Hindsight is a wonderful thing. This time last year when our sharemarket was nearing its global-crisis low, a small percentage of superannuation investors decided to switch to more conservative investment options. In the case of a friend of mine who celebrated his 50th birthday on February 26, his super fund effectively made the decision on his behalf. My friend belongs to a fund with an optional age-based ‘lifecycle’ strategy. The strategy gradually reduces member exposure to high-risk growth assets over a 10-year period – the trigger points being the member’s 50th and 60th birthdays. A few weeks ahead of his 50th birthday, my friend received an ‘opt-out’ letter from his fund explaining that his super would be switched to a mediumgrowth investment option.
Bringing unit registry into the 21st Century
Australian investors in managed funds must put up with record keeping that is stuck in the Dark Ages. While a couple of unit registrars are genuinely interested in being the ‘scale player’, much of the market stagnates on the internal systems of funds managers, which struggle to reinvest in the latest technology, or on the registries of custodians which in some cases are unwilling providers of the service. Studies have suggested that the real cost of unit registry for every investor in every Australian managed fund is as much as $90 a year, stratospherically high compared to our peers. Turnaround times of three weeks on statement requests are industry standard. In December 2009, Conexus Financial (publisher of this magazine) and Computershare convened a roundtable to discuss how the unit registry process could be made more efficient. Overseas, transfer agency is typically a discrete, outsourced process, while in Australia it tends to live alongside the fund accounting and unit pricing functions. Is there a sound operational reason why this should be the case? Is the fragmentation and under-investment that’s rife in unit registry best solved by the emergence of true ‘scale players’, or by key stakeholders – perhaps a group of custodians – co-operating to build an industry utility which performs the most commoditised registry tasks? What role can initiatives such as SwiftNet and the ASX’s AQUA Rules for the quotation of ETFs and structured products play in enhancing efficiency? This roundtable discussed all of these questions, with a forum of pivotal players from the custodian, funds management and admin consulting worlds. The discussion aimed to produce a list of actionable steps towards giving Australian investors a better deal on their unit registry.
Lean times for sec lenders after the shorting ban
As the capital raisings of 2009 turn into the M&A activity of 2010, the co-chair of the Australian Securities Lending Association (ASLA) predicts a return of transaction volume for his constituents, and a recovery in the income generated by lenders of stock. Peter Martin, whose day job is running securities finance at State Street Australia, says the problem is no longer supply of stock for loan, with $200 billion currently available in Australia, which he says is consistent with supply 18 months ago. Supply did threaten to become a problem in 2008. Some investors recalled stock and suspended their securities lending programs, against a backdrop of the shorting ban coming into effect, and media hysteria as the likes of ABC Learning’s Eddie Groves blamed hedge funds for the damage inflicted on their shareholders.
Leakages can be plugged
Funds could return up to 6 per cent more to members if implementation leakage were stopped, but even the latest in-the-Cloud software will not deliver on its promises if not part of a total review of business processes. Ironically, this Cassandra-like warning comes from an IT industry guru, Iain Dunstan, CEO of Bravura Solutions Group, who’s concerned that “well-intentioned people [are] confusing lower returns with costs”. In the past year, a member may have lost 20 per cent of their returns, he says, and these losses may stand at roughly $100,000. So, this is the backdrop against which policy-makers and do-gooders need to look at the efficiency issue. “What’s the best-case scenario with best-STP [Straight Through Processing] saving one dollar a member?” he asks. At this rate, “it’s going to take 100,000 years to get them back to square one”. The implementation-leakage savings of 6 per cent are put forward by Russell Investments expert Chris Briant.
Why TOFA needs your attention
With their analytical work and systems re-wiring in train, the investment administrators and custodians who have taken TOFA seriously can now pause to suck in a few lungfuls of air before the new tax regime begins, and their long, hard slog to comply continues. DST Global Solutions, which delivered its TOFA-compliant version of HiPortfolio3 in January, knuckled down more than a year ago to correctly interpret the new legislation, understand the tax options available to investors, and then update its processes and systems. Ian Mathieson, chief executive officer of the company’s Australian business, says the TOFA-Ready project has been the most demanding undertaken by DST on domestic shores. “We’ve gone through Y2K, GST, CGT. None of these have equalled the amount of effort that has gone into TOFA from a project point of view,” Mathieson says.
After the storm, custodians hit the ground running
As the world moves along its recovery path, financial services companies are generally bracing for increased regulation and new demands from clients in the wake of the global financial crisis. In Australia, and elsewhere, various government-sponsored inquiries are underway which will probably recommend a raft of measures which affect the operations of banks, funds managers, super funds, financial planners, platform providers and even research houses. The US even has its own Financial Crisis Inquiry Committee, which held its first hearings in February and is due to report by the end of the year. Australia, of course has its Cooper and Henry inquiries, both of which are expected to report mid-year, having completed its Ripoll inquiry late last year.
Infrastructure: how super funds are changing the world
For most super funds and other Australian institutional investors their experience with the ownership of infrastructure assets has, by and large, been a happy one. Not the same can be said for all such investors. Each of the eastern States has at least one disastrous toll road experience for investors and many retail investors in listed infrastructure funds were taught a painful lesson by the GFC. According to Mike Fitzpatrick, a veteran of the asset class, much of the recent criticism of infrastructure – and certainly that part assigned to the investment banks which packaged and promoted many funds – is justifiable. He predicts that the days when investment banks fed transactions by outbidding each other to win tenders and then structuring the investments into funds, often with long-term management contracts in place, are hopefully over. Fitzpatrick, along with chief executive John Clarke and non-executive director Les Fallick, last year bought the ANZ infrastructure business, which Clarke had run since inception and had about $1 billion invested in two unlisted funds.
Infrastructure: how super funds are changing the world
For most super funds and other Australian institutional investors their experience with the ownership of infrastructure assets has, by and large, been a happy one. Not the same can be said for all such investors. Each of the eastern States has at least one disastrous toll road experience for investors and many retail investors in listed infrastructure funds were taught a painful lesson by the GFC. According to Mike Fitzpatrick, a veteran of the asset class, much of the recent criticism of infrastructure – and certainly that part assigned to the investment banks which packaged and promoted many funds – is justifiable. He predicts that the days when investment banks fed transactions by outbidding each other to win tenders and then structuring the investments into funds, often with long-term management contracts in place, are hopefully over. Fitzpatrick, along with chief executive John Clarke and non-executive director Les Fallick, last year bought the ANZ infrastructure business, which Clarke had run since inception and had about $1 billion invested in two unlisted funds.
Things will probably be okay now … but maybe not
If you thought the global financial crisis was over, don’t be too hasty. Scenario analysis by MLC Investment Management – placing probabilities against 40 different scenarios – puts the possibility of further massive falls in values for some asset classes a little too likely, or not unlikely enough, for comfort. While not alarmist, with the most likely probability being continued recovery, the analysis illustrates the uncertainty embedded in asset values over the medium term, particularly for Australian and global equities and emerging markets. Susan Gosling, head of capital markets research for MLC, has produced a summary of the analysis to illustrate recent asset allocation adjustments to some MLC funds – the “horizon” series and long-term absolute returns fund. She compares these with the probability of weighted real returns for most asset classes.
Universal picture: Back to the future with Cooper
If Australia’s fund members are divided into four categories as Jeremy Cooper wants them to be, there’s a good chance that much of the colour and innovation we see today could be lost. To me the most startling recommendation was the one which, in my opinion, would see just about every Australian worker not already operating a self-managed fund placed instead into a “universal” category, under which they would be sent “back to the future”. They’d be offered only one investment strategy (confusingly the report says this should include a target-date strategy), with vanilla insurance and minimal reporting.
Tail wagging the dog
Two recent reports by Towers Watson and Ernst & Young have identified similar criticisms of infrastructure as an asset class, and these include high entry and management fees, illiquidity, lack of transparency, and hurdle rates. Frontier Investment Consulting’s clients have about $12 billion in infrastructure [half of that in Australia], and Chris Trevillyan, who heads Frontier’s research, concurs with most of the reports’ criticisms and adds more. “There is a real issue with the dearth of attractive infrastructure fund managers in the marketplace, including structural issues with related party concerns, fees and inappropriate protection of investor rights,” he says.
Citi punts on overseas equities
Fund managers should be looking to reduce cash balances, and move into equities to leverage into the economic recovery in the next 18 months, says analyst Richard Schellbach, Citi Investment Research. “Funds need to prepare for a Chinese renminbi revaluation or devaluation, and identify the asset classes globally that have been distorted by this excess money coming out of China and Asia,” he warns. Local fund managers have to pay attention to which asset classes are being “pushed out of whack”, such as emerging market equities, and some specific commodities – for example, energy. For 2010, Citi prefers overseas shares to Australian equities because the locals are trading at a rare PE premium, says Schellbach, “and we face currency headwinds for earnings”. This overearning, due to the commodity super-cycle, is abnormal relative to local equities’ history and to global companies.
