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Investment Overview for State Street (NYSE:STT)
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Below are key drivers of State Street's value that present opportunities for upside or downside to the current Trefis price estimate for State Street:
- Servicing & Administration Fee as % of Assets under Custody: State Street is highly sensitive to this driver primarily because asset custody is the firm's primary business, and the fact that it has over $24 trillion in assets under custody. Fees have been declining as a percentage of assets due to competition and as a result of economic conditions. We expect fees to remain around 0.018% of assets over our forecast period. However, if the company is able to leverage its market leadership position and increase its fees to 0.02% over the same period, then it would present an upside of about 5% to the Trefis price estimate.
- State Street's Assets Under Custody and Administration: We currently forecast State Street's assets under custody to increase from $24.3 trillion in 2012 to almost $40 trillion by the end of the Trefis forecast period. However, a slower than expected economic recovery coupled with intense competition could limit this to under $30 trillion at the end of our forecast period. In that case there would be a downside of about 10% to the Trefis price estimate.
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State Street provides investment servicing and investment management services to institutional investors such as mutual funds, corporate and public retirement plans, insurance companies and endowments.
State Street's primary business is Investment Servicing, which entails global custody, fund services, liquidity services and securities lending. The company earns a fee from its customers, generally a small percentage of total assets under custody.
State Street's Investment Management business includes advisory services and investment research and management of assets such as equity and fixed income securities, ETFs and cash and money market instruments.
State Street's main competitors include Bank of New York Mellon Corporation, BlackRock, JPMorgan Chase and Northern Trust Corporation.
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Complementary Investment Servicing and Investment Management businesses allow competitive fees
Since State Street has an in-house investment servicing business, it is able to offer investment management service at lower advisory fees. Most asset managers have to outsource trading and execution functions to other custodian banks, and are forced to charge higher fees so as to compensate for the costs associated with custody, trading and executing transactions. Additionally, State Street’s Investment Servicing business helps it attract institutional clients, to whom it can provide advisory services in addition to custody of financial securities.
Size and scale of operations
State Street is a leading custodian of assets with assets under custody and administration in excess of $24 trillion. It manages assets worth over $2 trillion and is present in over 100 markets across 29 countries. State Street benefits from economies of scale, which enable it to dilute operating costs (those associated with people and technology setup) over a larger asset pool and investor base thereby improving operating margins.
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Worldwide growth in demand for asset management services
Global assets under management (AuM) were estimated to be around $85 trillion at the end of 2012. 34 markets constitute over 95% of total assets under management. As economic conditions improve, we expect fund inflows to increase. Additionally, growing wealth in emerging markets will likely result in additional demand for asset management services (and as a result asset servicing).
Increase in cross-border investments and complex assets
Investors increasingly invest in cross-border assets, in emerging markets and in more complex (structured) financial instruments. These generally require the presence of large global custodians and not local/regional players or financial service providers' in-house investment servicing teams. Larger custodians like State Street and BNY Mellon will benefit greatly from this trend.
Growth in mutual funds and private pension plan providers
In many countries across the globe and mainly in emerging economies, the state is withdrawing from its role of a primary pension provider, which is causing the people to invest in defined-contribution pension plans and mutual funds. Since custody providers serve the institutional investors such as mutual and pension funds, custodians exhibit a promising growth prospects in terms of size of Assets under Custody.
Changes in asset management fee structure
The recent financial crisis has resulted in more transparency in the pricing of asset management services. As a result we expect performance fees (which look at longer investment horizons than before) to increase as a percentage of fees as opposed to management fees, which are simply charged as a percentage of AuM.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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