After one year in the job, State Street’s boss, Jay Hooley (pictured), surveys the post-crisis landscape and looks at the trends for investors and fund managers. He spoke with Greg Bright.
State Street, the Boston-based global bank and fund manager, is aiming to have more than half its revenue coming from non-US sources within five years, with Asia Pacific growth expected to figure prominently.
That implies a “heady” annual revenue growth rate in the mid-teens, compound, to lift the non-US share of total revenue from its current level of about 40 per cent, according to Hooley.
Hooley, State Street’s chairman, president and chief executive, took over the firm’s top job on March 1 last year, after several years of running the global services division. He believes his company has positioned itself well after the storm.
“We’re well-positioned in a financial sense,” he says. “We are one of the best-capitalised financial institutions. We’re also well-positioned in a strategic sense.”
State Street is expecting a continuation of the trend among big pension funds to employ a range of beta strategies coupled with an increasing use of alternatives, rather than a traditional active core approach for broad market equities and bonds.
“That portends well for us,” Hooley says.
State Street’s funds management arm, State Street Global Advisors (SSgA), is a quantitative manager with strong links to academia. It not only has one of the world’s largest cap-weighted index portfolios but also offers index-like strategies with various “active” tilts. At the other end of the spectrum it offers hedge fund-like long/short strategies.
Like other quant managers, the firm was an early sufferer in the global crisis. In August 2007 most quant managers, including SSgA, suffered a sharp fall in performance due to a combination of factors coming together under a weight of too much money. Since then, the quants have adapted their models and conditions have changed significantly such that performance has largely returned.
Hooley says: “We had a 100-year storm that no-one predicted. We went through a difficult cycle and we’ll be smarter for it. We’re comfortable in our space.”
He points out, however, that the firm will continue to look selectively for different styles of funds management to introduce to its range according to client demand.
It has recently concluded the acquisition, for instance, of Bank of Ireland’s global funds management arm, which is a traditional active manager.
Hooley says that pension fund trustees and management are increasingly looking for more comprehensive solutions, bringing together multiple strategies to produce an outcome. This is also a trend which suits State Street.
The firm’s State Street Associates academic team and Advanced Research Centre allow it to design models to produce optimum outcomes given certain risk tolerances, he says. The trends for lifestyle funds and liability driven investments in the US are driving demand in this regard.
While funds management may continue to be fragmented with demand for alternatives and capacity-constrained strategies, Hooley believes the asset servicing sector, including core custody, may see some further consolidation.
Currently, the big four custodian banks have about 70 per cent of the asset servicing market globally. Not only are regulators around the world looking at the banks for capital adequacy and other signs of weakness, but also many of the banks themselves are looking at their portfolio of businesses to see where they can best compete.
“It’s a scale business which requires continuous investment in IT and systems,” Hooley says. “We’ve never stopped spending 20-25 per cent (of revenue) each year throughout the cycle.”
That equates to more than $1 billion a year. Recent spending has had a focus on “cloud” computing, which offers not only cost savings but also much greater speed to market and innovation around data.
State Street has built its own private “cloud” rather than use a public one such as Google’s.