HI HO SILVER LINING: Asset values may have dropped off a cliff, but inserv administrators see opportunities in the midst of the pandemic

The trust banks enjoyed the first quarter of 2020. FX earnings were up across the board as volatility returned. After a generally undistinguished 2019, the banks bounced back in Q1 2020. But how is the rest of the year going to play out? When your social and business lives are conducted through Zoom, Teams, FaceTime and Webex, and you have to pretend that virtual happy hour is really quite fun, is there anything to look forward to?

Actually, plenty. There are at least four areas where inserv providers – banks and independents – could prosper in 2020, despite the best efforts of the World Health Organisation and its client nanny states. The first is clearly capital markets – FX, especially, but also trade execution and, if the regulators would stop trying to rig the market, securities finance. (BTW, banning short-selling is a direct infringement of the whole ethos of a free capital market. Spineless trade associations that pretend to represent lenders have been silent as jackbooted regulators have moved in.)

The trend towards outsourcing trade execution had begun well before the virus, but managers and owners now have another reason to get rid of as many functions as possible – and trading simply doesn’t add any value, only cost. Expect to see a growing number of asset owners with in-house management teams begin to push out non-core activities. Some of them have been caught with no swimsuit on when the tide went out.

On top of this, custodians say that they are busy dealing with lots of enquiries about middle-office outsourcing, and not just from within the second and third tiers of asset managers. Big names are thinking again about why they run huge and expensive in-house operations on high-maintenance platforms. They are also considering a more cohesive approach to enterprise data management, and many realise that they simply do not have the resources, or intellectual capital, to build a coherent, usable and flexible data repository – and are beginning to accept that paying a third-party to do it for them is a better solution. Yes, administrators are finally monetising data management.

Whilst a few providers continue to view ETFs with suspicion, most are bullish about growth prospects for the sector. The gradual roll-out of the new breed of semi-transparent funds in the U.S., and the possibility of similar models being approved elsewhere, will provide a huge stimulus to the sector, and providers with a compelling proposition (especially universal banks that can offer end-to-solutions, from seed capital onwards) are going to be very popular.

Finally, no one benefits more from a drop in valuations than private capital managers. There has been so much dry powder waiting to be invested, and the COVID correction will deliver some great buying opportunities. Almost every inserv provider understands this, and most have been building out their PERE capabilities. 2020 could be a really big year for the sector.

It’s also worth pointing out that administrators make money out of transaction fees too – it’s not all about ad valorem charges. Volumes have been high and may stay that way for a while, which will help offset the drop in asset values. And many custody banks – especially those in Europe – have learnt how to deal with negative interest rates and anything else the market can throw at them. So it’s unlikely a virus is going to derail them in the long term, even if there may be a few sniffles and sneezes along the way. As they say, it’s an ill wind that blows nobody any good.

 

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