Superannuation funds would like their custodians to be providing more liquidity and stress testing of their assets. Partly this is being driven by regulation, partly by trying to make sense of increasingly diverse and dynamic portfolios. It is also important in calculating the management expense ratios needed for MySuper on product dashboards.
The following quotes from the super funds that took part in our discussion give different takes on this need.
Stephen Merlicek, chief investment officer of IOOF: “We’ve been running to our custodian about liquidity testing and stress testing because they hold the underlying assets. So it puts a lot of emphasis on the custodian relationship going forward.”
Peter Rowe, acting chief executive, Vision Super: “Risk is one of the big things we’ve got to do a lot more work on and we think that the custodian is well positioned.”
Dharmendra Dayabhai, head of portfolio analysis and implementation at Unisuper: “Over the last 10 years, the way technology has moved forward, everybody’s got an iPhone and you press buttons and things happen and I suppose there’s a frustration of why the custodian can’t do something similar.”
Paul Kessell, chief investment officer, KineticSuper: “There’s becoming much more emphasis on the custodian to collate all that information because depending on the size of the fund, we’ve got limited resources and access to our investment managers to get all that information, the custodians are the obvious portal for all that information to come together. The custodians are struggling to be able to actually access that information and do
it in a timely manner to be able to provide us with the information we need for APRA and their dashboard and those timeframes are getting narrower by the day now.”
Better service soon
Aside from the increasing regulation requirements from APRA, which custodians are working towards meeting. Another issue has been the slowness of fund managers in providing the necessary data. “We’re just getting ready now for doing our first set of APRA reporting and not all of the funds managers, that we had, have responded in terms of agreement to provide the data that’s required. So that is going to take some time, to get into a rhythm and making sure that that data is provided in a timely fashion,” says Bartlett.
NAB is partnering with Ausmaq on its Look-Through Underlying Investment Data Service to provide the daily performance risk analysis and the monitoring that APRA requires.
“We’re well down the track to delivering the first release of our performance and risk analytics, so we’ll be taking that into production in the end of this year, but we do need to go faster,” says Bartlett.
One delaying factor is that fund managers are not yet fully aligned in getting information across quickly. Under ASIC regulations managers are not required to provide the same level of information on
the same kind of time line.
“What we’re finding is it’s absolutely critical that we work closely with the superannuation fund to put pressure on the fund manager so they’re getting the message, not just from the custodian,” Bartlett says.
Some funds have turned to other providers of risk analytics in the meantime, but have not lost sight of what their custodian can offer.
Kessell says: “We use a third party because our custodian couldn’t do so at this point in time. But, as the APRA reporting rolls out and becomes more day to day, it then comes back to the custodian again as to what other services can they can provide. We can then report to our board better than is currently the case. We hear that it’s going to happen, but I guess it’s a matter of when and there’s a lot of work and a lot of capital investment required to do that. To some extent we’re happy to pay for it.”
A separate area of focus for NAB is around developing capability to cope with the rise in member direct investment platforms as well as funds running their investment capability in house.
Bartlett talks about the latter development: “We’re seeing many, many of our customers doing that and so being able to support our customers with investment services and access to daily data is driving a lot of our focus and our investment around delivering that daily performance risk analysis.”
Disclosure
NAB is also looking to improve its abilities around managing the portfolio disclosure arrangements for hedge funds and private equity funds.
One of the biggest fears is around relationships with internationally based private equity firms and hedge funds.
Merlicek sums this up: “If you’ve got the best of the best private equity funds, which are very hard to get in and they’re based offshore, or hedge funds, they’re not worried about Australian law and they’ve got probably heaps of people trying to go into those funds. That becomes a dilemma then because they say ‘Well we can take somebody else’s money’, but from my perspective as an investment person,
I want access to those funds.”
Neville, who used to work in the hedge funds space, said that there was a growing flexibility to investor demands. “You have managers that would just walk away from 100, 200 million dollars because it’s just too much to deal with. But now that we’re passed this post-GFC kind of world, managers are a lot more transparent and do need capital in order to survive and grow. So there is some kind of give and take.”
This need is making some managers more open to the idea of portfolio disclosure. Geoff Saunders says he has been pleasantly surprised by how easy it has been to negotiate. “Funds overseas are less concerned about the APRA reporting because it is on an aggregated basis and it’s not public. It’s the PHD ones that really worry them and I’ve actually been pleasantly surprised with how engaged they have been. They genuinely want to understand all the issues, they genuinely want to help give you the information, but there’s a lot of education required to get managers over the line to the point where they are saying, ‘Yes, here’s our entire portfolio information, go and publish it on your website’.”
NAB is investing in this space with help from Bank of New York Mellon.
Bartlett says “Whilst we know that we can’t do everything ourselves but being the number one custodian in the Australian market does give us the ability to go out and bring capability from around the globe. So our foundation partner continues to be Bank of New York Mellon, and some of the capability that we’ve picked up recently from them is around managing private equity and hedge funds and so we’ll continue to leverage that relationship.
“But we’ll also look to build that out with other offerings, whether it’s GBST with their pre-trained tax calculator, whether it’s Deutsche Bank for their transition management capability. We will continue to look for best of breed and build that solution.”
Indeed, there was general agreement that as the proportion of superannuation assets domiciled overseas grows that listed assets pose few problems compared to international unlisted assets, not least for the role of custodians in valuing these assets. Another issue is in the valuation of units in international pooled funds, which typically are only valued once a month and in the disclosure of underlying assets.
Due diligence is harder too.
“One of the trends we’ve seen, the team in Sydney working with our super clients, is because of this increase into foreign investments, we’re doing a lot more due diligence work, particularly around operational and risk, kind of, due diligence of managers that are located in different jurisdictions or focus on boutique or alternative asset classes,” Neville says.
Infrastructure
One potential stumbling block to investing abroad is that it is not only Australian funds who are seeking prime assets overseas.
David Gall, executive general managers, banking and wealth solutions, NAB, says: “Superfunds do have, by world standards, quite a high level of infrastructure actually, sitting in their portfolio. The default is to use infrastructure as a substitute for not having a well-developed corporate bond market here in Australia or a variety of other fixed interest product available. So, it’s not uncommon for an Australian funds to have up towards 10 percent in infrastructure. Now some of the big offshore pension funds like CalPERS, which is the Californian Teachers’ Pension Fund – has one percent and is potentially going to two percent.”
Lim from Industry Funds Management concurred that there is more capital, chasing fewer deals. “At IFM at times we’ve been asked to make a decision as to whose commitment we accept because it’s going to limit them of deals and that’s a very difficult decision to make. Someone’s going to be upset somewhere.”
Such issues can prevent the odd custodian from assuming responsibility for an asset. This was the case for Industry Funds Management, which saw a deal fall through when a custodian did not want to take a counter-party risk on behalf of a client.
“The custodian refused to sign any documents, it’s really part of the parcel of their risk management and, as a manager, we were left with a bit of a question mark over who actually signs, who actually holds this risk. It is an area which this particular custodian just needs to bring more focus into, because ultimately we lost a deal because we just could not execute it.”
Fund managers have their limits on what they will invest in overseas too. Lim says IFM would not be prepared to invest in most Asian infrastructure currently due to concerns of political and financial security over a 20-year time horizon.
Neville concurred. “There’s always concern from pension fund investors on whether they’re going to get their cash back out of China. That’s a risk you kind of take on because you don’t have the same protections you would here, in Australia or the UK or the US.”
The tax hiccup
Another potential challenge is with taxation. Merlicek mentioned a recent residential housing deal in New York that fell through due to tax complications. “Everything else was fine – the investment case was great – but it got voted down on tax. US property-tax law regulations are quite onerous,” he says.
Kessell agreed that while some deals will work perfectly for a US-based investor, they won’t for an Australian-based one. “For some funds, we just don’t have the look-through to actually understand what the implications are. The costs for us to actually get some tax advice starts feeding into the decision-making process too.”
The value of international deals also have to be measured against the value that can be gained in the domestic market. Gall says it will be interesting to see the impact of the 1.5-percentage-point reduction in Australian corporate tax from 2015.
Participants
Christine Bartlett, executive director, asset servicing, NAB
David Gall, executive general manager, Banking & Wealth Solutions, NAB
Paul Kessell, chief investment officer, Kinetic Super
Joshua Lim, executive director, IFM Investors
Ravi Neville, principal, Mercer
Dharmendra Dayabhai, head of portfolio analysis & implementation, Unisuper
Peter Rowe, acting CEO, Vision Super
Stephen Mercilek, chief investment officer, IOOF
Geoff Saunders, partner, Allens
