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.
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. More difficult to quantify savings will come from reduced market impact through the off-market crossings, reduced cash drag and better foreign exchange transacting. “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,” Liddy said, such as the less liquid asset classes. 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, particularly delaying capital gains tax beyond the 12-month rule where possible. Martyn said this would not prevent a taxable event from occurring but the savings would still be significant.
Mercer Sentinel’s David says that some managers may resist the master manager proposal because it could potentially have some impact on managers current processes, but more importantly it disrupts their traditional relationships, particularly with brokers. However, the unbundling of transaction broking from research, which has been predicted for years, would alleviate some of the concerns.
Traditional brokers are likely to resist it as they did with directed brokerage programs. David says that the contractual arrangements for the master manager will be important and there will be a need for regular cost analysis to know whether the trading performance is acceptable – probably by a third-party provider.