Editorial: Custody battle

With all the macro issues that hang over the markets—the European Union’s sovereign debt crisis, China’s industrial slowdown and the limping U.S. economy—it’s easy to see why so many institutional investors show ambivalence in the current sputtering economy. Yet, for some intrepid investors, an uncertain climate offers opportunity—and the developing world, they argue, is where the action is.

Worldwide, 43% of institutional investors are likely to increase exposure to global bond strategies in the coming years, according to a Pyramis Global Advisors survey of pension schemes and other institutions from Europe, Asia and North America. (The survey found that 15% of Canadian investors will likely increase exposure to emerging market debt.) Accordingly, the appetite for emerging market bonds is expected to increase as pension investors eke out high-yield ways to meet
their long-run funding commitments.

Although the influx of new participants in emerging markets and the promise of real growth and earnings are becoming tempting, those prepared to dig in should be equipped for the political instability and day-to-day realities of a still-evolving trading infrastructure. Needless to say, investors can expect the launch of a host of new custodial and securities services and, as a result, competitive pricing.

In this issue, our annual Custody Report zeroes in on the grunt work and drudgery associated with onerous reporting requirements, tax settlement, clearing infrastructure, evolving regulatory initiatives and fees that institutional investors might encounter when they set their minds to invest in emerging markets.

Today’s custodians and subcustodians are expected to provide transparency and to bolster risk management protocols. They’re investing heavily in technology so they can improve access to information and provide seamless service to meet their clients’ demands.

There’s another driver for capitalizing on emerging markets: by 2037, half of the world’s citizens will live in emerging market cities, according to Credit Suisse. Over the long haul, a surge in cross-border investments will usher in new opportunities—along with a whole new set of risks. The test for custodians will be to figure out how to play it to their home advantage.

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