Superannuation funds are beginning to shed light on the inflated costs of poor foreign exchange execution. PHILIPPA YELLAND reports.
Unsexy. It’s the word of choice for many investors when they describe trading foreign exchange (FX) efficiently. FX is a back-office beta that has long gone unwatched. But transaction fees are being dragged into the spotlight as public lawsuits unfold in the US. In 2009, two of the world’s largest public pension funds, CalPERS and CalSTRS, sued custodian State Street. They allege it over-charged them by US$56 million for currency trading services over eight years. The case is still running. In Australia, FX inefficiencies and leakages hit the financial media after Qantas Super announced it had become the first superannuation fund to outsource FX services to a specialist manager, Russell Implementation Services (RIS).
The fund expects to save more than $1 million each year through the program. If monitored and measured, FX trading adds at least 8 basis points to portfolio returns, according to Ian Battye, managing director of RIS. He says the specialist FX manager has saved its clients, which include Russell’s multimanager funds, about $68 million in trading commissions since 2003. It has done this by transacting through a panel of FX traders instead of leaving it to funds managers’ custodians to liaise with a single FX desk. But it’s not the only way to prevent unnecessary FX losses. The $42 billion AustralianSuper has used the online database run by Global Trading Analytics, a trading costs analysis provider, for the past three years. UniSuper, which manages $25.4 billion, reviews FX costs every six-to-12 months. This periodic monitoring began more than six years ago.
Three sins And Queensland Investment Corporation (QIC), the $60 billion institutional funds manager, has managed FX service since 1997. Troy Rieck, managing director capital markets at QIC, says savings are made by reducing the impact of trading, rather than taking a price at any time, and using instruments that enhance performance, such as crosscurrency swaps. Don’t trade when FX markets are notoriously expensive, disorderly and illiquid, Rieck says. This rules out trading at daily market closing times, the end of the month and popular index-fixing times. FX fees are not fodder for the financial lift-outs of Sunday newspapers. Jeremy Cooper, who led the influential Cooper Review of the superannuation system, recognised that FX fees insidiously eroded superannuation balances. He put superannuation trustees on notice.
In his recommendations, he said the Superannuation Industry Supervision Act, the guiding law for fund trustees, should be amended to include “the expected costs of the (foreign exchange) strategy, including those at different levels of any interposed legal structures and under a variety of market conditions”, as one of the factors which fund trustees must “have regard”. He suggested “the availability of valuation information that is both timely and independent of the fund manager, product provider or security issuer”, as one of the factors to which APRA fund trustees must also “have regard”. Brett Elvish, who runs consultancy Financial Viewpoint, says implementation efficiencies exist to reduce and control costs. But its complexity is a barrier. “To be frank, a lot of people don’t understand it,” he says. “Not many executives or trustees understand FX efficiencies, and therefore there’s not enough focus. FX is a subsidiary activity.” The major problem, he says, is that funds managers’ custodians are not acting as fiduciaries.