The lower-for-longer environment has spurred a growing appetite for securities lending strategies among Australasian asset owners, according to JP Morgan, global head of agent lending, Paul Wilson.
On a recent tour to visit clients down-under, the London-based Wilson, said large asset owners globally, including Australia and New Zealand, were looking to squeeze extra returns out of their portfolios as record low rates continue to bite.
He said securities lending offered asset owners one way to boost portfolio returns, or cover expenses, without incurring undue risk.
“There is significant interest across Australia and New Zealand for asset owners to lend their securities or increase usage and penetration of lending to help generate low risk return, particularly as rates and yields around the world come down and costs go up,” he said.
While lending could earn asset owners up to 20 basis points or more on the value of the underlying securities, the opportunity is typically only available to large institutional investors – of which only a handful fit the bill in New Zealand.
Wilson said investors looking to borrow stock – such as hedge fund managers or banks – were interested in the global securities holdings of Australasian institutions (including large super funds and sovereign wealth funds) rather than domestic assets.
He said currently borrowing demand for fixed income securities outstripped equities as banks sought to cover tighter liquidity requirements under new global standards.
“Drivers for lending equities and fixed income have diverged. Equities is driven by short-term demand for specials while fixed income is driven by the desire by counterparty to obtain high quality liquid assets,” Wilson said. “Management of risk and the ability to customise or set lending parameters is critical to asset owners in meeting their risk appetite.”
However, he said the increase in supply has coincided with an easing of demand for borrowing – again, principally a function of regulation.
“This is creating opportunity and innovation for alternative structures and transactions, such as lending directly to end users or alternative collateral structures which are more balance sheet and capital friendly,” Wilson said. “Technology will play an important role across the industry as the need for automation in trading as well as post trade becomes critical in maintaining market share and in meeting the need to deliver more insightful reporting, data and analytics.”
Securities lending is typically offered as an add-on service by custodians – and the JP Morgan lending business sits inside its custodial unit – but Wilson said the group has both custody and non-custody clients in Australasia.
In New Zealand, JP Morgan has three main custody clients: the $30 billion plus Accident Compensation Commission fund; and, the two Annuitas-managed Crown funds – the Government Superannuation Fund and the National Provident Fund, which collectively manage about $6 billion.
JP Morgan boasts 14 lending clients across Australia and New Zealand, representing about US$300 billion in net assets of which US$122 billion is classed as “lendable”. Currently, US$14.3 billion – or just under 12 per cent of the lendable book – is on loan.
“As we look ahead, securities lending will continue to add much needed return to Australia and New Zealand asset owners who embrace the evolving market landscape as well as bringing critical liquidity to the markets themselves,” Wilson said.