After the success of QSuper’s pilot securities lending program, it believes other super funds would be remiss not to consider the strategy.
On average, a securities lending program will return about 4 basis points (bps) across a standard equities portfolio, but this can vary between 2 and 13 bps depending on the security lent, the collateral accepted, how that is reinvested, and the counterparty lent to, according to Matthew Lane, senior tax manager at QSuper.
“Your standard common stock is typically much lower [and] drives much lower lending returns, whereas from time to time these things called specials come up when stocks are in high demand, and the revenue that’s derived from those specific stocks at that point in time is significantly higher,” Lane said.
He referenced the Teacher Retirement Fund of Texas saying it made $100 million a year in the past decade from lending securities.
“I don’t know anything about their program, but assuming they have mitigated the risks and know what they are doing, that kind of money is not too bad.”
Lane and his team used a two-stage approach to have the securities lending program approved, with a view to expand should it be successful and the board willing.
First, the risks were clearly highlighted and articulated to the board, addressing concerns and scars left from the GFC, such as the perception that short selling involved greed and financial collapse.
“Empirical studies show that short sellers don’t amplify price declines, but rather align prices to their fundamental value. The notion that short sellers actually manipulate markets and accentuate price declines is simply just not supported,” Lane said.
Tax implications were discussed and seen as manageable, despite their complexity. Another common concern – the loss of voting rights – was addressed by making sure that any lending agreement would allow the fund to buy back the stock at any point, should it wish to exercise its voting rights.
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Second, a pilot program was designed that didn’t expose the fund to most of those risks, with additional mitigants put in place that addressed the remaining risks.
“[The] QSuper pilot program was quite limited and therefore brought about limited risk, [but] our view was that something was better than nothing. Given the limitations on the program, [it] meant the revenues were not as large as they could have been,” Lane said.
“It was more important to make sure everyone was comfortable with what was going on, [and] fully understood and was abreast of all the details.
“I can’t stress enough, and I certainly made this point to the board. The establishment of a securities lending program is not an all or nothing. There are countless opportunities to tailor a program that fits within your organisation’s risk appetite.”