global Markets foreign exchange and securities lending operations and its Global Advisors money management arm.

While the new division accounts for well under 10% of State Street's revenues at present, those revenues are “coming up very, very quickly,” said Mr. Wong.

State Street Global Advisors - even after acquiring $100 billion in actively managed assets last year through its acquisition of GE Asset Management- remains best known for managing more than $2 trillion in index strategies and passively managed exchange-traded funds, but State Street's asset servicing business, which accounts for more than 85% of the holding company's revenues, is focusing more and more on providing tools to help asset owners and money managers actively manage their portfolios.

Whether the client is a pension fund or a sovereign wealth fund or an insurance company, “what makes you successful is the ability to generate attractive returns,” and increasingly that will be determined by who has access to the better data needed to effectively create a new level of “information advantage,” said Mr. Hooley.

Some of State Street Global Exchange's offerings, meanwhile, have been embraced in the Asia-Pacific region, with the division's revenue growth there exceeding the strong growth seen in North America and Europe, said Marko Milek, State Street's Hong Kong-based head of global exchange for the Asia-Pacific region, in a separate interview.