At a recent Sydney seminar, UBS was bold enough to distribute a flyer entitled “Portfolio Protection Strategies for Industry Funds”, boasting that in the past 12 months its team, under head of derivatives Steve Boxall, had implemented single portfolio derivative protection strategies in excess of $1 billion. Citigroup’s Khan knows that super funds with internal investment teams may be tempted to “DIY” a derivate-driven protection strategy – after all, buying protection for exposure to a listed company can be as simple as dividing the allocation between its bond and a call option over it. However, Khan points out that the more strategies the funds attempt to implement, the more “balls they have to keep in the air”, particularly if loans become involved, and the more distracted they will become from what he sees as their “core responsibilities” such as asset allocation. UBS’ Liddy argues that investment banks make the markets and are thus closest to them, enabling them to have the best “overall macroeconomic view” of a fund’s position.
“Using a bank to consolidate your approach to a transition or buyback gives you uniformity, security and better returns than letting your funds managers take a piecemeal approach,” he says. Grove’s Brett Sanders observes that the investment banks are beginning to give a “better deal” on their structured products, with an institutional audience in mind. “I attribute it to a number of factors. One is Standard & Poors tightening up their methodology for assigning these products a credit rating, another is increased competition, and a big one is the importation of better practices from the US and Europe, because Australian investors are often getting marketed repackaged versions of existing products from overseas,” he says.
For funds with liquidity concerns, Sanders says that many structured products now come with monthly pricing to facilitate early exits (others just list), and it seems in most cases the associated fees are “something like the true unwinding cost”. Terry Charalambous, a Russell Investment Group research associate for alternative assets, says trustees he’s spoken to welcome a greater role for investment bank asset management products, albeit more through fund-of-funds than directly at this stage. “I see them as quasi-placement agents, they are opening up deal flow and diversification which super funds need going forward,” he says. UBS’ Liddy argues that the ‘image problem’ of investment banks among wholesale investors has been exaggerated.
“Don’t confuse trust with familiarity. The institutions have known the funds managers for years, but they’re getting to know the banks and in a few years it won’t be an issue,” he says. “It’s like the master custodians, when they came out everybody threw up their hands and said ‘what do we need this for?’, now everyone understands and uses them.” Even so, Liddy predicts investment banks will soon embark on a major recruitment drive to poach well-connected wholesale business development managers from the funds management market, and hints that UBS will not be left out. Longevity of relevance Whether or not investment banks can win direct business with super funds on the accumulation side, many are tipping they will have a big role to play for defined benefit funds, as well as for the post-retirement product offering of defined contribution schemes.