NAB Custodian Services (NCS) has launched its master manager service – involving the amalgamation of super fund portfolios to boost operational efficiency – and expects to run a pilot program with a major super fund in the first quarter next year.

The custodian held a series of presentations to funds around the country last week in which it was claimed the new implementation services marked the biggest step forward since master custody was introduced in the mid-1980s. Patrick Liddy, NCS director of marketing and strategy, and Vicki Martyn, head of product development, said that master custody was the “basic engine” for custodians, which had not changed much in 25 years. They predicted that, just as with the introduction of master custody, it would take about five years for the new implementation services to be widely adopted by institutional investors. For NAB, there are three different services being offered. When combined with overlay programs, they are similar to what QIC refers to as ‘omega management’. NAB is offering the capability to build ‘emulation’ funds, provide a full master manager service or provide a ‘propagation’ service. The emulation funds are index funds which are built to replicate the return characteristics of a group of active managers. MLC built Australia’s first one of these, which Vanguard implements. The emulation funds can outperform the manager portfolios even though they transact after the underlying managers. Vanguard has in turn provided a master manager program, which it calls Centralised Portfolio Management (CPM), with VFMC its first client. ‘Master manager’ goes a step further and takes only the buy and sell orders of a fund’s underlying managers and then constructs a single portfolio on a more efficient basis, using internal crossings and other techniques to save on costs. NAB says this can save a fund up to 100bps. NAB’s Liddy said that accounting firm KPMG was commissioned to analyse the impact on a large super fund which had $4 billion in Australian equities. He said the fund would save $20 million a year, consisting of $14 million in tax savings and $6 million in brokerage. “We think that the market will end up with a hybrid model, using master manager for some but not all of a fund’s total investments. There are some asset classes which won’t fit,” he said. The propagation service involves tax parcel selection for optimal results. For instance, when a stock, such as BHP, is held by multiple managers the tax parcel that most reduces the tax to be paid will be used. Martyn said this would not prevent a taxable event from occurring but the savings would still be significant. State Street has also been building a similar service to a master manager, however, this is being offered through its funds management arm, State Street Global Advisors, rather than by the investor services arm. Russell Investment Group also offers a range of emulation funds.

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