NZX is understood to be shopping around its Wealth Technologies investment platform following a flurry of activity in the sector.
Over the last 12 months or so the local investment administration market has seen several businesses change hands including Hatch, MMC and Implemented Investment Solutions.
In a statement, Simon Beattie, NZX head of investor relations and communications, said the exchange “has a long-held policy of not commenting on market speculation”.
“NZX sees significant growth opportunities for the NZX Wealth Technologies business,” Beattie said.
As told to investors last week the NZX forecasts a four-fold growth in funds under administration (FUA) for Wealth Technologies by the end of 2024 – pushing out the target date a year from previous estimates.
According to the NZX presentation, the platform FUA was on track to reach $40 billion by December 2024 “driven by a large contracted client being onboarded over FY23F and FY24F and other high & medium conviction prospects”. Beattie said the prospective client details remain confidential for now.
The new large platform client is booked for a software-as-a-service (SAAS) treatment rather than the more lucrative “full custody and operations” business. Wealth Technologies earns between 0.25 and 15 basis points for SAAS clients, the presentation says, compared to 5 to 22 basis points for the full custody service: on average the platform generates 3.4 to 5 basis points on its FUA.
As at October 31 the NZX platform reported just over $10 billion under administration with clients including JB Were, Hobson Wealth, Saturn Advice, Stuart Carlyon, Public Trust and Craigs Investment Partners.
The Craigs money on Wealth Technologies largely represents the funds managed by QuayStreet, which the NZX purchased last week in a deal that could cost $50 million. Craigs is shifting to the SS&C ‘Aloha’ system to administer its remaining $26 billion of client funds, typically held directly in separate accounts or in discretionary investment management service portfolios.
As reported last week, the stock exchange bought the management rights to the $1.6 billion QuayStreet business for an upfront $31.25 million with a further $18.75 million earn-out “based on net FUM inflows from the Craigs network over a three-year period”, NZX chief, Mark Peterson, told investors.
Peterson said there would be “no immediate change for QuayStreet clients” post purchase, however, over time “Smartshares, with input from Craigs and clients, will work to align and refine the products to ensure the funds continue to meet customer needs and represent value for money”.
The deal, though, marks a sharp turn towards active management for the passive-leaning Smartshares, which has been building up a diversified set of exchange-traded funds (ETFs).
Peterson said the “QuayStreet funds will be offered as a premium product set, complementing Smartshares’ existing systematic and passively managed product offering”.
Combined with the $1.8 billion of FUM acquired through its $25 million takeover of the ASB employer superannuation master trust last year, Smartshares should hit almost $10 billion after digesting QuayStreet. The passively managed ASB master trust funds, though, are more in tune with the current Smartshares index strategies with a transition process now underway.
The NZX will also onboard another KiwiSaver scheme after taking control of QuayStreet early next year.
“Smartshares will take over the management responsibilities for the QuayStreet KiwiSaver Scheme and the QuayStreet funds in late February 2023. Craigs has agreed to provide Smartshares with services to ensure the transition is seamless for Craigs and QuayStreet clients,” Beattie said.
“It is intended that Smartshares will keep QuayStreet KiwiSaver as a standalone scheme.”
The NZX-owned SuperLife KiwiSaver (a new default provider) reported almost $1.8 billion under management as at the end of October while the QuayStreet scheme has about $250 million.
QuayStreet, which comes with a distribution arrangement with Craigs, will be absorbed into Smartshares over the next three years, the NZX presentation says, attracting integration costs of some $4 million.
While the deal brings Smartshares further scale – Peterson said NZX analysis indicated local fund managers need between $15 billion to $20 billion for optimum efficiency – it has also flummoxed competitors who worry the exchange is straying out of bounds.
The NZX has offered index ETFs since the late 1990s, building a bigger passive empire with the $30 million purchase of SuperLife in 2014 but the encroachment into boutique active management territory with QuayStreet changes the narrative again.
Smartshares was the biggest money-earner for the NZX during the September quarter: the funds business is forecast to account for over 40 per cent of group revenue in the second half of this year compared to 21 per cent in the opening six months of 2022.
However, the NZX expansion into investment management and administration has also come at considerable costs – ongoing as well as acquisition expenses.
Graham Law, NZX chief financial officer, told investors last week that while “we are experiencing cost pressures, we have been managing costs to limit or defer the increasing cost base”.
“We are actively managing or replanning activities due to cost inflation pressures,” Law said.
About 67 per cent of NZX costs are staff-related: in total the group has a headcount of just over 290 with Smartshares accounting for about 70 and Wealth Technologies almost 80.
Since buying the platform formerly known as Apteryx from parties associated with the now-defunct NZAM hedge fund manager in 2015 for $1.5 million, the NZX has booked capital development costs of over $30 million as it built a new technology system.