Glut of Awards Fails Custodians
Byline: Heather McKenzie
It is common in schools and sport clubs to award children with a medal no matter how they have performed in a given competition. Apparently, encouragement via a piece of tin and ribbon is more important than the performance itself - we can't have the little darlings walking away from the 100 metres with nothing but bruised pride.The same could be said of global custody surveys. There are so many conducted throughout the year - around 26, according to custody portal globalcustody.net - that it is rare for a global custodian not to pick up a piece of tin among the myriad results on offer. Awards in categories like "most improved", "best value for money", "most committed to the business" all have custodians gushing with pride.
However, are such surveys really of any use? Do custodians' clients - the pension funds, plan sponsors and asset managers - base their decisions to award mandates on how a custodian has performed in an industry survey?
The short answer is no. Mark Walker, head of the European custody group at Mercer Investment Consulting, says that in almost all of the custodian searches the firm does for pension funds, surveys play no role in the decision-making process. "As an adviser, we make no allowance for survey results when benchmarking custodians' performances. My general feeling is that there are often too many industry-wide surveys."
Walker says the best use of surveys is to detect trends in custodians' performances year-on-year, rather than viewing any single survey in isolation. "How custodians progress in surveys that have consistent methodologies is a useful trend to track because it is a reasonable reflection of who is coming up in the custody world. Surveys are more important from a custodian's point of view in assessing what their clients think about them."
Charles Cohen, senior consultant at Thomas Murray, a custody adviser, and formerly of JP Morgan Investment Management (JPMIM), says the majority of investment managers do not have a formal evaluation process when it comes to their custody providers. If they do, it tends to be quite basic, that is, unweighted. He remodelled JPMIM's model from an unweighted process, in which proxy voting contributed a higher proportion of the ranking than trade settlement.
Cohen questions the effectiveness of surveys. He says: "Custodians do try to strong-arm investment managers into improving scores or justifying negative comments. I kid you not, meetings could get ugly. As a result, there always will be a temptation on the part of the investment manager to 'dumb down' anything controversial in an evaluation in order to keep the peace."
Walker and Cohen point out the role that an existing relationship has to play in how an investment manager responds to a survey. Walker says: "Many of the survey questions are answered from the point of view of the relationship the investment manager has with the custodian. If they have a good relationship, the marking tends to be higher." Cohen agrees, saying it is difficult to prove what role a "special relationship" between a custodian and investment manager plays in the survey process.
While the surveys may be of questionable use for their clients, custodians are in little doubt of the important role they play. …