Checking up on your custodian

Trustee boards "don't take an enormous interest in the activities of their custodians", says Keith Yuen, secretary and investment adviser to the MTRCL Retirement Scheme, one of the biggest employee pension plans in Hong Kong with HK$3.4 billion in assets. "But they should."

Yuen says sponsors are too concerned with the solvency of the scheme and whether its assets match its liabilities to focus on the day-to-day operations of their back office. "But we really should pay more attention to what our custodians are doing because we need to be sure that our assets are in good hands and that the information we need to monitor our funds is reliable and accurate."

Speaking to delegates at the annual Investor Services World conference in Hong Kong, Yuen explained that plan sponsors often wait for their fund managers to report on the performance of their custodial banks. "As long as the custody function runs smoothly and doesn't cost us a lot of money, we tend to let our fund managers do most of the interaction with the custodians, including helping us choose them."

But it may be time for plan sponsors to rethink their approach, says Yuen, particularly in light of the system failures caused by the collapse of the World Trade Centres in New York. "It's imperative that we have timely and accurate reconciliation of our fund manager's trading reports," he told the audience. "The September 11 disaster in the US showed us how important it is to have continuity of operations and a reliable back-up system."

He says, when selecting a custodian, plan sponsors look for institutions with a sound financial track record, a solid credit rating, a commitment to the business of custody, good regional and global coverage and quality staff. Yuen stressed that a bank's financial strength and ability to provide financial services such as foreign exchange and cash management, were more important than a bank's technical capabilities.

"While online access to information about our portfolio is convenient it does not sway our decision to choose one custodian over another. We monitor our position once a month or once a quarter which makes internet access convenient but not necessary."

He says custodial banks are spending a lot of money on developing top-of-the-line back office systems and hopes that the savings created from these technological advances will one day filter down to the plan sponsor level.

Ultimately Yuen hopes that custodial banks will one day provide accounting services and performance measurement services. "We now use investment consultants to do this performance measurement work, but with the information that they have at their fingertips, the custodians are well placed to offer us advice on which funds to invest in."