Over the past decade, asset managers have turned to emerging and frontier markets for new investment opportunities—and capital allocated to these markets will likely continue to grow. This trend puts new demands on traditional back-office functions. So much so that it’s often uncharted territory for even the most seasoned operational executives.
NEW MARKETS, NEW DEMANDS
The reality is that status-quo approaches don’t apply in these new markets. Functions such as trade settlements, tax reclaims, entitlements and foreign exchange are exponentially more complex. What is routine in developed markets might be risky in emerging and frontier markets. This is why I advise asset managers to team up with qualified custodians to cut through the complexity. I believe that there are several mission critical qualities to look for in a global custodian:
- LOCAL: Deep local market experience
It would seem obvious that having direct, on-the-ground knowledge of market nuances is critical to success. Unfortunately, however, too many firms discount the importance of this local insight. But the benefits are far reaching: Not only do effective custodians understand markets as they are, but they can shape the marketplace as it evolves. This influence can be invaluable to investment firms. Local custodians have the insight and proximity to meet with regulators to promote reform and enhancements. In addition, the best of them keep their clients informed about regulatory changes and can decode their impact and offer timely advice on how firms should respond.
- CONNECTED: Sound sub-custodian networks
Global custodians usually employ regional experts who coordinate with sub-custodians that have skilled local workers. These native employees speak the language, know the culture and have valuable relationships with stakeholders. The overall quality of a global custodian is only as good as the quality of the sub-custodians. So when selecting a global custodian, asset managers should assess the sub-custodian network and ask:
- Does the workforce have the right domain experience?
- Is the network reliably embedded on the ground?
- How well and how quickly can they provide fit-for-purpose intelligence?
Answering these questions could help asset managers differentiate among global custodians and avoid the pitfalls that foreign investors face without “eyes and ears” on the ground.
- CAPABLE: Robust functional capabilities
Having the right capabilities is another non-negotiable characteristic for global custodians. First, asset managers should be assured that global custodians have optimal safekeeping structures. And of course, they must efficiently process the core back-office functions necessary to settle transactions and account for entitlements and custody assets.
To do this well, custodians need local market knowledge, a strong control environment and supporting technology. This is critical because so many core functions are so different in these markets. There is the impact of taxes on investment performance, entitlement processing and dividend accrual and collection, and foreign exchange transactions to name a few.
RIGHT-FIT SERVICE MODELS
Custodians should be local, connected and capable, but they should also offer client service models that are suited to the investment firm’s unique business model and specific requirements. One size fits all will not suffice. This is especially true for large, complex asset managers.
I think that the best service models for custody in global markets provide direct coverage by client service specialists and relationship managers that are familiar with an asset manager’s business. They have high-level domain experience in the markets and in-scope assets that they augment with local experts as needed.
While custody is considered by many to be a commodity for developed markets, it is a mission critical value-added service in emerging and frontier markets. If you’d like more information about this topic, please read my recent InsideOps article, Mission Critical Qualities of Global Custodians, or contact me at firstname.lastname@example.org.