T H E L E A D I N G I N D E P E N D E N T J O U R N A L FO R T H E S U P E R A N N U AT I O N A N D I N S T I T U T I O N A L F U N D S M A N A G E M E N T I N D U S T RY April 2011
Volume 25 - Issue 3
Industry split on mining tax 8 CMSF News roundup from the Conference of Major Superannuation Funds
Some major superannuation funds are unhappy with the Government’s decision to link an increase in the superannuation guarantee to the Minerals Resource Rent Tax.
T 12 SUPERSTREAM The devil will be in the detail when it comes to SuperStream
15 EQUITIES Australian equities could face an uncertain future
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19 HEDGE FUNDS Hedge funds haven’t always performed as advertised For the latest news, visit superreview.com.au COMPANY INDEX
higher superannuation guarantee was deliverable without reference to an MRRT. Russell said the increase in the SG amounted to so little and was being implemented over such a prolonged period of time that it could be introduced with or without an MRRT. Australian Institute of Superannuation Trustees (AIST) chief executive Fiona Reynolds said that while it would have been preferable to deliver the higher SG without tying it to a mining tax, the superannuation industry had been left with little choice on the issue. “It would be preferable if it wasn’t tied to a tax. But it is and we are not getting one without the other,” she said. “One is funding the other. So I think it doesn’t do us any good to spend our time worrying about the mining tax. Even though I think as policy going from 9 to 12 per cent does stand on its own.” Non-Government Schools (NGS) superannuation fund trustee, John Quessy, said that while he believed tying the superannuation guarantee rise to a tax was wrong, the Government appeared to
he Federal Government has created divisions within the superannuation industry by tying delivery of an increase in the superannuation guarantee to the implementation of the Minerals Resource Rent Tax (MRRT). A roundtable conducted by Super Review during the Conference of Major Superannuation Funds (CMSF) on the Gold Coast has revealed the depth of the divisions, with all participants supporting increasing the superannuation guarantee (SG) from 9 per cent to 12 per cent, but few supporting its connection to the MRRT. The divisions were magnified because the Assistant Treasurer and Minister for Financial Services, Bill Shorten, had just hours earlier addressed the CMSF and called on delegates to support the MRRT in the interests of ultimately delivering the higher superannuation guarantee. However, the chairman of State Super, Don Russell, a former senior adviser to former Treasurer and architect of the superannuation guarantee, Paul Keating, said he believed the 3
“I do not get the logic of the superannuation industry fighting for a mining tax.” – Peter Beck
AUSTRALIAN EQUITIES 15
have very little choice in the matter. However, Pillar Administration chief executive, Peter Beck said the industry should not have been asked to fight for something that was outside of its control. “Why don’t they give us a challenge like efficiency where we can do more about it?” he asked. “I do not get the logic of the superannuation industry fighting for a mining tax. We should be fighting for efficiency, anything that is within our control.” The roundtable will be published in full in the May edition of Super Review. 19
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Technology not always best fit for funds By Benjamin Levy
SUPER funds that are implementing new technology systems should review their business processes to make sure they fit the new system, according to the chief executive of IQ Business Group, Graham Sammells. Some super funds were
procuring existing technology and excessively customising it to fit their past business processes when they should be changing their processes instead, Sammells said. The technology was being over-customised to the point where it would be an even bigger misfit to the business process than before, he said.
“They probably spend more than they would expect customising, and the result may be that they aren’t playing to the true strengths of the technology that was purchased,” Sammells said. “It’s a natural human resistance to change. It’s natural to look at new technology for its new whizzbang
LGS and VFMC join sustainability push LOCAL Government Super (LGS) and Victorian Funds Management Corporation (VFMC) are among a group of global asset managers that have partnered with major real estate industry associations to create a foundation that will focus on the sustainability of fund managers in the real estate industry. The Global Real Estate Sustainability Benchmark (GRESB) Foundation will survey fund managers with the aim of reducing the sector’s carbon footprint by increasing the transparency of real estate investment managers. The data will enable institutional investors to compare the environmental performance of individual property investments with their environmental real estate targets, according to a joint statement from LGS and VFMC.
The results of the initial survey are expected in September this year and will form the basis of a collective effort to improve the resource efficiency of the institutional real estate industry, the groups stated. VFMC chief executive Justin Arter said VFMC believed investor value and sustainable practices could be enhanced through proper management of environmental, social and governance risks LGS chief executive Peter Lambert said he encouraged all property investors to look at means to reduce their impact. “Since 2004 LGS has made significant improvements in energy, water, carbon efficiency and waste recycling to our direct property portfolio and we are now starting to see financial benefits from this in terms of higher yields and superior occupancy rates,” he said. SR
SPAA rejects Govt approach to super contribution cap By Caroline Munro THE Self-Managed Super Fund Professionals’ Association (SPAA) has rejected the Federal Government’s proposal to raise the concessional superannuation contribution cap to $50,000 for all those over 50 with less than $500,000 saved. The SPAA stated that the raising of the cap should apply to all over 50s regardless of their super balance. The SPAA chief executive, Andrea Slattery, said an arbitrary and unindexed $500,000 balance threshold would be overly complex and impose unnecessary costs, and ran counter to the Cooper Review’s aim to improve efficiency. Slattery added that it would also discriminate against people who make voluntary non-concessional contributions from
after-tax dollars, and may also result in an increase in the number of people inadvertently breaching the contribution caps. Some super members may also mistake the $500,000 threshold figure as an adequate amount for
retirement, whereas research showed that retirees needed significantly more than that, she said. “As an alternative to the $500,000 threshold, SPAA has recommended the concessional cap be increased from $25,000 to a suitably higher amount for all individuals over age 50 to give them the opportunity to contribute more to super in the years leading up to retirement,” said Slattery. “If the Government decides to retain the $500,000 threshold, the SPAA recommends that only concessional contributions and investment earnings be counted against it. Given that only concessional contributions and fund investment earnings are subject to concessional tax treatment, the SPAA believes only the member’s concessional contributions should count against the $500,000 threshold.” SR
features that can be easy to utilise, but they don’t look at the core processes behind it to really take advantage of the entire technology stack,” Sammells said. Super funds should focus on their staff and their business processes, rather than using technology to “save the world”, he added. SR
Global confidence up, but down in Europe By Chris Kennedy GLOBAL institutional investor confidence rebounded in March after dropping sharply this year from its December peak, despite a plunge in Europe. The State Street Global Markets Investor Confidence Index, which quantifies investor confidence based on allocations to equities, noted an increase of 6.5 from February’s revised reading of 91.8 to reach 98.3. The index had fallen from a high of 104.2 in December, which was the highest level since March 2010. The latest increase was largely due to a sharp rise in North America, where confidence rose 10.5 points to 103. Confidence was also up 8.7 points in Asia to 100.2 but declined sharply in Europe, down 15 points to 64.3. “After the declines in February, March saw something of a rebound in confidence and institutional investors were comfortable adding to equity holdings after the pull back in prices that took place between 3 March and 16 March,” said index co-developer Ken Froot of Harvard University. European investors were more cautious due to ongoing uncertainty around the size and form of the ‘Pact for Euro’ aimed at address the sovereign debt crisis, he said. Electoral uncertainty in Germany may also have been holding investors back, he added. Fellow co-developer Paul O’Connell of State Street Associates said that institutional flows into emerging markets rose slightly in March but flows into developed markets were lackluster. “Asia remained a destination of choice, despite the supply-chain uncertainty stemming from the tragic earthquake in Japan,” O’Connell said. SR APRIL 2011 * SUPERREVIEW
IFF asks funds to join eRollover Hub By Chris Kennedy THE Industry Funds Forum (IFF) is inviting Australian Prudential Regulation Authority-regulated super funds to join its eRollover Hub for electronically processing superannuation rollovers following a successful trial. REST, Sunsuper and Statewide Super have processed more than 850 rollovers between them so far on the hub, reducing the average
cost per transaction from $12.50 to $0.40, according to Cuscal, whose ClickSuper payments solution underpins the eRollover Hub. The system also reduces the disinvestment period for members’ funds to less than 48 hours, rather than weeks or months, according to Cuscal. IFF executive officer Helen Hewett said the hub was an attractive solution because it required one single fee-free connection and
payments processes, reduced waiting times for members who were switching funds, and improved operations. “Simplifying the transfer of money between funds has also benefited investors by allowing them to more readily combine multiple accounts, ultimately saving them paperwork and fees. And these benefits will only multiply as more funds take part in the project,” he said. SR
Super caps force investors to look for alternatives
Preparation key for SuperStream changes THE Australian superannuation sector and employer groups need to proactively address and prepare for the changes and requirements brought about by the impending SuperStream legislation, according to the IQ Business Group (IQBG). Funds will need to review the intricacies of current processes and systems for staff, the firm said, as well as business operations and technology infrastructure ahead of the implementation of the legislation if the changes are to be effectively managed. In particular, the business solutions provider pinpointed the use of tax file numbers, data standards, expanded electronic commerce and ongoing data quality as key action items in facilitating reduced fees and operational costs.
was immediately available. Other industry and public sector funds that will soon be using the hub include Vision Super. Vision Super chief operating officer Peter Rowe, who is also chair of the IFF eCommerce Steering Committee, said the hub is standards-based and can scale effectively with volume and growth in participants. Sunsuper chief executive Tony Lally said the system speeded up
By Ashleigh McIntyre
IQBG chief executive Graham Sammells urged funds to begin making changes in order to stay on top of their game. “Smart organisations will develop a roadmap of initiatives to deal with the pending SuperStream changes,” he said. “While all the details are not yet finalised, we are confident that most of the proposed changes will come into effect and there is enough direction to start working on it now.” SR
WHILE the laws surrounding excess superannuation contributions caps remain a problem for middle-class Australians, investors must look at alternatives in order to have adequate retirement savings, according to an industry expert. Argyle Lawyers principal Peter Bobbin told a Macquarie briefing that people want the tax effectiveness and asset protection associated with super, but investors are continually being penalised for excess contributions. “When is a tax not a tax? Well maybe when it’s a penalty. When you’ve got an excess contributions tax that can take 93 per cent of your earnings … that suggests to me it’s a penalty because you’re putting too much money into super,” he said. “My anecdotal evidence is that the people who are being affected by excess contributions tax are middle-class Australians.” “Sadly I think I won’t succeed in saying it’s unconstitutional, but it should be,” he said. Bobbin cited margin lending products as one-tax effective alternative for clients to earn money outside of super when their caps had been exceeded.
“It’s going back to your plain old interest deduction: borrowing to make an investment for the purpose of producing an assessable income – as boring as it is – means you can claim a tax deduction for the interest,” he said. Although he cautioned that it is important that these products have a product ruling to avoid tax complications in the future, as tax deductibility of interest is the most litigated issue in tax law. “Product rulings give the investor certainty that even if the law expressed is later found to be wrong, you will not pay more tax than what the ruling indicates you would have been liable to pay,” he said. SR
First Westscheme appointment to AustralianSuper board CURRENT Westscheme director Simone McGurkhas become the first member of the Westscheme board to join AustralianSuper, following the February announcement of a merger between the two funds. McGurk, who replaces retiring AustralianSuper director Cath Bowtell, is also currently a Western Australian State Training Board member, the UnionsWA Secretary and a member of SUPERREVIEW
the Australian Council of Trade Unions executive. AustralianSuper chair Elana Rubin said McGurk has a strong insight into the issues facing Australian workers and an affinity with the ‘members first’ philosophy of AustralianSuper. “Simone was a member of the Westscheme Board that demonstrated its ‘members first’ philosophy when it
sought a merger with AustralianSuper, knowing our size, expertise and products would provide a positive difference to their retirement outcomes,” Rubin said. “Irrespective of the proposed merger with Westscheme, Simone is a high calibre appointment and one that reflects the growing geographic diversity of AustralianSuper.”
The appointment ensures the interests of West Australian members will be well represented and demonstrates AustralianSuper’s commitment to the successful finalisation of the merger, Rubin added. The AustralianSuper board now comprises seven members from New South Wales, five from Victoria and one from Western Australia, the fund stated. SR
Still a long climb back to high water mark By Chris Kennedy SUPER continued its strong financial year performance in February, but setbacks caused by market volatility in March means funds still have a long way to go to claw their way back to 2007 high water marks, according to Chant West. The median growth fund has posted a cumulative return of 31.5
per cent since the markets bottomed, but will need a further 5 per cent from the end of February, a month that delivered 1.2 per cent growth on the back of strong local and global share performance. This meant the median growth fund was up 9.6 per cent for the financial year, Chant West found. “While this is good news, we’ve seen share markets retreat sharply in March. Initially that was due to
the political instability in the Middle East and North Africa, but now we’ve also had the tragedy unfolding in Japan, which is weighing heavily on investor sentiment,” said Chant West director, Warren Chant. Chant did not believe this would have a significant economic impact over the medium to longer term despite the immediate effect on investor confidence.
“Meanwhile, the end of February marked two years from when the markets bottomed. Australian and international share markets are still more than 20 per cent off their peaks, and listed property markets are even further back,” he said. “So funds still face an uphill battle to get back to their pre-GFC levels – even those that are well diversified into unlisted assets.” SR
Fund managers bullish on North American equities Peter Meany
CFSGAM grows global infrastructure after mandate wins By Ashleigh McIntyre INCREASING institutional demand for global listed infrastructure has led Colonial First State Global Asset Management to expand its team after securing $100 million in mandates. After winning mandates from a financial services company and a corporate superannuation fund, CFSGAM has appointed Ofer Karliner as senior analyst focusing on toll roads and energy pipelines, based in Sydney. He joins the team from CP2 where he was head of transport infrastructure. Before that, he worked as a senior equities analyst with Macquarie Securities. Karliner’s appointment follows another recent addition to the team’s Hong Kong office, with senior analyst Jin Xu joining from Deutsche Bank. Peter Meany, head of global infrastructure securities with CFSGAM, said the appointments coincided with increased demand for the asset class from the institutional side. He said this demand stemmed largely from expectations that global listed infrastructure will deliver solid performances in 2011 despite an anticipated patchy recovery in global gross domestic product growth, with strong pricing power, sustainable growth and predicable cash flows expected to underpin performance. SR SUPERREVIEW
FUND managers are favouring North American equities over those from Asia exJapan, with concerns about inflation and tightening measures driving funds elsewhere, according to a new survey. The HSBC Fund Managers’ Survey found that 100 per cent of managers surveyed
were taking an overweight position towards North America in the first quarter of the year, up from 75 per cent last year. There was also an increase of 10 percentage points of those fund managers taking a neutral view towards China equities, up to 43 per cent. Head of global investments
at HSBC Bank Australia Geoffrey Pidgeon, said the survey shows a significant change in investor confidence. “Fund managers are looking to North American equities because of improving economic conditions, merger and acquisition activities and encouraging company
reports,” he said. “At the same time, fund managers are lukewarm on Asia ex-Japan due to concerns about rising inflation in the region, and less bullish on greater China equities as the market takes in the impact of ongoing austerity measures to contain inflation.” SR
Super system needs fixing to address retirement gap SELF-managed super fund (SMSF) legislation needs to be addressed if Australia is to avoid the blow-out of pension costs to $68 billion a year by 2020. National accounting firm Chan & Naylor believes that while SMSFs go a long way to addressing the nation’s lack of retirement funds, Government reform is also needed to fix “serious flaws” in the trust mechanism and create best practice.
These flaws include the arbitrary maximum limit of four members, the potential 93 per cent tax penalty for over payment of contributions and the age limits that restrict members from contributing. It also lists the need for improving the operating environment of SMSFs to include better education and support, as well as lifting annual concessional contribution limits, which currently stand at $25,000 per year for most Australians.
“None of the above factors assist in the fundamental and bedrock sole purpose test of superannuation, which is to provide retirement income for members,” said Ken Raiss, director of Chan & Naylor. He believes there should be more focus on maximising superannuation, rather than legislation that taxes and penalises those who contribute more to their retirement. SR
Intra-fund advice included in ASIC shadow shop THE Australian Securities and Investments Commission (ASIC) has announced it will begin shadow shopping retirement advice this year, which it says will target all advisers – including those from industry super funds. In response to questions about whether the shadow shopping exercise would apply to all advisers in the retirement advice area, ASIC stated there would be no exceptions. “Essentially, anyone giving retirement advice could be
shadow shopped,” said an ASIC spokesperson. The Association of Financial Advisers chief executive Richard Klipin said he welcomed shadow shopping as an opportunity to get a fix on the progress the profession had made as a whole. “The expectation of the advisory profession is that if ASIC is shadow shopping advisers in the area of retirement advice, then that’s exactly what they’ll do,” he said. “It will be all advisers providing advice in the field
rather than separating out certain types of advisers.” Klipin also said he was pleased with ASIC Commissioner Greg Medcraft’s comments that it would not be an exercise in naming and shaming, and that it would involve an expert reference panel as part of the process. “We’re keen that the shadow shop becomes the mirror to the industry and that the good work of advisers is recognised rather than some of the negative connotations and insights of previous shadow shops.
“I think the key way for shadow shopper 2011 to benefit the profession is that it’s done with the right spirit and the right intent,” he said. SR
Worldwide interest in ESG to transform portfolios By Chris Kennedy ENVIRONMENTAL, social and governance factors will transform the portfolios of institutional investors as they attract more interest from investors and governments around the world, according to investment man-
agement consultant Michael Dieschbourg. Private and government policies are re-shaping the investment environment, Dieschbourg said at the van Eyk conference in Sydney recently. The majority of asset owners now want to integrate ESG into
their decision-making, and consultants and advisers such as Mercer, Towers Perrin, McKinsey and Bain are already operating in the ESG area, he said. “As institutional investors we have a duty to act in the best longterm interests of our beneficiaries,” Dieschbourg said.
“In this fiduciary role, we believe that environmental, social and corporate governance issues can affect the performance of investment portfolios. We also recognise that applying these principles may better align investors with broader objectives of society.” SR
‘SMSF’ conjures administrative nightmares By Ashleigh McIntyre THE name ‘SMSF’ could be driving away potential trustees due to the connotations of increased administrative and regulatory burdens. Michael Hutton, head of wealth management at HLB Mann Judd Sydney, said SMSFs were misnamed and a better title would be ‘Personal Super Fund’. “The title ‘SMSF’, and the frequently used alternative name ‘DIY Super’, suggests that those who have such a fund must do all the investment, structuring and ongoing management work themselves, when the reality is this is not the case,” he said. Hutton said many people believe the portfolio management and overall administration must fall to them as a trustee, but are unaware that advisers can help with things like contribution strategies, ensuring legislative and administration requirements are met and more. “People with sufficient retirement savings shouldn’t allow concerns about the administration and regulatory requirements to over-ride all other considerations and prevent them from setting up a SMSF,” Hutton said. The change of name to ‘Personal Super Fund’ would reflect the true benefits of SMSFs, he said. SR APRIL 2011 * SUPERREVIEW
Super funds up the ante on advice By Ashleigh McIntyre ADVICE is certainly on the radar of the vast majority of superannuation funds, with almost all funds surveyed indicating they are looking to increase their advice offering in some way over the next three years. The survey, undertaken at the Conference of Major Superannuation Funds (CMSF) on the Gold Coast, found that 73 per cent of funds were looking to substantially increase their
advice offering, while 23 per cent were thinking of marginally increasing their services. The remaining 4 per cent said they were not looking to increase advice over the coming three years. David Whiteley, chief executive of the Industry Super Network (ISN), told delegates the financial planning industry was concerned about these ambitious plans for growth. “It’s an irony lost on me that industry funds are now adver-
tising and promoting financial advice, when we have often been portrayed as being anti-advice – which has never been the case,” he said. Whiteley said that over the last few weeks, intra-fund advice had been portrayed as ‘McDonald’s advice’. “We need to ensure that advice provided by super funds … is not seen in any way as second rate or substandard. “We have to consistently promote the benefits of the advice
that we provide our members, as well as the appropriateness of the advice,” he said. Kay Thawley, chief executive of Industry Fund Services, said the best way for funds to achieve the expansion of their advice offering was through leveraging workplace even further. She said the best way for industry funds to do this was to build shared capability through the Industry Super Network by using union workplace representatives to distribute toolkits.
Group risk services may be unsustainable AS the group risk sector begins to see increasing auto-acceptance levels (AAL), concerns have risen about how funds will meet members’ needs in the future. Damien Mu, chief distribution and marketing officer at AIA, told delegates of the Conference of Major Superannuation Funds (CMSF) he was worried that it was an unsustainable model. “My concern is: when is the tipping point? We can’t just keep adding things on there and hope for the best. There comes a time when we need to step back and look at how we are meeting members’ needs,” Mu said. He said that members were currently getting the benefit of not needing to go through the underwriting process, but he warned the claims impacts for in-
surers would play out in the next few years. “As an industry we need to be mindful of the potential impact that auto-acceptance will have,” he said. Mu was not the only one concerned about the sustainability of AAL. Robin Knight, head of group market and actuarial at OnePath, told delegates he was concerned about problems of uninsurable people taking advantage of AAL. “The worry is that you will get people joining industry super funds just to get access to these high auto-acceptance levels,” Knight said. “We could have many latent claims sitting there that are going to emerge and which will be paid for by the ordinary membership,” he said. SR
Flexibility needed on MySuper reserves THE Federal Government has been urged not to apply a one-size-fits-all approach when it comes to operational reserves for super funds operating MySuper products. Towers Watson director of superannuation Brad Jeffrey told the Conference of Major Superannuation Funds (CMSF) on the Gold Coast that it would be wrong to impose uniform requirements when each fund was different. SUPERREVIEW
He said it needed to be remembered where the money for operation risk reserves came from – members. “It is members’ money, therefore the reserve must be appropriate but not excessive,” Jeffrey said.
He said that in many instances the size of the reserve would not only need to reflect the size of the fund but quality of its outsourced service providers. The general manager, supervisory support at the
Australian Prudential Regulation Authority (APRA), Greg Brennan, indicated the regulator would be supporting a flexible approach. He pointed to the different rationale APRA applied to major banks when compared to small credit unions. As well, Brennan said APRA research indicated that around 80 per cent of industry funds already had some sort of reserving regime in place. SR
She also suggested funds could reach more members with third party distribution agreements alongside their in-house advisers, with one example being the possible use of credit unions. SR
Too hard to compete for group risk SMALLER companies thinking of dabbling in group insurance should think again, as high barriers to entry and small margins make the sector increasingly a playground for big insurers. The $3.1 billion group insurance sector is increasingly being shared among fewer and fewer insurers, according to key industry players speaking at the 2011 Conference of Major Superannuation Funds (CMSF). The top two group insurers now hold approximately 33 per cent of the market, while the top four have increased their share from 54 to 64 per cent – a total of $1.8 billion in premiums, up from $1 billion in 2007. Damien Mu, chief distribution and marking officer for AIA, said he found the figures unsurprising as he was seeing a specialising of group risk in the market. “Group risk used to be seen as a poorer cousin, but now there is a genuine need for specialisation, with a need for infrastructure, separate investment and products and services, as well as technology to support the group insurance channel,” he said. Head of group market and actuarial at OnePath, Robin Knight, said he felt that as the sector went through specialisation, it was being faced with the need to make big investments in technology. “It’s almost an all or nothing. Are you going to spend the $20 million plus to play in that market?” “It’s harder for the smaller players faced with those decisions to get the scale to justify the spending for specialist services. It’s a lot easier if you are a bigger player to spread the cost of the technology across different areas of the business,” Knight said. SR
SG rise tied to MRRT: Shorten THE Assistant Treasurer and Minister for Financial Services, Bill Shorten, has made clear that delivering an increase in the superannuation guarantee to 12 per cent is inexorably tied to the delivery of a Mineral Resource Rent Tax. Addressing the Conference of Major Superannuation Funds (CMSF) on the Gold Coast, Shorten asked superannuation fund trustees to drive home the
message that passage of the MRRT legislation was directly linked to ensuring Australians did not grow old in poverty. He described the MRRT as “a really good tax” based on the special prosperity of the mining boom. “They [the mining companies] can afford it, but Australians can’t afford to grow old poor,” Shorten said. In doing so, Shorten and the
Government appear to have stepped away from the promise of the Hawke and Keating Governments that the superannuation guarantee always needed to be viewed as a non-wage benefit rather than as a tax. Shorten, referring to the policies of the “Gillard/Swan Government” said he did not believe that a decent retirement issue should be a partisan political issue.
Possible grace period for MySuper requirements SUPERANNUATION funds wanting to comply with the proposed new MySuper regime may be given time to grow their reserves to meet the necessary capital requirements. A senior Treasury official told the Conference of Major Superannuation Funds (CMSF) that such a transition period was being considered as part of the broader industry consultation process. Treasury principal adviser on superannuation, Jonathan Rollings, said the industry working group was considering whether funds would be allowed to operate on the basis of trustee capital or an operational risk reserve. He said there was then the question of setting a minimum amount for the funds involved. Rollings said it was then a question of
whether the funds would be given time to build to the minimum amount over time. The CMSF delegates were also told that with MySuper scheduled for introduction from 1 July, 2013, the question of transitionary arrangements needed to be looked at. Rollings said the duration of any transitionary arrangements would be decided as part of the consultation process. On the question of licensing of MySuper funds, he said a view was emerging within the working group process for a condition within existing Registrable Superannuation Entity (RSE) licences. Interestingly, an electronic poll of CMSF delegates indicated most did not believe MySuper would succeed in achieving the cost savings envisaged. SR
“It is not a partisan issue, it is an Australian issue,” he said. The minister exhorted CMSF delegates to direct some of their time and attention to prosecuting the benefits of the MRRT as a means of underwriting the increase in the superannuation guarantee to 12 per cent. He said that to do so would be to ensure that they would not regret in the future that they had not done enough. SR
Medicare clearing house should go to ATO THE superannuation contributions clearing house established within Medicare should be transferred to the Australian Taxation Office (ATO). That is the recommendation of the chief executive of superannuation administration company AAS, John McMurtrie, who told the Conference of Major Superannuation Funds (CMSF) such a transfer made good sense. He said the Medicare clearing house was doing good work for employers with fewer than 20 workers
but did not represent an instinctive choice. McMurtrie said that in circumstances where the ATO handled BAS reports and withholding tax it represented a natural home for the clearing house. Further, he claimed employers were more likely to access a clearing house based in the ATO. McMurtrie also called for a June 30, 2015 date for the abolition of cheque processing in the super industry and a 2013 date for the abolition of paper-based transactions. SR
APRIL 2011 * SUPERREVIEW
Shining a light on trustee boards The trustee boards of superannuation funds wield considerable power – something the Federal Opposition has suggested may need to be more closely scrutinised and opened to member sanction.
hould the trustee boards of superannuation funds be any less responsible to their members than the boards of publicly listed companies are answerable to their shareholders? That is the key question that has been asked by the Opposition spokesman on Financial Services, Senator Mathias Cormann, and it is a question that the superannuation industry would do well to take extremely seriously given the finely balanced nature of the Federal Parliament. Over the past decade key sections of the superannuation industry have been at the forefront of calls for shareholder activism, and of the need for
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superannuation funds to exercise their voting rights with respect to issues within major publicly listed companies – such as executive remuneration and ethical investment. In circumstances where the average Australian is likely to hold vastly more in their superannuation account balance than they do in shares in publicly listed companies, it should follow that superannuation fund members should be allowed more of a voice in the running of the funds in which they are members. However, as things currently stand, the trustee boards of superannuation funds are in a unique position. Provided they act within the strictures and regulations of the Superannuation Industry (Supervision) Act they need not consult with their members on any particular matters affecting the fund – up to and including entering into a merger with another fund. Thus, members of West Australian fund Westscheme ultimately have no direct say in
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the merger of their fund with AustralianSuper. They need to accept that the fund’s chief executive, Howard Rosario, and the trustee board have acted in their best interests. Equally, the members of AustralianSuper will have to accept that their CEO, Ian Silk, and the trustee board are not diminishing their overall position by merging with Westscheme and therefore taking on that fund’s assets and liabilities. As Cormann succinctly put it: “The current framework relies entirely on the trustees doing the right thing in satisfying their trustee fiduciary duty to act in the best interests of their members.” However he also noted: “There don’t seem to be any independent checks and balances along the way to ensure a particular merger is in fact in the fund members’ best interests.” The bottom line in any of the recent fund mergers that have occurred is that the decisions have ultimately been made by fewer than 30 people and have not been subject to
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either audit or oversight by the regulators. Nor has there been any significant level of questioning around the issue of those holding multiple trustee directorships across the superannuation industry. For his part, Cormann has raised the need for better regulatory supervision, a review of merger arrangements, and the delivery of more adequate remedies for members when a merger ends up disadvantaging them or does not end up delivering any of the advantages originally promised by the relevant trustee boards. If the superannuation industry were driven simply by commercial and financial realities in much the same way as the broader financial services sector, then the issues raised by Cormann would not prove to particularly significant. However, the superannuation industry is unique because it draws in the highly volatile elements of politics and industrial relations – largely as a result of the evolutionary process from award superannuation through to the development of industry superannuation funds. It is undeniable that the position prosecuted by some elements within the industry superannuation funds has its origins in deeply held political
philosophy, and it is also undeniable that some of the people whose careers have taken wing within the industry superannuation fund movement cut their teeth in the trade union movement and, very often, the Australian Labor Party. It would therefore seem to be in the best interests of superannuation fund members if the fortunes of their superannuation balances and the fortunes of the funds controlling those balances were delinked from the notion of political philosophies and political agendas. It is on that basis, that there is much to be said for legislative and regulatory changes giving superannuation fund members more say in not only how their funds are run, but who is actually running them. The current structure of the superannuation industry is the result of its evolutionary history. What was appropriate 20 years ago is not necessarily appropriate in 2011 and beyond. Now, with more than $1.3 trillion in assets and funds under administration, it is time the industry and those running it were subjected to higher levels of accountability to those whose financial interests they are seeking to represent. SR
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Delivering the detail of SuperStream
SuperStream has been hailed as perhaps the best recommendation to emerge from the Cooper Review but, as BRAD PRAGNELL writes, the devil will be in the detail of delivery. uperStream has been an element of the Cooper Review that has received nearly universal support. Eliminating paper and moving towards greater use of electronic payments and data transfer has been seized upon as an objective that will benefit trustees and members alike. The joint Financial Services Council and Ernst & Young research from 2010 estimated that an investment of $1 billion by the industry towards SuperStream implementation would yield a $20 billion benefit over the coming decade.
To achieve this will require the creation of a sustainable architecture within which superannuation funds collect and exchange data. Standards and their governance form a critical part of this and will be necessary components of SuperStream. They confront industry and government with some key decisions that will need to be made. Standards are must-haves, not nice-to-haves, in interconnected industries seeking efficiencies. Standards enable greater automation and use of technology, reducing the high
If SwimEC in its current form is unsuitable, questions surrounding standards governance in superannuation remain open.
costs associated with manual handling. Standards can also drive competition and innovation by providing common platforms for users, competitors and suppliers. However standards don’t fall from the sky fully-formed. Governance is required so that someone develops, maintains and ensures adherence to the standards. SwimEC was an important initiative along the pathway for improved standards for superannuation. However that body in its current form was regarded by the Cooper Review as insufficient to act as a suitable governance body. If SwimEC in its current form is unsuitable, questions surrounding standards governance in superannuation remain open. What type of governance is required? What type of body should be responsible? Is this something best left to a government regulator or could it best be done
by an industry self regulator? A real life example of standards governance self regulation is the Australian Payments Clearing Association (APCA). APCA was founded in 1992 and exists to manage rules and regulations for Australia’s payment systems, including cheques, direct entry, ATM/EFTPOS, high value and wholesale cash. The rules are publicly available on the APCA website and include message formats, how those messages are exchanged, minimum technology required and how parties agree to exchange value. APCA also issues BSB numbers. However it is not a clearinghouse, system operator nor handler of messages in its own right. APCA members are required to comply with its rules and this includes, in particular areas, independent testing and audits. As well, APCA activities take place within an environment with a strong regulator in the form of the Reserve Bank of Australia. APCA liaises very closely with the RBA and that regulator could easily choose to take over APCA’s role if it felt fundamental policy objectives were not being met. While compliance and regulation is well and good, APCA could not have been established without industry commitment and recognition of benefits. Establishing this recognition was not without its challenges. In its formative period, APCA brought together three diverse groups – banks, building societies, and credit unions – each with their own separate clearing systems. APCA’s current governance clearly recognises this with no one major industry group able to impose its will on the whole APCA membership. This provides a fine balance of interests between these groups. In creating APCA, the Reserve Bank of Australia also played
an important role in bringing together sectors with different standards, business models and cultures. But in the end, it was acceptance by key industry participants that self regulation and standardisation would ultimately produce benefits for both themselves and the industry that sealed the deal for APCAâ€™s creation. What then have been the benefits of the past 18 years? Australia is now one of the least paper-based payment systems in the world. According to McKinsey, we rank with nations such as Finland and the Netherlands as leading lights in the adoption of efficient electronic payments. Obviously not all of this is APCAâ€™s doing but this framework has permitted Australia to have one of the most sophisticated and efficient payment systems in the world. And what are the lessons from the APCA experience for creating a superannuation standards governance body? One is that key stakeholders from across the industry plus government and regulators need to be involved and broadly satisfied with the development of the governance framework. The end result needs to be seen as fair, representative and balanced. In addition, decision making processes need to be transparent, the standards produced open and non proprietary, and where possible those standards must leverage off existing industry structures and processes. In his presentation to the November 2010 Association of Superannuation Funds Australia Conference on a possible
superannuation standards governance model, Jeremy Cooper suggested that body should have a statutory basis. This may be needed, given the unique issues confronting superannuation and the desire for the Government to implement SuperStream in a timely basis. However, Mr Cooper also recognised the need to directly involve industry stakeholders with-
in any new body. It is this involvement of industry which gives self regulation its ultimate power â€“ by harnessing the commitment and expertise of industry while also fairly recognising it will be industry participants making the investments to implement the changes. The current environment presents a golden opportunity
for the superannuation industry to seize the prize and help create a standards governance framework that will propel the industry into the twenty-first century. SR Dr Brad Pragnell is head of industry policy at the Australian Payments Clearing Association.
APRIL 2011 * SUPERREVIEW
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AUSTRALIAN EQUITIES 15
Sailing into the wind
Domestic equities have performed well in the past and represent a solid option for investors but, as DAMON TAYLOR reports, there are many variables to watch out for.
his time last year Australian domestic equities seemed set to surge on the back of a strong Australian economy and a recession avoided. Fast forward to present day and there has been little to alter this rosy view but, according to AMP Capital head of Australian equities Greg Barnes, local market gains have been gradual rather than groundbreaking. “Certainly, last year the Australian economy had a very shallow slowdown compared to the rest of the world where you had
a very deep recession driven by the global financial crisis,” Barnes said. “Australia has come out of that shallow slowdown with a fairly slow trajectory of growth – but growth nonetheless. “You compare that to the US which has come out of the recession with a much more rapid pace of recovery and what we’re seeing is that trajectory reflected in the share price performance and a lot of the strong macro economic numbers that are coming out of the US.
“So if you roll the clock forward to this year, I think that the Australian economy is in sound shape,” Barnes continued. “You’ve got a very strong growth impetus coming from the resources sector, from the terms of trade, and a very strong capital expenditure pipeline, a large chunk of which is related to the resource spending but some of which is related to broader infrastructure spending as well.” Barnes added that when strong terms of trade and high capital expenditure came together, the result was strong nominal economic growth that would also benefit Government revenue. “You’ve also got unemployment heading to low levels – notwithstanding the employment figures that we’ve seen recently – and with employment at fairly full levels you’ve got a household sector that is in reasonable shape as
well,” he said. “So with those key growth drivers as a backdrop, the Australian market is in good shape.”
PLOUGHING FORWARD Identifying global impacts on the Australian equities market outlook, Fidelity head of Australian equities Paul Taylor agreed that there had indeed been steady growth but added that it had not been without its headwinds. “If you looked over the last 12 months, there’s really been a bit of a ‘sawtooth’ happening,” he said. “We’ve been up and down but we’ve really gone nowhere. “So I’d characterise it by a solid Australian economy, great companies, good balance sheets, all the micro things you’re looking for but we’ve also had these black clouds hanging over us from a macro perspective,” Taylor continued. “So the sovereign debt crisis in Europe which
seems to be working its way through the European economy from Greece to Ireland to now Portugal and potentially Spain, then there’s the Middle East’s geopolitical issues and that’s obviously kicked off some more macro. “So for the last 12 months, we’d have the market move based on these sort of micro fundamentals, which all look positive, but then we get knocked back based on these macro issues.” Not seeing the same black clouds internationally, Barnes said there was much in global markets that would support local market growth, rather that detract from it. “The Australian backdrop is sound but you’ve got a broader international economic environment which is quite robust Continued on page 16
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16 AUSTRALIAN EQUITIES
Sailing into the wind ☞ Continued from page 15 as well,” he said. “You’ve got that strong growth impetus coming though in the US – obviously Europe is a little bit behind that, but core Europe is doing okay – and then you’ve got the emerging markets which are really the key engine of growth globally. “So as we roll through 2011, I think we’ve got an environment which is going to be quite supportive of equities,” Barnes continued. “Typically, that third year coming out of an economic slowdown is quite a strong year where the second is normally slower. “So this year, if the pattern is similar to what we’ve seen in years past, we think domestic equities will have a reasonably firm 12 months.”
US OUTPERFORMANCE Yet irrespective of whether activity internationally is likely to have a positive or negative effect on local markets, it is interesting to note that Australia equities actually underperformed the US equity market in 2010. However for Taylor, despite Australia’s stronger foundation at the beginning of the year, such a result was far from surprising. Pointing out the recent strength of the Australian dollar, he said that although the US economy had come back well, its outperformance was a lot less significant when viewed in terms of a constant currency. “The US did perform quite strongly but for them the recession and difficult period was SUPERREVIEW
much worse, so the recovery was always going to be a little bit stronger,” said Taylor. “But the big factor that moved in Australia was the dollar. “Often if you put these things on a constant currency basis, it tends to even things out significantly,” he continued. “But the US was obviously a weakening currency so, from an Australian investor’s perspective, the difference was probably a lot smaller because while you had an improving US market, you would have lost money on the currency. “When you’re trying to compare globally, you need to put everything into a constant currency.” Equally unsurprised, Barnes said that the slowdown in the US was probably unprecedented in many ways. “Confidence was really shattered,” he said. “They had a housing sector which was in pretty significant difficulty and it really took the various stimulus measures a while to get traction. “Now, however, we’re seeing those stimulus measures gaining momentum and as a result the economy is on quite a sharp growth recovery,” Barnes continued. “Australia, on the other hand, was a much shallower slowdown and not even a recession as it turned out. “And what happens is that from an equity market perspective, analysts put through an earnings revision – so the actual earnings numbers that companies report typically surprise as well.” According to Barnes, several
strong reporting seasons with strong earnings upgrade cycles for US corporates meant the US equity markets were always going to be well placed for significant growth. “On the other hand, if we look at the most recent Australian reporting season, if anything we’ve probably had some slight downgrades to earnings growth expectations,” he said. “So if you compare the two markets and the two outcomes, that probably explains a great deal of the weaker performance that we’ve seen here in the Aussie market.” Along similar lines, Vanguard Australia and Asia Pacific chief investment officer Joe Brennan said markets that are more severely depressed would always bounce back further. “A lot of the headlines and prognosticators like to talk about the economic numbers and other things like that,” he said. “But the biggest driver in any period usually ends up being the market and, more importantly, what they’re willing to pay for a dollar of growth – in other words, the valuation. “So the valuations were so depressed in the US, much more than here, that what you got was the valuations coming back a lot,” Brennan continued. “It wasn’t that the US companies were performing all that much better or that the economy was anywhere close to as good a shape. “That’s not what the market was saying. What happened was a bounce off the bottom of valuation land.”
STEADY HAND ON THE TILLER Bringing the focus back to local equity markets, Barnes said that while performance has been steadily positive through 2010 and the beginning of 2011, the reality is that there will always be developments on equity managers’ radars. “So one of the main ones we’ll
be watching carefully, despite its recent strength, is the resources sector and how it impacts the rest of the economy,” he said. “Because the flipside of a very strong resources sector is that the Australian economy needs to make room for that exceptional growth. “By that I mean that the Australian economy just doesn’t have the capacity to accommodate the sort of growth that we’re seeing in the resources sector and therefore some of the other non-resource sectors in the
economy need to make a little room, to give up a little bit of capacity, to do that,” Barnes continued. “It’s really that sort of nonresource related sector that’s been fairly slow to recover even though there have been expectations that it would and a lot of the macro data is suggesting that it should be picking up.” Barnes said that the banking sector was another area of focus for AMP Capital. “The banking sector’s gone through a period of significant change with the adjustments to their capital bases, the higher cost of capital, the housing market slowdown,” he said. “So banks have gone through a period of adjustment to prepare themselves for what looks like will be a slower credit growth environment. “And certainly last year I think that was weighing on the bank sector,” Barnes added.
“This year it looks like some of those pressures have eased and the bank share prices have come back. “So it’s an analysis about whether the bank sector looks reasonable from a share price perspective compared to the current outlook that they face.” For Taylor, the other domestic fear on peoples’ radars was interest rates. “So if you look at it from an average Australian’s perspective, the things probably on their mind are interest rates and where they’re going,” he said. “They’re probably thinking about the carbon tax, is that going to have any impact on prices, are electricity prices going to go up, are petrol prices likely to do the same? “Now, increasingly, the words coming from the Reserve Bank seem to be that interest rate rises are getting pushed out further and further,” continued Taylor. “Consumer confidence is reasonable, they see Australia’s in a good position but I think people generally have been trying to get their finances in order. “So that’s potentially been holding back the domestic economy but I think the Reserve Bank is definitely feeling that they’ve done their job with the interest rate rises we had in succession last year.”
INFLATION FEARS Echoing Taylor, Brennan said that inflation was the one blip on the domestic equities radar that could compromise Australia’s current growth. “I think the strong growth that’s in place in Australia, there doesn’t seem to be a lot of things tipping it over,” Brennan said. “The one thing that you’d want to keep an eye on – and I think the RBA is fully Continued on page 18
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18 AUSTRALIAN EQUITIES
Sailing into the wind ☞ Continued from page 16 aware of this – is the fact that inflation isn’t necessarily a global phenomenon. It can be a regional or local phenomenon. “And in so far as the Australian economy is, when you think about some of the drivers of its success being the commodities boom, metals and mining, jobs, currency and all of this surging activity, there are a lot of linkages to a single factor,” Brennan continued. “But I think the RBA is acutely aware of that and they have their finger on the trigger to raise rates and stem off any inflation.” But despite a number of
both domestic and global issues that Australian equity managers will be keeping a watchful eye on, the bottom line seems to be that domestic equities are well placed for a year of growth in 2011. Brennan’s prediction was that the next 12 months would be a continuation of themes for the local market. “It seems to me that a lot of the same things will continue to be in place,” he said. “The global economy is healing, demand for resources is set to continue and Australia’s fundamentals still seem to be intact,” Brennan said. “So while I’m not good enough
to tell you whether or not that’s going to continue, it seems for right now as though a lot of the drivers for growth are still in place.” For his part, Barnes said that there was every reason to be upbeat about equities. “We’ve been looking for a mid-teen return at a capital level when the market’s on a 4 per cent yield,” he said. “I think our strategist Shane Oliver is on record as calling the market up around the 5500 level, and obviously this pullback gives us some pause for thought around that but certainly that’s the target level that we’ve been looking at.
“I think if you step back and look at things certainly over the last 20 or 30 years, the Aussie market has outperformed internationally,” continued Barnes. “We’ve got a strong demograph-
ic growth profile which underpins economic growth here and that has a strong correlation with market performance and we don’t see anything to really change that.” Barnes said that if one looked back over the longer term, Australia had done very well over a century of market returns. “In fact, we’ve done extremely in terms of the real return from equities in Australia,” he said. “It’s been among the best globally.” “There is a very sound capital market here and a very sound equity market. There’s no reason to think that sort of performance won’t continue.” SR
HEDGE FUNDS 19
Hedging against the future Not all hedge funds proved to be the all-weather performers many had expected through the global financial crisis but, as DAMON TAYLOR writes, that does not mean they should disappear from well-balanced allocations.
s Australian super funds make their way towards the end of the 2010-11 financial year, it seems likely their returns will reflect steady – if not stellar – growth. Markets have settled to the point where the troubles of the global financial crisis (GFC) seem a distant memory, but the experience has not been forgotten. Hedge funds, like a number of alternative assets, did not provide the downside protection expected – and according to Towers Watson director of investment services Graeme Miller, that fact is something investors remember well. “The thing that disappointed hedge fund investors most through the GFC was that these funds had been marketed as being absolute return funds that would aim to deliver positive returns regardless of equity and credit market conditions,” he said. “And unfortunately, the great majority of hedge funds failed to deliver on that promise. “Now as markets returned more to normality or as we saw stronger investment performance from markets from about March 2009 onwards, hedge funds – like all other forms of risky investments – delivered strong positive returns,” Miller continued. “But in saying that, I think the jury is still out as to whether those strong positive returns are simply reflections of strong market conditions across the board or whether they do, in fact, reflect learnings that hedge fund managers have derived from their financial crisis experience.”
CRISIS MODE Providing an another perspective, Alternative Investment Management Association president Kim Ivey said that for the vast majority of super funds he’d spoken to, hedge fund experiences had been positive
during the GFC. “The sense some people seem to have that all hedge fund investors were disappointed during the GFC, I think is a misnomer,” he said. “Yes, there were investors in hedge funds who may have gone into or invested in funds purely on the back of past performance or purely on the back of a brand or a name. “But what’s so important about investing in hedge funds is an understanding of what the strategy really is,” Ivey continued. “There’s so much diversity, so much dispersion, even inside a recognised strategy from manager to manager, much more dispersion of returns than there is in the traditional world. “So just going with one manager, believing that it’s a brand name and really not digging down into the risks and what are all the sources for the performance is a critical mistake.” Ivey also pointed out that the chief reason Australian hedge fund investors may not have been disappointed was, in fact, their GFC performance. “More than 50 per cent of Australian-based hedge funds actually outperformed the ASX200 during the calendar year 2008,” he said. “Many, particularly those in the managed futures and market neutral sectors, also exceeded cash returns during this period.” Yet according to Miller, the real test of hedge funds will not be during a period such as the one that we’ve just experienced where equity markets and credit markets themselves have delivered very strong returns. “Rather, I think the real test will be during the next crisis we experience,” he said. “In a strange sort of way, even as I say this, it will be very interesting to see how hedge funds perform in Continued on page 20
APRIL 2011 * SUPERREVIEW
20 HEDGE FUNDS
Hedging against the future ☞ Continued from page 19 light of a certain amount of weakness in markets following the Japanese tsunami. “At the end of the day, hedge funds have done well in recent times – but so have all risky assets,” Miller continued. “The thing that most institutional investors are looking for from their hedge funds is to provide diversified returns relative to the other sources of returns in their portfolio. “And realistically, the last 18 months haven’t been a very good test of whether that objective is being met.” Ultimately, it is apparent that the question of whether hedge funds survived the GFC well or emerged battered and bruised is a matter perspective and investor expectations. Yet irrespective of one’s standpoint in that argument, Mercer principal Harry Liem said that in recent months the hedge fund performance story had been a positive one. “So looking at the official numbers for hedge funds in 2010, based on the HFR [Hedge Funds Research] index, in US dollars the funds were up about 10.5 per cent,” he said. “So if you hedge that back to the Aussie dollar, you get a little bit more but given they do better when equities markets are a bit normal, rationalised or have recovered slightly, it was actually a pretty good year for hedge funds. “The hedge fund industry is basically back on track in that before the GFC happened, the industry’s assets were at about $1.9 trillion US dollars,” Liem continued. “That fell to as low as $1.4 trillion during the GFC, but they’ve actually got back to that $1.9 trillion mark now. “On the surface, it seems like the industry has managed to recover and is now tracking well.” Looking at individual strategies, and specifically at those that had SUPERREVIEW
led hedge funds’ overall recovery, Ivey said that there had been some wind in the sails of most recognised strategies this year. “The one strategy which is logical given the strength of equity markets post-GFC, but that has found it difficult to make money, is on the short selling side,” he said. “But most recognised strategies have been positive over the past 12 months. Those that have done better than others have tended to be strategies like macro which look at the thematic issues in marketplaces and tend to invest in deep and liquid markets.”
MULTI-STRATEGY FUNDS Adding further detail, JANA Investment Advisers principal for alternative investment solutions, Michael O’Dea, said that multistrategy funds had also been popular with institutional investors implementing their own hedge fund programs. “That is, multi-strategy funds with an event driven focus that typically invest in distressed securities, merger arbitrage and other corporate events,” he said. “These are managers who offer diversification benefits and the possibility of re-deploying assets within their universe of strategies depending on the relative attractiveness of each, though the drawbacks are that they tend to be less liquid and less transparent than many other single strategy hedge funds. “Overall, we favour strategies which have a low net market exposure and are therefore less sensitive to swings in market sentiment,” O’Dea continued. “We think that strategies like global macro that take top-down views on markets are positioned well to profit from large macroeconomic events, and bottom-up stock pickers in long short equity can target companies priced cheaply relative to peers or other segments of the market.
“But ultimately, it’s important to take advantage of a range of different opportunities and to diversify the portfolio as much as possible.” So with runs on the board during 2010 and with assets back to pre-GFC highs, it seems hedge funds should again tempt investors. But the question, and one already posed by Miller, lies in what hedge fund managers and investors have learned from their GFC experience and, more importantly, how they intend to implement their new knowledge. Ivey said that hedge fund managers and investors were both better placed simply because their understanding of what had occurred during the GFC was now much more complete. “At the time of the GFC, no one really understood the reason why everyone was hitting bids all over the place because it just wasn’t logical,” he said. “It didn’t make investment sense for those sorts of prices to be transacted, but afterwards I think investors – and not just institu-
“Overall, we favour strategies which have a low net market exposure and are therefore less sensitive to swings in market sentiment.”
tional investors here in Australia but investors all over the world – are now much more aware of the liquidity being forced out of markets. “And the proof of that heightened understanding post-GFC lies in the fact that by far the biggest influx of money that’s coming into the hedge fund industry over the past two years, again both here in Australia as well as globally, is coming from pension funds, insurance companies, banks, and large investors. It is not coming as
much from high-net-worth investors and private banks – those investors which were really the backbone of the hedge fund industry when it started out in its first 20 years,” Ivey continued. “But in creating those inflows, these investors have started to place a lot more emphasis on what they see as the cardinal sins and the remedies to those sins are trying to find out what are the sources of risk, what are the sources of return and what sort of businesses are the investors placing their money in. “In other words, they’re looking at the operational risks behind the business of hedge funds and I think that’s extremely prudent.”
STICKING TO BASICS O’Dea said that the GFC had been a reminder not just to hedge fund investors but to all investors to adhere to some basic investment principles. “The first of these is that liquidity is like oxygen; you only notice it when it’s not there,” he said. “Number two is ensuring there is a sufficient margin of safety.”
HEDGE FUNDS 21
O’Dea added that diversification was always important and pointed out that it was never a good idea to invest in complex models and strategies that weren’t well understood. “Another key learning has been that leverage doesn’t make a bad investment good and excessive leverage can be catastrophic,” he said. “And finally, there is no such thing as an investment guru. “The other risks of limited transparency, high fees, etc can be mitigated by a well thought out and structured program,” O’Dea continued. “There are many talented managers across the industry, and no segment of the market should be ignored just because of a label. “But the bottom line is that there are no infallible strategies to make money; common sense and good judgement are what are important.” For Miller the biggest change had been investors being far more forensic in trying to understand the market exposures embedded in hedge fund strategies.
“So trying to really understand the equity beta and the credit beta that are in hedge fund portfolios is something that is absolutely essential,” he said. “And that’s because the reason that the majority of investors invest in hedge funds is to access a skill premium rather than to access an equity risk premium or a credit risk premium. “Most investors have got more than enough of those sorts of premiums already in their portfolios and so what they ideally want to do is strip out other sorts of market premiums but, at the very least, understand the extent to which that presence exists,” Miller continued. “And that is so (a), they can make adjustments to other places in their portfolio to reflect that and (b) this is the other key learning, make sure that the fees that are being paid are only being paid in respect of the scarce skill that a hedge fund manager might bring to the table. “They really want to make sure that fees are not being paid for market exposures that can be very cheaply and easily obtained through other means other than hedge funds.” According to O’Dea, there are five big areas where gradual change is taking place in hedge funds investment. “Firstly, there is greater recognition of the advantages of investing via managed accounts, especially in liquid hedge fund strategies, where the assets are held in the investor’s (or a third party’s) name rather than the manager holding these assets in their own vehicle,” he said. “This helps limit the risk of fraud, provides the investor with total transparency, and affords the investor much greater control over the investments. “There is also a better understanding of the real drivers of returns of hedge funds and their risks,” O’Dea added.
“Some investors are using selective hedge funds as a complement to existing market exposures rather than investing in all the different hedge fund strategies.” O’Dea’s third area of change was in the benchmarking of hedge fund returns. He added that fairer and lower fee structures were also emerging. “Many investors are much more careful about the types of structures they are prepared to invest in as well,” he said. “For example, does the manager have the right to suspend redemptions? Is there a liquidity mismatch in the portfolio? “And lastly, a better knowledge of hedge funds is making investors turn the spotlight back on some of the portfolio construction practices of conventional balanced fund investing,” O’Dea finished. “So they’re asking if there’s too much of an emphasis on equities to generate returns. “What’s clear though is that with a carefully developed plan, a small allocation to hedge funds can play a very meaningful role in overall portfolio construction.”
their MER-type fees, then I think the danger for hedge funds is that they’ll become less relevant just given the amount of fee budget that they gobble up,” he said. “I’m hopeful though that MySuper will provide scope for trustees to construct portfolios in a way that has regard not so much to the absolute level of fees but rather to the expected level of performance net of all fees. “Personally, I think it would be a real shame if MySuper meant that funds abandoned what would otherwise have been compelling investment opportunities simply because the headline impact on fees was something that couldn’t be accommodated within MySuper,” Miller continued. “So I’m a little bit fearful that it might hap-
MYSUPER LOOMS Yet while hedge fund investment habits may have changed for super funds in the wake of GFC experiences, the reality is that they may have to change again within a MySuper environment. Though little is known of the upcoming legislation’s final form, it seems clear that fees will be a prime focus. So given the skill, and therefore fee, premium that exists, will hedge fund investment suffer? For Miller, the danger lies in how much emphasis MySuper places on the reduction of the management expense ratio (MER). “Naturally, we don’t yet know what the final MySuper regulations are going to look like but in the event that MySuper forces or encourages funds to reduce
pen, and if that does happen, then I think the consequences for hedge funds would be negative. “But I’d like to think there’d be recognition that it’s not the absolute level of fee that’s important, but rather the value derived from every dollar of fee that’s spent.” Bringing another option to the table, Liem said a number of Mercer clients had already made it clear that they wanted to get into hedge funds but didn’t want to pay heavy fees. “And for investors taking that view, there’s a number of products out there that can actually give them that,” he said. “These products actually do the
same thing as hedge funds but they do so on a mechanical basis and at much lower fees. “These sorts of mechanical replicators could be quite attractive for many super fund investors and they’ll be sufficient for those who are fee conscious,” Liem continued. “We’ve actually got enough supply now with managers to cover maybe 70 to 80 per cent of hedge fund strategies through replicators as a cheap core. “So while there’s a few out there, the fees can be something like 50 basis points plus say another 10 per cent performance fee and that’s way down from a 2 per cent management fee plus 20 per cent performance.” But if hedge fund manager skill is wanted, Ivey said that the unavoidable reality was that hedge funds were extremely active portfolios. “So the fees they charge are at a premium to not just index funds but to traditional portfolios as well,” he said. “But we hope that super funds look to whether hedge fund performance justifies their fees rather than at fees alone. “There’s always going to be that tension,” Ivey continued. “If you move into a MySuper product and you already have a consultant telling you that you’ve got to watch your MER and hedge funds, whether you’re paying one in 20 or even two in 20 in your normal superannuation product, I guarantee that same conversation is going to happen in the MySuper products. “So the message for superannuation funds and trustees is not to be penny-wise and pound-foolish when looking at the benefits; make sure you’re looking at the diversification of benefits and not just the basis point increase on underlying fees at the portfolio level.” Continued on page 22
APRIL 2011 * SUPERREVIEW
22 HEDGE FUNDS
Hedging against the future ☞ Continued from page 21 LOOKING AHEAD It seems evident that the year ahead will be an interesting one for hedge fund investment. But the guiding light for Miller is ensuring that the market risks embedded hedge fund portfolios are well understood. “I think the most successful hedge fund portfolios will be those that draw their risk and return from sources other than traditional equity and credit betas,” he said. “Understanding the liquidity profile and making sure that liquidity is there when you need it is critically important as well.
“But the final point is to make sure that the fees that you pay are a sensible reflection of the true underlying value that’s going to be added via skill,” Miller continued. “The last thing you want is to be paying excessive fees for returns that could be generated through conventional market exposures.” Focusing more on the hedge fund investment outlook, O’Dea admitted that 2011 was already shaping up in interesting fashion but he pointed out every year was interesting in investment markets. “The uncertainty created by the tension between supporting government policies with weak-
ening political resolve will create an interesting backdrop to investing in 2011,” he said. “At the moment, a potential opportunity comes from the fact that global companies are sitting on large stock piles of cash and at some point company management will be faced with a decision to (1) use it on capital expenditure; (2) return it shareholders; or (3) acquire other businesses. “Mergers and acquisitions could be poised for a flurry of activity and hedge fund managers in the merger arbitrage space are ready to take advantage if this unfolds,” O’Dea continued. “Overall though, we favour
strategies which have a low net market exposure and are less sensitive to swings in market sentiment. “We think that strategies like
global macro who take top down views on markets are well positioned to profit from large macroeconomic events, and bottom-up stock pickers in long/short equity can target companies priced cheaply relative to peers or other segments of the market.” Seeing similar opportunities, Liem said that the events outlined by O’Dea and the market dysfunction that they caused could not help but be a positive for hedge funds. “Bottom-up and top-down, the opportunities are out there and as long as markets remain slightly dysfunctional, astute hedge fund investors will be able to take advantage.” SR
Super Review’s monthly diary of superannuation industry events around Australia and abroad. APRIL NEW SOUTH WALES 6 – FSC Life Insurance Conference. Venue: The Hilton Hotel. 488 George Street, Sydney. 14 – ASFA Luncheon. Are we coming out of the GFC or just coming up for air? Panellists: Dave Marvin, chairman of Marvin & Palmer Associates; Steven Billiet, chief executive of ING Investment Management; Michael Dwyer, chief executive of First State Super; John Coombe, Sydney head of consulting and executive director of JANA Investment Advisers. Venue: The Westin Hotel. No. 1 Martin Place, Sydney. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.
Industry thought leader appointed University of Technology Sydney’s Professor Susan Thorp appointed as first chair of finance and superannuation.
ustralia’s first chair of finance and superannuation has been appointed at the University of Technology Sydney’s (UTS’s) Business School, with Professor Susan Thorp taking up the position. One of the financial backers of the role is the Association of Superannuation Funds of Australia (ASFA), which said the creation of the chair is recognition of the central role superannuation plays in the financial
VICTORIA 6 – ASFA Compliance Summit. Venue: Grand Hyatt. 123 Collins Street, Melbourne. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798. 6 – ASFA Luncheon. Investment Governance – It’s not just about being compliant. Speaker: Justin Arter, chief executive of Victorian Funds Management Corporation (VFMC). Venue: Grand Hyatt. 123 Collins Street, Melbourne. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.
QUEENSLAND 12 – ASFA Luncheon. SuperStream – Are you ready? Speaker: Gordon Williamson, general manager of member services at Telstra Super. Venue: Sebel and Citigate. King George Square. Cnr Ann and Roma Streets, Brisbane. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.
Fax details of conferences, seminars and courses to Super Review on (02) 9422 2822
After spending less than a year at Colonial First State (CFS), Marianne Perkovic has succeeded Paul Barrett as the new general manager for the CFS advice business. Colonial announced Perkovic’s appointment following Barrett’s recent move to ANZ to head up the bank’s advice division. Perkovic joined CFS in January last year as general manager for distribution, after heading up Count Financial since 2006. In her new role, she will oversee CFS’s advice brands, consisting of Commonwealth Financial Planning, Financial Wisdom, Whittaker Macnaught and BW Financial Advice. Perkovic assumed her new role on 14 March and will report directly to CFS chief executive officer, Brian Bissaker. T. Rowe Price has further ex-
health of most Australians. “Retirement income policy is fundamental in developing economic and social policy,” said ASFA chief executive Pauline Vamos. Professor Thorp is an academic and researcher in superannuation and finance, and it is hoped that her position as chair will help her to become a thought leader in the superannuation industry. The new chair is jointly fundpanded its Australian equities capability with a new appointment, while plans to hire another three equity analysts for its Sydney office are already underway. The company has appointed Viral Patel, formerly a research analyst with Alliance Bernstein’s Sydney office, to the newly created role of associate director of research for Australia. Patel will report to portfolio manager, Randal Jenneke, who was hired last June with the task of piecing together the equity investment management and research team. The company stated that enhancing its local investment capability would enable it to launch a differentiated Australian strategy for local and regional investors. BT Investment Management (BTIM) has appointed Justin Davey as a portfolio manager and a credit analyst in its income and fixed interest boutique. Davey moved from Challenger Financial Services and will manage a number of fixed income credit portfolios. He will also be the primary analyst on the financial, infrastructure and utilities sectors, and will work closely with income and fixed interest quantitative analysis and the risk unit in developing
ed by ASFA and for an initial three years by the Industry Super Network, the Sydney Financial Forum, the NSW Premier’s Office and the Paul Woolley Centre for the Study of Capital Market Dysfunctionality. credit models. During his career, Davey worked as an auditor, credit analyst on Wall Street and a rating analyst before he moved to the buy-side as a portfolio manager. His past employers include Standard & Poor’s, Citibank and Ernst & Young. Colonial First State Global Asset Management (CFSGAM) has expanded its global listed infrastructure team after securing $100 million in mandates from a financial services company and a corporate superannuation fund. Ofer Karliner has been appointed as senior analyst focusing on toll roads and energy pipelines, and will be based in Sydney. He joins the team from CP2 where he was head of transport infrastructure. Before that, he worked as a senior equities analyst with Macquarie Securities. Karliner’s appointment follows another recent addition to the team’s Hong Kong office, with senior analyst Jin Xu joining from Deutsche Bank. Peter Meany, head of global infrastructure securities with CFSGAM, said the appointments coincided with increased demand for the asset class from the institutional side. SR APRIL 2011 * SUPERREVIEW
THE OTHER SIDE OF SUPERANNUATION
Taming the beast HOSTPLUS is undoubtedly the most-used superannuation fund for employees working in the clubs and pubs industry and, according to Rollover’s last look, has been rewarding its members with perfectly acceptable returns over the past year or so. However he noted while watching yet another early season game of rugby league that the Hostplus logo was this
year appearing on the shorts worn by the Penrith Panthers who, in days of old, were known as the ‘mountain men’. In point of fact, anyone living in Penrith lives on the plains below the mountains, but Hostplus chief executive David Elia is no doubt hoping the team scales some serious heights this year, because the Panthers certainly do not come to the
competition with the same sort of credentials as the Melbourne Storm. Hostplus was last year a sponsor of the Melbourne Storm, but that relationship soured somewhat after the team was stripped of its points and previous premierships as part of the salary cap scandal. While Rollover reckons plenty of people will notice the Hostplus logo on the Penrith Panthers’ shorts, the sponsorship is likely to be far more about the number of the fund’s members employed by the vast Panthers Leagues Club than it is about the sustained winning form of the team in 2011. Perhaps the sole purpose of the sponsorship is to support the club that employs a healthy swag of the club’s members. SR
Taking the credit ROLLOVER is as aware as the next person that the way politicians sound can very much depend on the quality of their speechwriters. Sometimes speechwriters have succeeded in gaining some of the credit for the words spoken by their political masters, other times they have quite sensibly managed to remain in the shadows. It is with this in mind that Rollover offers the following introductory words from a speech by the Assistant Treasurer and Minister for Financial Services, Bill Shorten, to a Deutsche Bank Investor Conference in Canberra. “Welcome to the Bush Capital. This is a city, and certainly this part of the city, is one built along lines of symmetry and symbol. The natural amphitheatre for a national conversation formed by Mount Ainslie, Red Hill and the Brindabella foothills. The view line from the front of Parliament House across the lake to the War Memorial – deliberately to remind politicians of the consequences of their decisions. SUPERREVIEW
The uphill walk from Old Parliament House to the new Parliament building – reminding us of our history, our traditions and our progress. And the grass growing on top of this great structure where the legislature now meets – an invitation to the people of Australia to walk atop their political representatives – reminding those of us working beneath who is the boss.” Rollover leaves it to Super Review readers to decide whether the speechwriter should claim any of the credit. SR
After the carnage, cost cuts WITH the NSW election having resulted in a change of Government there has been plenty of speculation about whether the newly incumbent O’Farrell Coalition Government will embark on a round of cuts to the State public service. However Rollover understands that the new State Government will need to be very careful about the manner in which it goes about its jobs cuts and expenditure savings, in circumstances where a good many public servants remain on defined benefits arrangements. Rollover understands that the dreaded phrase “unfunded liabilities” has already been spoken. SR
Chasing the sun ON the issue of politicians, Rollover is reminded that it is only a matter of weeks now before Australia enters the winter months and the Federal Parliament goes into its annual winter recess – a time when sundry politicians find the time to travel overseas on ‘educational’ and ‘fact-finding’ tours. The politicians undertaking these tours seem to unerringly head for pleasant northern climes and return with their heads full of vital new information to assist their electorates just in time for the resumption of Parliament amid the nascent blossoms of spring. However it seems that politicians are not the only ones embarking on vital, overseas fact-finding tours this year with Rollover having been told of nearly a dozen superannuation fund executives who will be seeking to find new truths in Europe and the US over the winter months. He wishes them well on their educational journeys and expects their members will be apprised of their findings in due course. SR
Got a funny story? about people in the superannuation industry? Send it to Super Review and you could be raising a glass or two. Super Review is giving away a bottle of bubbly for the funniest story published in our next issue. Email email@example.com or send a fax to (02) 9422 2822.
Published on May 18, 2011
Published on May 18, 2011
Super Review is the leading monthly publication dedicated to servicing all segments of Australia’s superannuation and institutional investme...