Implementation leakages: where funds are missing out Super funds pay a lot of attention to fees charged by their service providers but are often leaving money on the table by not focusing sufficiently on the implementation processes of their managers and custodians. For instance, most super funds have several cash accounts with their bank and custodian, each paying a different interest rate. Most often, the average rates were well below the official cash rate, according to Patrick Liddy, a former custodian who heads up IE Group*, a cash and FX diagnostics firm. (*Greg Bright is a shareholder in the IE Group.) Chairing a panel on implementation leakage, Liddy said that funds tended to leave “standing orders” with custodians rather than managing the cash or FX as aggressively as other parts of the portfolio. “The difference can be many millions of dollars a year, for even a medium-sized fund, just with the cash component,” he said.

“Banks are prepared to give their institutional clients the official rate or better, especially in today’s climate, but they won’t do it unless it’s managed actively.” Jonathan Green, head of investment facilities for NSW Treasury Corporation, described FX management as “the last frontier”. Green presented the results of a T-Corp study last year, conducted with the help of Russell Investments, which estimated that the average FX ‘cost’ from five sample managers ranged from minus 6.2bps (the manager beat the reference rate), through to 1bp to 7.2bps. Russell’s comparable ‘market’ average was 9.9bps. Green noted that the two main drivers of leakage were the “window” in which the manager executed an FX trade (such as the time elapsed since an underlying securities trade) and the degree of pricing tension. After the review, by moving all managers to the use of a third-party broker panel rather than just relying either directly or indirectly on their custodians, and moving to more effective windows of execution, the fund reduced the average cost to about 2-3bps.

Green recommended funds undertake regular monitoring and FX execution analysis and called for an industry standard on time-anddate stamping of FX trades. Christina Liosis, chief financial officer at Telstra Super, called for greater consistency and transparency by super funds in their reporting of fees and other costs to members. Drawing from Chant West data, she said that investment and administration fees were often not separated, performance fees might not be included, member protection fees might not be included and fees of underlying managers in funds of funds not included. Industry firebrands put torch to agency overload The mass of super fund capital absorbed through disclosed and hidden costs is something that irritates Ron Bird and Jack Gray, two academics with the Centre for Capital Markets Dysfunctionality. Bird set the iconoclastic tone of his session on agency costs with a verbal jab at free-market thinking. Reflecting on the financial crisis, Bird says, Alan Greenspan turned to George Soros and claimed: “The benefits of markets are so great that we need to pay the price”, to which the hedge fund manager replied:

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