In April 2008, when the position was recommended, there was significant expansion among spreads of investment-grade bonds, a widening in the gap between physical and derivative spreads and material liquidity premiums were available. In November 2009, when the position was taken off, the credit risk premium and the liquidity premium were both close to historical averages. Towers Watson claimed the cumulative return for the portfolio with the tilt would have added almost 3 per cent between October 2008 and 2009, with the key focus on an adjustment of risk. Speaking generally, Hess, who is based in New York, said he was disappointed with the level of innovation in the industry. “Innovation in funds management is surprisingly low for the amount of brain power in the industry.
It is cheaper to copy, and 130:30 is the typical example – one person came out with it [and] now we have 300 products in that space and they can’t all be outperforming,” he said. Towers Watson often examined its own biases in order to better understand them, Hess said, and he acknowledged a bias towards boutiques. “We have a bias [towards] asset management people owning themselves but there is no one vowed business model. Generally we would like to see more innovation.” As well as good, unique investment ideas, this could manifest in the way business was conducted. “We would like to see the fee issue as part of that – sharing the value created. How do you empower investors? They work through intermediaries, so can we advocate for our client base [on] buying power. “I think there needs to be more co-operatives: investors banding together for better terms and [for] co-investment. There needs to be better dialogue among the funds.”
After-tax returns Aided by some comments from Jeremy Cooper in his final report to the Government on superannuation, the trend to aftertax management and reporting at the funds management level is set to accelerate. Towers Watson is expected to publish a study early September which details the advantages of after-tax reporting from a super fund member’s perspective. Often times the manager will not know the exact tax position of a certain parcel of shares and therefore may trade at an inopportune time for tax purposes, such as when the parcel is about to tick over the one-year mark for a reduced capital gains level. For some strategies which have high turnover, they can also miss out on franking credits if they are unaware of the 45-day rule’s impact on a particular parcel. One of the leading multimanagers in after-tax reporting, Warakirri Asset Management, recently notched up three years of performance in its after-tax regime. The Warakirri experience, including how after-tax reporting changes manager behaviour for the better, will be detailed in the October issue of Investment Magazine.