Sunsuper’s move to involve its investment operations in execution and implementation of investment decisions has saved the fund more than $28 million in transaction costs over the past eight months as the fund has been transitioning its assets.
Lounarda David, chief investment operations officer at Sunsuper, described the savings as “enormous”.
“These savings wouldn’t have been achieved without my team’s in-depth knowledge of our manager’s processes and execution arrangements which were gained during our operational due diligence and risk reviews of the managers,” she said.
“Transitions are risky and confidential activities, so we couldn’t engage our managers in the discussions and planning. But, our in-depth knowledge of our managers enabled us to make a significant contribution to reducing the transition costs and risks for our members, and also eliminating any impact on Sunsuper’s daily business activities.”
One example of how David and her team reduced costs relates to international markets and foreign exchange hedging transactions. Members would not have received a good outcome because of managers’ operating models and counter parties which involved a lot of transactions that were not executed at the best rate, thereby increasing the transaction cost.
Because of their in-depth knowledge, the investment operations team was able to direct the transactions to a party with whom they had negotiated a much better arrangement.
“Another example was we didn’t just go and buy a portfolio: we bought some baskets of notional, some baskets of physical, and so we were able to eliminate unnecessary trading and keep the portfolios in line with the target models, but at much lower transaction and exposure costs,” David said.
Historically, investment decisions at super funds have been made by investment teams and investment committees, with reviews of the operational risks considered a side issue.
Sunsuper has a robust governance arrangement that requires operational due diligence reviews and signoffs by investment operations before an investment approval can be implemented.
“If our review highlighted a material issue that could not be resolved, then our investment team would not have any appetite for investing in that product or the manager” she said.
She claimed this approach reflects the maturity of the business and recognises the risks and impact of non-investment related matters.
She said: “That is quite important because it requires an organisation with a strong risk management culture and sound understanding of the end-to-end operational and implementation arrangements, to say, ‘I’m not going to invest with this manager or product because of the non-investment related issues that are of a high risk and not within our risk appetite, therefore I am happy to walk away from that investment’”.
Over the past year the $34 billion fund has turned over $15 billion of its assets as it restructured its assets.
“Throughout the transition period we had no processes unmanaged and, more importantly, we were able to use the knowledge and expertise we gained from our manager reviews to reduce the cost of the transaction for our members,” David said.
“That’s some of the benefits we’ve seen from the operational reviews, which is often missed in the market.”
She added while operational reviews were a prudential requirement for funds, how they did them and what they learn from them makes all the difference.
“These reviews are not easy and are very time consuming: you are talking about reviewing managers in multiple geographies, with different regulations and governance models, different operating models, different execution arrangements, different technology, different sizes and across different asset classes. You really need to be across all of those areas and have a good understanding of market practices vs best practices, which makes the reviews even more challenging.
“In conducting these reviews, we are assessing from our risk perspective and with our risk appetite in mind rather than the manager, so the focus is very different. What may be an acceptable arrangement to a manager may not be acceptable to Sunsuper.”
David will be speaking at the Investment Operations Conference at the Sheraton on the Park, Sydney, on February 24, 2016. To register click here.