Investment success at scale

Transcription

November 2011
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contents
November 2011 Investment Magazine 03
01
news
05_Australia falls short of pension gold
06_Don’t believe the investment hype
08_Funds embrace short-termism
14_imagining futures: scenarios analysis and investment
cover story
18_Super size me: investment
success at scale
The investment firepower and cost savings promised
by economies of scale have enraptured the Australian
superannuation industry. However, some investment chiefs
believe that bigger size brings a new set of problems that
can undermine performance. SIMON MUMME reports
roundtable
28_Unlimited: being direct with PE
secondaries
How should investors approach private equity
secondaries: by acquiring existing commitments or
by targeting underlying portfolio companies in these
programs? SIMON MUMME reports
features
24_Risk management in three
steps
Diversification, hedging and portfolio insurance are
three complimentary, rather than competing, ways to
mange investment risk, writes Stoyan Stoyanov
02
03
04 05
The bullish fundamental case for Asia ex-Japan debt should be tempered by fears
of illiquidity. SIMON MUMME reports
regulars
36_Can super serve all generations?
10_Editorial
As the superannuation industry grows it must be flexible enough to meet the
demands of all constituents, writes Andrew Whiley
12_Fiduciary Investing
38_Longevity: super’s next evolution
42_FSC Viewpoint
34_Why Asian debt buyers don’t like maturity
The superannuation industry has learned much in 20 years. Increasing longevity of
members will provide further lessons, writes Doug McTaggart
40_CFA Viewpoint
45_AIST Viewpoint
46_Unbalanced
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news
Australia falls short of pension gold
By Amanda White
Australia is capable of achieving
the elusive A-grading in the Melbourne
Mercer Global Pension Index, according
to its author, David Knox, if the country
adopts a number of regulatory reforms.
Knox, who is senior partner at
Mercer, says the biggest reform that will
improve Australia’s ranking will be an
increase in the superannuation guarantee.
This will have the effect of increasing
retirement income, as well as the value
of assets in the system, and so improving
sustainability.
If Australia combines this with
increased labour force participation, and
introduces some “integrity measures”, it
would be “pretty close to A-grade”, Knox
says.
He says Australian superannuation
fund member statements show what a
member’s account balance currently is,
but not what it is projected to be when
the member retires.
“This ‘integrity measure’ has been
adopted as regulation in some countries
and it serves to engage people,” Knox
says.
Australia has moved back into second
position in the index, from fourth last
year, thanks to an increase in the age
pension and an increase in the household
savings rate.
An increase in the age pension was
announced a few years ago, but it has
taken a while to be reflected in the latest
rankings.
“It has increased income for
Australia’s poorest but has also increased
retirement income for the average earner,”
Knox says.
In addition, an increase in the
household savings rate has contributed
to the financial security of people in
retirement, and served to improve the
country’s rating.
The Netherlands is ranked first in
the index for the third year in a row, and
Knox says Australia’s index fell short of
being the best in the world because of
lower levels of adequacy.
“The Netherlands does a couple
of things very well,” he says. “They
have a good base pension, and a good
replacement rate for the median
earner. They also have high coverage
of the workforce and level of assets
proportionate to GDP is high.”
But overall the index findings reveal
that many of the world’s retirement
systems are under significant stress
and even the world’s most advanced
retirement income systems require
ongoing reform to ensure they remain
robust.
Knox says there are a couple of
common reform agendas that would
improve the systems around the globe.
“There needs to be recognition of
the aging population; and an increase in
the state pension age or retirement age,”
he says. “If people are working longer,
then adequacy is increased and they are
drawing down for fewer years.”
The US, the UK and Australia have
all indicated a move to encourage greater
labour force participation, he says.
Also globally, there could be
encouragement of a higher coverage of
private pension.
“In some countries it covers only half
the workforce,” Knox says.
Knox says he hopes the Mercer index
will be a document considered by policy
makers around the globe.
The Mercer report, now in its third
year, is funded by the State Government
of Victoria and one of the conditions
of continued funding by the Victorian
Government was that two additional
countries were added each year.
This year Poland and India were
included, and next year Korea and
Denmark are slated for inclusion.
The index is calculated by combining
values that are awarded for adequacy,
sustainability and integrity, with about
half of the index questions sourced from
international groups such as the IMF and
the OECD, while the other half are from
Mercer Global Pension Index
Country
David Knox
2011
2010
2009
Netherlands
1
1
1
Australia
1
4
2
Switzerland
3
2
-
Sweden
4
3
3
Canada
5
5
4
UK
6
6
5
Chile
7
7
7
Poland
8
-
-
Brazil
9
8
-
10
10
6
USA
There needs
to be recognition of the
aging population; and
an increase
in the state
pension age
or retirement
age. If people
are working
longer, then
adequacy
is increased
and they
are drawing
down for
fewer years
Singapore
11
9
8
France
12
11
-
Germany
13
12
9
Japan
14
13
11
India
15
-
-
China
16
14
10
Mercer.
“We try to break it down into simple
questions to reduce subjectivity,” Knox
says.
With regard to investments,
countries are scored on their allocation to
growth assets.
Knox says Mercer believes between
50 and 60 per cent of a countries’ pension
assets should be in growth assets, as an
indication of diversification.
The ratings of countries’ pension
systems are affected if they fall outside
this range.
Australia, for example, has more than
60 per cent allocated to growth assets
and was rated down because of that.
This year Mercer also included a
“Gold Standard” as an indication on how
to achieve the elusive A-rating.
“We attempted to show [that] for
a developed economy, which applies
regulation and the introduction of
appropriate policies, it is possible to reach
the A-grade.”
opinion
06 Investment Magazine November 2011
Don’t believe the investment hype
DANIEL GRIOLI of FuturePlus
challenges some recent trends in
asset allocation.
I
n my last article, we considered
how the global financial crisis has
resulted in a renewed focus on asset
allocation. We also considered the importance of valuation and why trying to
identify catalysts for changes in valuation
can result in missed opportunities. In this
article I would like to tackle the notions
that shifting asset allocation is a new
idea, that minimising volatility reduces
risk, and consider why the best way to
approach asset allocation is to start with
a blank sheet of paper.
Asset allocation:
a new idea?
For a long time, prudent investors
have been shifting their asset allocation
to reduce risk and position their portfolio
to capitalise on long-term opportunities.
In his book, The Intelligent Investor, first
published in 1949, Benjamin Graham
wrote:
“We have suggested as a fundamental
guiding rule that the investor should never
have less than 25% or more than 75% of his
funds in common stocks, with a consequent
inverse range of between 75% and 25% in
bonds… According to tradition the sound
reason for increasing the percentage in
common stocks would be the appearance
of the ‘bargain price’ levels created in a
protracted bear market. Conversely, sound
procedure would call for reducing the
common-stock component below 50% when
in the judgement of the investor the market
level has become dangerously high.
“These copybook maximums have
always been easy to enunciate and always
difficult to follow - because they go against
that very human nature which produces
that excess of bull and bear markets.”
Why would a common sense
approach to investment such as that
described above fall out of favour?
As Graham points out, the discipline
required to invest this way goes against
human nature. Being contrarian - which
is what such a strategy requires - only
comes naturally to a small minority of
people. The rest of us have to fight our
inclination to draw comfort from holding
opinions that are consistent with those of
the majority.
very different investment outcomes.
“Dynamic” asset allocation
is born
Risk: capital loss
or volatility?
As considered in my previous article,
the popularity of financial theories
such as mean variance optimisation,
the capital asset pricing model and the
efficient market hypothesis influenced
many investors to re-define risk.
Instead of being permanent loss of
capital, risk became the volatility of
investment returns. The need to reduce
risk by shifting away from overpriced
assets towards underpriced assets
became less important to investors as
they increasingly focused on reducing
volatility.
In the quote above, Graham
highlights the importance of valuation
in asset allocation, as it helps to reduce
risk by selling assets when prices are high
and positioning the portfolio to take
advantage of the opportunity of buying
assets when prices are low. All else being
equal, buying an asset at a cheaper price
is less risky, as a lower price equals a
greater margin of safety.
This is the opposite of how an asset
allocation strategy focusing on volatility
would behave. Such a strategy would
reduce its exposure to assets that have
fallen in price, as a rise in volatility usually
accompanies a fall in price. The corollary
of this is that assets are less volatile
when their price has risen, so seeking to
minimise volatility has the potential to
bias a portfolio’s asset allocation towards
expensive assets.
This highlights an important point.
When it comes to asset allocation, the
definition of risk that is used - permanent
loss of capital or volatility - may result in
Daniel Grioli
When it
comes to
asset allocation, the definition of risk
that is used
- permanent
loss of capital or volatility - may
result in very
different
investment
outcomes
How do you pitch an old-fashioned
idea such as asset allocation to a new
audience? The marketing of emerging
markets as an investment idea gives us
a clue. Antoine van Agtmael came up
with the idea to rename less developed
countries “emerging” markets. He did so
after struggling to raise a fund to invest
in what were then known as third-world
countries. Van Agtmael recounts:
“We had the goods. We had the
data. We had the countries. We had
the companies. What we did not have,
however, was an elevator pitch that liberated
these developing economies from the
stigma of being labelled as ‘Third World’
basket cases, an image rife with negative
associations of flimsy polyester, cheap toys,
rampant corruption, Soviet style tractors,
and flooded rice paddies… Racking my
brain, I at last came up with a term that
sounded more positive and invigorating:
Emerging Markets. ‘Third World’ suggested
stagnation. ‘Emerging Markets’ suggested
progress, uplift and dynamism.”
Just as third-world equities would
never sell, pitching the idea of going
back to investing like we did in the past
- focusing on value rather than volatility would be a tough sell. Humans are biased
toward action; therefore a name such
as “dynamic” asset allocation naturally
sounds appealing. It also implies that
the alternatives are static, perhaps even
boring.
DAA vs blank paper
Most dynamic asset allocation
begins with a strategic asset allocation,
which is calculated using the long-term
equilibrium risk and return assumptions
for each asset class. In practice, markets
are rarely in a state of equilibrium - the
risk and return characteristics of each
asset can deviate significantly from
long-term assumptions. Dynamic
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opinion
asset allocation is then implemented
as an overlay to compensate for the
difference between long-term equilibrium
assumptions of risk and return, and
current economic and market conditions.
The danger of this approach is that it
anchors the portfolio’s asset allocation to
the strategic asset allocation. Anchoring
is a cognitive bias, which describes the
common tendency to rely too heavily
or to “anchor” on one fact or piece of
information when making a decision.
Once the anchor is set, there is a bias
toward adjusting or interpreting other
information to reflect the “anchored”
information. Through this cognitive bias,
the first information learned about a
subject can affect future decision-making
and information analysis.
How does strategic asset allocation
anchor dynamic asset allocation? For
example, a portfolio has a strategic
asset allocation of 60 per cent shares
and 40 per cent cash. As the fund
manager responsible for the portfolio,
you are concerned that equities appear
significantly overvalued and so you decide
to take a dynamic asset allocation tilt of
-5 per cent shares/+5 per cent cash. Your
portfolio asset allocation is now 55 per
cent shares and 45 per cent cash.
Did you notice the problem?
Instead of considering cash and shares
individually, using valuation, technicals
and sentiment to form an opinion of the
possible return and risk for each asset,
you have begun with an anchor - a 60
per cent shares and 40 per cent cash
portfolio - and positioned the portfolio
relative to the anchor. The anchor has
the potential to prevent you from fully
analysing any new information and
investing accordingly. It creates a mindset
that focuses on adjustment to current
values - in this case, the strategic asset
allocation - rather than the absolute value
of each asset.
One method of avoiding the pitfall
of anchoring is to start with a blank
sheet of paper. Imagine that the portfolio
is currently invested 100 per cent in
cash. For each investment ask yourself
the questions: Given what I now know,
would I expect the investment return
Investors
should investigate new
information
and test that
their assumptions
still hold, as
opposed to
anchoring
or basing
decisions on
assumptions
that may no
longer be appropriate
to be greater than the return on cash?
Am I being adequately compensated for
the additional investment risk? If the
answer to these questions is yes and it
corresponds to an existing investment,
then fine. However, if the answer is no,
then the investment should be sold or
at the very least subjected to further
scrutiny.
Selling all of a portfolio’s assets
and starting from scratch isn’t usually
possible. However, the discipline of
approaching the portfolio as if it were a
blank sheet of paper encourages investors
to re-visit their assumptions. It allows
investors to investigate new information
and test that their assumptions still
hold, as opposed to anchoring or basing
decisions on assumptions that may no
longer be appropriate.
This raises an interesting question:
Assuming that we review our asset
allocation with a metaphorical blank
sheet of paper, how do we assess the
potential risk and return of each asset
class? This will be considered in my next
article.
Funds embrace investment short-termism
By By Sam Riley
An MSCI global asset owners survey
covering more than $US 5.5 trillion in
assets under management shows funds
are taking an increasingly short-term
focus and putting a greater emphasis on
risk management.
The 2011 Global Asset Owners
Survey, Back to the Future of Risk
Management, which includes 85
participants in 26 countries, also
reveals Australian asset owners have
substantially higher levels of external
management and more funds allocated
to equities than asset owners from other
countries.
Frank Nielsen, MSCI executive
director of research, says the number of
funds using stress testing has increased
by almost 300 per cent since 2009.
Participants cite market risk,
counterparty risk and liquidity risk as the
top three risk concerns.
Funds are also becoming increasingly
short-term in their outlook, with the
majority of funds surveyed shortening
their strategic asset allocation horizon
from three years to one.
Nielsen says the survey reveals that
the current uncertainty in markets is
producing a short-term outlook and a
greater focus on risk management.
“There is a risk that they [asset
owners] are basically overreacting now
to the recent crisis and have become
too dynamic and too responsive and are
forgetting that they have a long-term
investment horizon,” he says.
When it comes to Australian asset
owners, 85 per cent of their assets are
managed externally, which Nielsen says is
a substantially larger proportion relative
to other regions.
The number
of funds
using stress
testing has
increased by
almost 300
per cent since
2009
European funds have on average
less than half of their assets externally
managed while in North America the
proportion is just over 60 per cent.
Australian asset owners surveyed also
have an average of 60 per cent allocation
to equities compared to 43 per cent for
funds globally.
Australian funds also have
substantially less in bonds, allocating 12
per cent on average compared to 37 per
cent for funds in other regions.
The alternatives allocation for
Australian funds is in line with the global
average, which is around 20 per cent on
average of the portfolio.
Almost all Australian funds in the
survey invest in hedge funds and require
transparency, such as aggregate risk
exposures in relation to liquidity and
other risk information.
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without taking account of any particular investor’s objectives or financial situation. An investor should, before making any investment decisions, consider the
appropriateness of this information, and seek professional advice, having regard to their objectives and financial situation.
editorial
For sale: 12% super
I
n November 2010, Andrea Forbes,
senior policy adviser to Bill Shorten,
told attendees at an industry roundtable in Canberra that the argument to
boost the Superannuation Guarantee
(SG) to 12 per cent needed broader
media coverage.
She wanted coverage of the policy
push to extend beyond the trade and
financial press to metropolitan dailies
with broader readerships. Her intention
was clear: the Minister for Financial
Services Superannuation wants the
debate heard by all Australians.
On October 17, Shorten featured in
a policy roundtable convened by Conexus
Financial, publisher of Investment
Magazine, in which consumer advocacy,
economics and investment professionals
debated whether the boost to 12 per cent
SG will benefit working Australians. It
was covered by 7.30 that night.
The story asked questions that
Shorten and the industry must answer
to convince the public why more super
is necessary. Super asks a lot of workers:
why should they forgo more of their
salary now - in addition to potential
wage increases - for the promise of more
money later? In the story, Shorten’s
answer was that the system is successful
and will continue to be so. Indeed, the
universal benefit and worthiness of super
to Australians and the national economy
are clear to this magazine.
Some thought otherwise. Nick
Gruen from Lateral Economics argued
that people should be allowed to satisfy
mortgage demands before contributing to
super. Eva Cox, a feminist academic and
commentator, opposed an SG increase
because super is taxed at a flat rate of 15
per cent for all people. Displaying her
flair for soundbites, she called it a “welfare
system for rich men”.
Cox also said the finance industry
had benefited inordinately compared
to the services it provides to fund
members. “There is an awful amount
of people that have got their snouts in
Simon Mumme
investment
magazine
November 2011- Issue 78
Editor: Simon Mumme
[email protected]
(02) 9227 5712, 0438 768 663
Head of design: Saurav Aneja
[email protected]
(02) 9227 5709, 0431 012 528
Publisher: Colin Tate
[email protected]
(02) 9227 5702, 0412 641 099
Associate publisher, Investment Magazine
& I&T News:
Laurence Jarvis
[email protected]
(02) 9227 5704, 0466 324 707
Adviser market sales - agencies: Peter Balinski
[email protected]
(02) 9227 5703, 0410 129 128
Printing: Sydney Allen Printers
Mailhouse: D&D Mailing
There are
big questions
that Shorten
and the industry must
answer to
convince the
public why
more super is
necessary.
the superannuation trough,” she said,
referring to how numerous “agents”
in the industry - funds managers and
other service providers, and indeed
media and conference companies - incur
significant costs that are ultimately paid
by members.
Soon after the 12 per cent campaign
was launched, Ian Silk, CEO of
AustralianSuper, said a boost to 12 per
cent SG is a massive “free kick” for the
industry. To justify this privilege it must
prove it is capable of delivering valuefor-money investment services to its
mandatory customers. It must deliver
what it promises - and be seen to do so.
Corrections
In the September issue of Investment
Magazine, Ian Robertson of Local
Government Super (LGS) was
incorrectly named as chair of the fund.
John Beacroft is the chair of LGS.
Robertson is a trustee.
Factual errors were also made in the
article “Funds choose the Bluedoor”.
Investment Magazine provides the
following clarifications:
•AXA has invested $40 million in the
North administration platform, not
$40m in the Bluedoor solution;
•Bluedoor is available as a complete
system and can be implemented in
full or in a phased approach;
•Bluedoor is purpose-built for the
internet and has enabled web-based
transactions since its inception; and
•Enhancements made through
ongoing research and development
are available to all clients.
Research & Subscriptions: Danielle Elliott
[email protected]
(02) 9227 5718, 0431 732 546
ISSN 1838-8949
Subscriptions are $99 inc GST per year (11 issues)
within Australia
Circulation: 3,942
Investment Magazine is published by Conexus
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Exclusive Media Partner of
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fiduciary investing
fiduciary investing
on the
record
The investment committee of Media Super has
instituted a number of major alternative investment
decisions in the past year,
writes SAM RILEY.
W
hether it is sitting on the
board of Media Super or
in his previous job as chief
executive of the printing industries’ peak
body, Philip Andersen is no stranger to
adapting to change.
He was the industry representative
of Print Super when it had just $150
million under management and was
part of the investment committee that
reorganised Media Super’s external
managers when it was born from the
merger of Print Super and Just Super in
2008.
This year Andersen retired after
19 years as the chief executive of the
Printing Industries Association of
Australia, having overseen a sea change
in printing driven by the rise of online
competition.
As chairman of Media Super’s
investment committee, he is part of a
team that is spearheading changes at the
industry fund, which now boasts more
than 125,000 members and $2.6 billion
in assets under management.
Andersen says the committee has
had a lot on its plate this year with
discussions across a broad range of
subjects, including to what extent
the fund should hedge the currency
exposures of its larger offshore
investments.
How to best increase the fund’s
exposure to private equity and
infrastructure has also been the focus of
the committee, as has implementing the
commitments the fund made when it
became a signatory last year to the UN
Principles for Responsible Investment.
Andersen says the fund now hedges
around 20 per cent of its currency
exposure but discussions have centred on
whether to increase that.
“A lot of our peers are up around 50
per cent, and we are having some papers
prepared to look and see if we should
make changes there,” he says.
The recent fall in the Australian
dollar has sharpened the focus of funds
on managing their currency exposures.
In 2010 the fund appointed its first ever
currency overlay manager, Tactical Global
Management (TGM), to passively
manage currency exposure.
The fund and its main asset
consultant, Frontier Investment
Consulting, also carry out stress tests to
ensure that, if the Australian dollar fell
sharply, the fund would have enough cash
flow to maintain the currency forward
contracts TGM have put in place.
The currency overlay is a reflection
of the fund’s greater scale, which has seen
Media Super bolster its in-house capacity
in the past few years.
Andersen highlights the appointment
of chief investment officer Jon Glass in
2009 as a pivotal moment for the fund
because it brought a greater focus on
risk management and the investment
processes of the fund.
“We are now, for instance, looking
at value at risk (VaR), and we also look
at stress testing, and we do liquidity
stress testing on the balanced options,”
Andersen says.
While Glass says the fund has
maintained traditional asset buckets
rather than moving to a risk allocation,
they are now looking at risk “across the
portfolio”.
Glass has also overhauled the fund’s
hedge fund and private equity approach
by moving Media Super out of fund-offund vehicles.
The move was driven by concerns
fiduciary investing
about the transparency and the
underlying risk of fund-of-fund vehicles.
Glass has, in the past, also raised
concerns about the fee structure of hedge
fund-of-fund products.
In September the fund appointed
private markets specialist Quentin
Ayers to provide advice about selecting
private equity managers in Australia and
overseas.
About 6 per cent of Media Super’s
assets were previously invested in private
equity fund-of-fund vehicles and Media
Super will let these commitments run
down as it looks to appoint managers
over the next three years.
“Private equity provides a
diversification away from the volatility
that we are experiencing in public equity,
especially if you hold the view that
public equity will remain volatile for the
foreseeable future,” Andersen says.
Frontier will continue to advise the
fund on its overall asset allocation and
how much it holds in private equity.
The fund
has, in the
past, also
raised concerns about
the fee structure of hedge
fund-of-fund
products
Andersen says that currently its most
popular option, the balanced option,
has 28 per cent in Australian equities,
22 per cent in international equities, 3
per cent in private equity, 3 per cent in
international private equity and 12 per
cent in infrastructure.
The balanced option also consists of
9 per cent in direct property, 5 per cent
opinion
in “alpha opportunities”, 15 per cent in
diversified fixed interest and 3 per cent
in cash.
Media Super allows its members to
design their own investment strategy
from four pre-mixed investment
options and six asset-specific investment
options - including a socially responsible
option.
Imagining futures: using scenarios
analysis in investment strategy
Chris Condon explores two
disciplines that can prepare investors
for the future.
“S
cenarios analysis” is an
idea that many investment
practitioners say they use in
the process of developing their investment strategies. But it can mean different
things to different people. In this article I
explore two different notions of scenarios
analysis that I have been exposed to in
recent times. No doubt there are other
interesting ideas in this space and by
writing this note I am inviting others to
share their thinking.
scenarios analysis
The first concept is one that was
introduced to me a number of years ago
by Susan Gosling, a former colleague at
MLC who wrote “A Scenarios Approach
to Asset Allocation” in The Journal of
Portfolio Management. The concept,
as developed by Susan, together with
others in the MLC investment team,
is principally designed to improve
asset allocation. It does this by deeply
imagining a set of possible futures rather
than shoehorning past returns into the
convenient, but often inappropriate,
stricture of the normal distribution, as
implied by mean/variance analysis.
The second concept, pioneered by
Shell last century, has been promoted
by Peter Schwartz, who was a member
of Shell’s strategic planning group. It
involves organisations building narratives
Chris Condon
opinion
for different futures, rehearsing their
responses if those futures were to
eventuate, and thus becoming agile in the
face of a changing environment. I thank
Paul Scully, a trustee of NSW State
Super and a long-standing friend in the
investment industry, for introducing me
to this thinking.
The two concepts are different;
they live in different domains. In this
article I will briefly describe some of
the features of each, and conclude with
some observations common to both
approaches that may help funds improve
the way they think about asset allocation.
Art of the Long View
I start with the Schwartz concept,
as it is intuitive and paints on a broad
canvass. Organisations and individuals
can use it to prepare for an uncertain
world. By designing blueprints for
responding to different potential
futures, organisations are better able
to respond quickly when the world
changes. This improves their chances
of survival and can give them the jump
on their competitors. They can make
their organisation deliberately adaptive.
Sometimes these blueprints will indicate
immediate actions that are inexpensive if
the risky future is not realised, but pay off
handsomely if it is. This approach seems
like common sense. And in a way it is.
But in my experience, most organisations
only do this implicitly, if at all. Schwartz
suggests that this is inefficient and
insufficient.
The Art of the Long View: Planning
for the Future in an Uncertain World is the
title of Peter Schwartz’s 1991 book. In
it he discusses the technique of planning
for different scenarios. He brings this
discussion alive by using examples of the
day. As an aside, it is interesting to look
back at how a futurist in 1991 considered
how the world might change in the years
to 2011.
Some of the trends he postulated
are bang on. Many have withered. And
he missed others. But the value of his
thinking is not in the accuracy of his
predictions, but in how he suggests
By designing
blueprints
for responding to different potential
futures, organisations
are better
able to respond quickly when
the world
changes.
This improves their
chances of
survival
and can
give them
the jump on
their competitors
firms should prepare for the future. A
firm relying on a single world view may
flourish if that future is realised. But this
will be down to luck, not prescience. And
the firm will most likely be even more
susceptible to a fall, as success inevitably
breeds contempt.
Instead, Schwartz suggests firms
should imagine a number of different
possible futures. These do not have to be
probable, just possible. In fact, thinking
about likelihood is poisonous to effective
development of specific scenarios.
It narrows perspective and distracts
managers from developing a narrative
for the specific future in question. This is
because assigning probabilities requires
managers to compare and rank scenarios,
anchoring thinking in the most likely
ones.
Schwartz likes to label his scenarios
with pithy and evocative names. Three
examples in his book are:
• “New empires”: a win-lose scenario
in which the trend to globalisation
degenerates to regionalism, with
a number of protectionist trading
blocs. Progress is inhibited by giant
bureaucracies, both government and
corporate. This is a bleak and conflictprone world. I am happy to say it has
not eventuated, but I do worry about
a pervasive complacency that does
not recognise the fragility of current
practices and institutions that promote
international cooperation and trade.
• “Market World”: a win-win
scenario in which a multicultural world
is full of entrepreneurialism, hope and
harshness - a smart form of capitalism
where international institutions set rules
and standards, enabling meritocracy
to survive across the world. There is
nowhere to hide from what economist
Joseph Schumpeter called “creative
destruction”. There will be losers,
especially those who had been cosseted
from market forces. But overall the pie
is much larger, and billions of people
will have been lifted from poverty. This
scenario has not been realised. It does
not include the mercantilist policies of
many large emerging countries. And the
regulators forgot their important role.
But many of the attributes of such a
future have come to pass. Planning for
such a future would have paid off.
• “Change without progress”: this
is the dark side of “Market World” - full
of chaos and crisis. The self-interest of
capitalism is not adequately controlled
by regulators. International institutions
are undermined by nationalistic rivalry.
The divide between rich and poor
deteriorates, currencies fluctuate wildly
and Europe disintegrates. This too has
not eventuated, but some of the features
of the global financial crisis resonate in
this scenario.
Armed with such narratives, firms
plan and rehearse for the set of future
scenarios. As the world evolves these
plans evolve to reflect differences
between the emerging reality and the
most prescient scenario. Firms using this
approach can quickly adjust previously
considered plans, putting them at a
significant advantage to competitors who
are surprised by a changing world.
Forget mean/variance
Whereas Peter Schwartz’s approach
is in the domain of business strategy,
Susan Gosling’s scenarios analysis is
focused on investment strategy: how
institutional investors should allocate
to different asset classes to get the best
future return and risk outcomes. It too
involves imagining narratives about
potential futures. However, it is more
structured in that it requires explicit
forecasts of investment returns from
each candidate asset grouping for each
scenario. History is often used as a
guide to developing these forecasts, but
judgment is critical, and the approach
encourages the imagination of futures
that have not been encountered in the
past.
Before working with Susan on this
concept, I would look at a historical
series of multiple decades as a guide to
estimating the statistical distribution
of returns for different asset classes.
This history would tend to drive the
covariance matrix assumed in the asset
opinion
allocation process. I would guesstimate
the means of the return distributions
using forward-looking judgment, based
on the notions such as economic growth,
productivity improvements, real interest
rates and the equity risk premium. I then
used a simple form of scenario analysis,
in which I would perturb the assumed
means (and sometimes the components
of the covariance matrix) in a type of
sensitivity analysis that recognised
uncertainty inherent in the assumptions.
My purpose was to discover a set
of candidate asset allocations that were
robust under a range of conditions
and recognised the known issues in
the mean/variance model, and in the
assumptions used by it. In other words,
I was guarding against the “garbage in/
garbage out” phenomenon.
Susan turned that approach on its
head. She eschewed mean/variance
analysis, which essentially assumes that
investment returns conform to a simple
parametric distribution, such as the
normal distribution. Instead, return
distributions in Susan’s approach are
non-parametric. They are built from
the bottom up using judgment in the
form of plausible narratives about a
set of different future worlds, and how
asset returns may look in those different
futures. The result is a non-parametric
distribution of returns, often with the
leptokurtic characteristics observed in
historical returns.
How do you come up with scenarios?
Start with getting some thoughtful
people in a room, with plenty of good
coffee and post-it notes for a no-holds
brainstorming session. Many of the
techniques Peter Schwartz discusses in
his book are useful. Create narratives.
Make it fun. Don’t let anyone say: “The
chances of that happening are slim”. The
idea should be to flush out the possible,
not the probable. Do this as a group in an
environment of creative dialogue.
You should also inject external
thinking into the process if possible,
but only after the creativity of the team
wanes. You should guard against external
ideas stifling originality. With that caveat,
here are some ideas I recently came across
in a survey conducted by The Economist
Intelligence Unit. That team developed
24 scenarios and asked 800 respondents
to assess the likelihood of each, and its
impact on their investment portfolio.
The six scenarios viewed as most
likely were:
1.Further political turmoil in the
Middle East;
2.The Internet and social media
are a catalyst behind rapid political and
economic change around the world;
3.Pension funding crisis deepens in
developed countries;
4.High inflation forces policy
tightening in emerging markets;
5.Widespread social unrest caused by
rising food and commodity prices; and
6.Oil price spikes to US$150 a
barrel.
Interestingly, only the second scenario
was viewed as having a positive impact
on investments. These respondents were
pervasively pessimistic. This may well be
a sign of the times. But I suspect that it
is generally easier to imagine what can go
wrong than what can go right.
Personally I would add a scenario
entitled something like, “Greying
boomers continue to work and play hard”.
Under such a scenario work would blur
into retirement and boomers in their
seventies would continue to make a
huge contribution to economic activity
through paid and unpaid work, and
would consume hard in pursuit of active
leisure.
The next step is to forecast asset
class returns for each asset grouping
under each scenario. This can be done
using simple determinist return models.
Don’t worry about risk at this point. The
idea is to imagine what return could be
generated by an asset class if that scenario
were to eventuate.
Here is an example for Australian
equities in a scenario that worries
me - one in which China’s demand for
Australian resources diminishes as its
pace of building infrastructure and
housing decelerates. In this scenario the
world generally recovers from today’s
How do you
come up with
scenarios?
Start with
getting some
thoughtful
people in a
room, with
plenty of
good coffee
and post-it
notes. Create
narratives.
Make it fun.
Don’t let
anyone say:
“The chances
of that happening are
slim”
economic malaise, and China itself grows
- but in industries that are not as resource
intensive. This has an especially negative
impact on Australia. The long mining
boom falters, with a flow-on to other
sectors, such as housing and banking.
Real earnings per share decline over
five years, with concomitant impact on
reinvestment and dividends. Moreover,
the value of Australian shares is rerated
downwards as a reflection of pessimism
and/or a better understanding of the
risks inherent in this narrow economy.
Using a simple model with simple
assumptions, it is not difficult to arrive
at a nominal total return on Australian
equities in this scenario of 3 per cent
per annum over five years. An awful
situation, but one that is entirely possible.
Similar calculations are also
performed for all other asset classes and
for all scenarios.
This requires a bit of work, but it is
not difficult. It is best to keep the number
of scenarios small, and to use aggregated
asset groupings. The key is to ensure that
the narratives for each scenario are clearly
and obviously evident in the derived
returns. A test of this is to ensure that
everyone in the team can approximately
reproduce any rate of return using the
back of a small envelope and a calculator.
One point of difference between
this scenarios model and the approach
promoted by Peter Schwartz is in
the number of scenarios. Schwartz
recommends that only a handful of
scenarios be considered, even suggesting
that three is sufficient. But in doing so
he is at pains to emphasise that you
should not fall into the trap of thinking
in terms of base case, good and bad
scenarios. These are not narratives,
just perturbations on narrow thinking.
Instead, go to the effort of developing
a narrative, using the tools of fiction
writers, including plots and even
characters and location.
On the other hand, the scenarios
modelling technique developed by Susan
Gosling will often use 20 to 40 scenarios.
The richness of this approach is lost if
the number of scenarios is too small.
opinion
But I do believe that the benefits
of parsimonious use of scenarios
(that is, keeping it real and tractable)
outweigh any potential benefits of
greater granulation.
Similarly, the number of asset
groupings should also be kept as
small as possible. Your return models
may require some degree of building
from the bottom up. For instance,
estimating the returns of equities
in major countries (or industries)
may be necessary to generate global
equity returns. But this requirement
should not necessarily drive the
number of asset groups over which
you are making asset allocation
decisions. After all, strategic asset
allocation should be used for no
more that setting the overall shape
of the fund’s portfolio; it should
not result in artificial constraints
on the investment teams that select
individual investments.
The next stage in this process
is to assign probabilities to each
scenario. Once again, this requires
judgment. Perhaps the easiest
way to do this is to use a small
number of “likelihood labels”, such
as “likely”, “possible”, “plausible” and
“unlikely”. Each label could be given
a weight, such as 10, five, three and
one respectively. Then assign each
scenario a likelihood label. The
probability of a scenario is then just
its weight divided by the sum of the
weights.
The result is joint nonparametric probability distribution
of rates of return for each asset
grouping. This is akin to the joint
normal probability distribution as
described by means and covariances.
But there is a crucial difference:
the non-parametric distribution is
derived from careful thinking about
the future, rather than shoehorning
the past into the normal
distribution.
From here the investment team
can apply stochastic asset/liability
analysis to discover investment
strategies that are likely to deliver robust
outcomes for the investment objectives of
the fund. This non-trivial task is beyond
the scope of this article.
So what?
Using scenarios analysis means
that you don’t have to be hidebound
by the convenience of mean/variance
analysis. It’s impossible to forecast the
future - so don’t. Instead, imagine a set
of possible futures. Have fun creating
a plot (with characters, if you like) for
each scenario. Develop the qualitative
narrative, and then turn over an envelope
and guesstimate how each key asset class
may perform in each narrative. You don’t
have to be convinced that that future
will occur. But thinking about it in these
terms will make you better positioned if
the world moves in that direction.
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cover story
The investment firepower and cost savings
promised by economies of scale have enraptured
the Australian superannuation industry. This
has instilled in some funds an urge to merge
in order to enjoy the benefits of being large.
However, some investment chiefs believe that
bigger size brings a new set of problems that
can undermine performance.
SIMON MUMME reports.
T
he quest of many superannuation funds, to
create optimal investment strategies at the
most reasonable cost, has spurred some of
them into mergers to reap the benefits of being large.
Big funds can, for instance, staff more investment
professionals to research investment opportunities
and risks more thoroughly; use their size to access
strategies run by highly sought-after investment
managers; negotiate lower fees and preferential
commercial terms with service providers, such as
fund managers, custodians, administrators and
wholesale insurers; and internalise operations that
were previously outsourced to these providers.
Bigger size gives transformative opportunities to
funds.
“Scale is seductive,” admits Sam Sicilia, CIO of
the $10 billion Hostplus. But the fund is resisting
this siren song until it sees incontrovertible evidence
that size is crucial to investment excellence in
superannuation.
All debates about scale in Australia refer
to the operations of the nation’s largest defined
contribution fund, the $42 billion AustralianSuper.
Ian Silk, CEO of the fund, has overseen its attempts
to exploit the benefits of the decreasing unit cost of
its operations as the fund has grown. He has learned
that size, by itself, is worth nothing.
Silk says the revered benefits of scale in a
competitive investment market do not come
automatically with increased funds under
management.
“We have the latent potential. But the question is
whether you can exploit it for stakeholders,” he says.
Doing so requires investing in skilled people,
resourcing them with the technology and systems
to extract scale benefits and then making sure it
happens.
bullseye
Mark Delaney has first-hand experience of how
greater scale can impact an investment portfolio. He
managed investments for the $3 billion Australian
Retirement Fund (ARF), which merged with
the Superannuation Trust of Australia to form
AustralianSuper, at which he is CIO and commands
a $42 billion portfolio and a team of 30 investment
professionals.
The greatest difference between then and now,
he says, is having more staff to deeply research
markets, evaluate investment opportunities more
thoroughly and implement portfolio decisions more
efficiently. The portfolio has grown immensely
and includes a much broader range of assets, but
Delaney now has a greater understanding of how it
functions - and its potential.
“Greater team depth gives us the chance to do
more strategically, including sector tilts, because
you’re not as rushed running from one job to
another,” he says.
Michael Dwyer, CEO of the $30 billion First
State Super, which cemented its merger with Health
Super in July, says the fund’s newfound scale will
drive down the already “rock-bottom” fees it charges
members - such as the 50 basis points it charges
members in its balanced option. But better returns
can’t be guaranteed.
“If you’re a larger scale fund you’re better able
to get costs down but you don’t have to be big to get
good returns,” Dwyer says.
“For niche players who have strong support,
provided they manage their costs, there is no
imperative to merge.”
Greg Nolan, general manager of investments at
the $4.6 billion Care Super, says that as large funds
get even bigger, they eventually outgrow the benefits
of scale.
The fund, which is in formal discussions with
the $1.6 billion Asset Super about a potential
merger, recently commissioned asset consultant
JANA Investment Advisers to assess whether super
funds with $10 billion or more under management
were more successful investors than smaller funds.
JANA concluded that there is little or no
correlation between fund size and returns. Bigger
funds did not perform badly but their smaller peers
were not disadvantaged by their size.
It finds that once funds reach a “critical mass”
they can exploit benefits through economies of scale.
These include: tiered fee structures within
collective investment pools; greater control over
investment strategy through discrete, cost-efficient
mandates; the ability to provide a broader range of
investment products at lower costs per member;
and the use of larger mandates to negotiate greater
cover story
alignment with service providers.
However, Nolan says that
some benefits of being small can be
compromised when a portfolio grows
into the tens of billions.
“Getting beyond a $10 billion fund,
it becomes harder and harder to get
efficiencies,” Nolan says.
He says larger funds find it more
difficult to change asset allocations
and to invest with managers who limit
how much they are willing to invest in
particular strategies.
“We manage $1 billion in Australian
equities with six managers, and to change
one manager is a significant process,” he
says.
The JANA research shows that very
large funds find it challenging to secure
enough capacity with active managers
of Australian equities and bonds. It
says funds between $5 billion and $10
billion are probably best able to achieve
an optimal balance between maximising
investment performance and minimising
costs.
This balance is close to what some
fund executives, such as Sicilia, call the
“sweet spot” of fund scale. It is different
for each fund, he says, and is reached
when a fund is not forced to reject an
investment idea because it is too small.
Sicilia knows the feeling of hitting the
sweet spot.
“There is nothing I’m aware of in
which the Hostplus board would say, ‘It’s
a great idea but we don’t have the money
or resources to do it’,” he says.
But this sensation can sour as,
inevitably, funds grow bigger - and bigger
- in a market where contributions are
mandated.
“No fund can stay in the sweet spot,”
Sicilia says. What is worse, however, is
that “size brings headaches”.
An initial problem is the difficulty
of investing with funds managers who
have capacity constraints. By accepting a
large mandate from a big fund, a manager
takes on the business risk of one day
losing its big client and seeing revenues
drop sharply overnight.
Some managers prefer to have a more
diverse clientele of smaller funds, Sicilia
says.
Moreover, these funds have less
ability to use the size of their mandates
as a bargaining tool to negotiate lower
fees. He asks: What incentive does a
manager have to accept a large mandate,
which can incur considerable business
risk, for a lower fee when they can take
on a number of smaller mandates from
smaller funds that pay higher fees?
He also says that big funds with
investment teams must be wary that
their sector specialists do not fall prey to
“asset-class capture” and champion their
area of expertise irrespective of market
conditions.
Sicilia prefers to talk to Hostplus’
asset consultant, JANA - which has
investment strategy and manager
research teams - about the opportunities
available to the fund. The consultant is
experienced and Hostplus can benefit
from its successes and mistakes, he says.
Sicilia does not know how big
Hostplus will be when it outgrows its
sweet spot. But he is certain that its
investments will suffer when it does.
“There has to be a point where a fund
becomes so big that its size is detrimental
to the investment case,” he says.
Delaney disagrees. He says funds
strike the sought-after sweet spot when
their strategies work harmoniously. This
can happen regardless of their size.
“It can happen for small, medium or
large funds,” he says. “But consistently,
larger funds can operate more cheaply
than smaller funds and have more
resources. That’s unambiguous.
“Our performance will be good or
bad depending on how skilful we are at
getting the right strategy for the fund.”
Delaney says AustralianSuper has
never been unable to invest in a strategy
or manager because it is too large or will
force a manager to breach their capacity
constraints.
To illustrate the point, he says that
in 2002 managers of Australian smallcap equities said they could not beat the
index while managing more than $200
million.
Mark Delaney
Sam Sicilia
Larger
funds can
operate more
cheaply
than smaller
funds and
have more
resources.
That’s unambiguous
“Now they manage five times that
amount,” Delaney says. “So it has always
been an issue and isn’t materially worse
now than it has been.”
He shrugs off concerns that
AustralianSuper’s size causes a
detrimental market impact when it
executes investment decisions. Public and
unlisted investment markets in Australia
and overseas are easily large enough
to absorb the fund’s capital without
difficulty, he says.
However, Jack Gray, principal of
consultants Rawson East and a director
of placement agent Brookvine, says
market impact is a real concern for the
world’s bigger institutional investors.
“When you get to a certain size you
have market impact,” Gray says. “That is a
well-known diseconomy of scale.”
Gray consults to APG, the $375
billion Dutch pension fund. “Almost
every deal is too small to have a
significant impact on [fund] returns,” he
says.
Delaney says his use of active
managers has not changed since the days
when he managed a $3 billion portfolio
at one of AustralianSuper’s predecessors.
Then, ARF indexed half of its Australian
equities portfolio; now, AustralianSuper
does the same.
He does not believe that big funds
should abandon active investment
strategies and focus exclusively on
managing beta risks.
“A large chunk of performance
comes from asset allocation and sector
tilts. That is always the case,” Delaney
says. “But if you are skilled at manager
selection it is a material value-add, and if
you aren’t it will detract.”
Larger funds may have opportunities
to negotiate preferential access, fees and
terms with unlisted asset managers, but
smaller funds are better positioned to
invest more frequently and profitably in
boutique funds managers, Gray says.
“If you’re a small fund you don’t
necessarily have disadvantages as you may
be able to get in to a new fund manager
that may become very successful,” he
says. “A big fund may not be able to get
cover story
in because of capacity constraints or
because they don’t want to invest in a
new manager.”
Much research and investor
experience demonstrate that smaller
investment mandates deliver better
returns. An April 2010 research
paper, Pension Fund Performance
and Costs: Small is Beautiful, written
by Rob Bauer, Martijn Cremers
and Rik Frehen, assesses this in its
comparison of the performance and
costs of large pension and mutual
funds.
The researchers draw on
databases, including that maintained
by pension fund researcher CEM
Benchmarking, which cover about
40 per cent of assets managed in the
US pensions industry. This includes
the returns of 463 defined benefit
funds from 1990-2006 and those of
248 defined contribution funds from
1997-2006.
They find that greater size
results in pension funds incurring
lower costs than mutual funds; but
the performance of pension funds,
after expenses and trading costs,
was positive but “relatively small”
compared to the benchmark.
“While larger scale brings cost
advantages, these are apparently
overshadowed by size disadvantages
in equity performance,” the paper
states.
It also finds that small mandates,
particularly those focused on smallcap equities, beat benchmarks by
about 3 percentage points each
year while similar strategies run by
mutual funds did not perform as
well.
“Liquidity limitations seem
to allow only smaller funds, and
especially small-cap mandates, to
outperform their benchmarks,” the
researchers write. Bigger funds are
not able to exploit the illiquidity
premium in some small-cap equities
because they are unable to invest
a meaningful amount of capital in
these stocks.
DIY funds management
Some large funds with investment
staff take a big next step: run money
themselves. The common motive for this
is to reduce the amount of fees paid to
external fund managers.
Even though many senior portfolio
managers at AustralianSuper are former
investment managers, the fund has not
decided to insource this operation. It
Michael Dwyer
will begin managing money if it becomes
clear that “we think we can do it cheaper
and better” than external managers,
Delaney says.
Some funds have made the move.
UniSuper, for instance, manages a
portfolio of core Australian equities and
some fixed income, while Telstra Super
manages 30 per cent of its domestic
equities allocation plus some cash. About
The best performing large cap Australian Equities Fund
over 1, 2 and 3 years and since inception in 2007*
Rolling
1 Year
(p.a.)
Rolling
2 Year
(p.a.)
Rolling
3 Year
(p.a.)
Since
Inception
(p.a.)
Since
Inception
(Cumulative)
71.30%
L1 Capital Australian Equities Fund
39.87%
33.06%
20.40%
14.79%
S&P/ASX200 Accumulation Index
11.73%
12.45%
0.32%
-2.36%
-8.89%
Outperformance
28.14%
20.61%
20.08%
17.15%
80.19%
Performance data current as at 30 June 2011
Outperformance Every Year Since Inception
45.0%
39.87%
35.0%
26.53%
25.0%
13.15%
15.0%
11.73%
L1 Capital
Australian
Equities Fund
5.0%
-5.0%
-15.0%
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#
S&P/ASX 200
Accumulation
Index
-1.43%
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-9.9%
FY08#
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FY09
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general information only. You should assess whether the information is appropriate for you before making an investment decision. The performance figures are sourced
from the S&P/ASX 200 Accumulation Index and from actual composite dollar weighted performance figures achieved by the Fund [before fees, expenses and tax]
up to June 30, 2011. Past performance is no indication of likely future performance. The value of investments in the Fund can rise and fall. Neither L1 Capital Pty Ltd
nor any of its associates guarantee the performance of the Fund or the repayment of capital by the Fund. Investments in the Fund are not deposits or other liabilities
of L1 Capital Pty Ltd or its associates, and investment type products are subject to investment risk including the loss of income and capital invested. Investments
in the Fund are only open to wholesale clients within the meaning of the Corporations Act 2001. The relative performance of the Fund has been determined based
on a comparison with the performance of all participants in the June 2011 Mercer Performance survey. Investment decisions should be made based on information
contained in the current information memorandum for the Fund.
cover story
30 per cent of Equipsuper’s $4.4 billion
in assets - a mix of Australian equities,
fixed income and direct infrastructure - is
managed by an internal team of five.
Danielle Press, CEO of Equipsuper,
says funds that manage their own
money internalise the risk of a funds
management operation. This includes
finding skilled investment professionals
and then retaining them, because most
of the value in an investment strategy is
inside the brains of the people developing
and executing it.
“The people risk is huge,” Press says,
and these people must often be paid
similar amounts to what they could earn
in a funds management business.
But this risk does not only materialise
in cases of staff turnover: “You’re dealing
with egos,” Press warns. “That is a very
different management game.”
The team runs at a “fully loaded” cost
of 14 basis points - including systems,
rent and accounting - which is far
cheaper than the percentage-point fees
charged by external active managers. But
funds running money internally should
not focus only on saving money.
“You have to make sure you’re not
giving up returns by doing this,” Press
says.
The risk of costly operational
errors, stemming from compliance
breaches or breakdowns in counterparty
relationships, must also be managed.
“If you’re going down this path then
make sure your board is committed,”
Press says.
In October 2010, CEM
Benchmarking published its findings
from a comparison of returns among
defined benefit funds that insource
investment management and those that
don’t.
It shows that funds with more
internal investment management
outperform others at the total fund level,
and that each 10 per cent increase in
resources committed to internal funds
management adds an average of 4.1 basis
points in net value.
The researcher also measured the
impact of internal management at the
Danielle Press
Funds between $5
billion and
$10 billion
are probably
best able to
achieve an
optimal balance between
maximising
investment
performance
and minimising costs
asset class level. Before investment costs,
CEM finds no major difference in gross
value. However, after costs are deducted,
internally managed portfolios of stocks
in the Europe, Australasia and Far East
index beat externally managed portfolios
by an average of 96 basis points.
Internally-managed emerging markets
stocks beat those managed externally by
an average of 28 basis points. But among
portfolios of US stocks and fixed income
there was little difference.
CEM says these findings are
consistent, despite funds’ countries of
origin and whether they managed more
or less than $20 billion.
Merger mania
Funds seeking greater scale benefits
through mergers is a sign of the times.
Julie Lander, CEO of CareSuper, says
cost savings would be a likely outcome
of the fund’s potential merger with Asset
Super. A merged entity would lease one
(albeit larger) office instead of two and
compliance costs would be minimised.
Greater fee income from a broader
member base would allow the fund to
increase services to members and the
overall costs of operation would fall in
relation to the fund’s growing size.
The Government wants to
see an efficient industry managing
compulsory savings - particularly if the
Superannuation Guarantee rises to 12
per cent - and some superannuation
executives believe that scale is the best
way to meet this demand.
It is unlikely that the Government
would outwardly force fund mergers.
But Lander says its preference is clear:
“The Government would like to see fewer
funds,” she says.
Brett Cole provided additional reporting
for this story.
manufacturing
Manage investment risk in three steps
Diversification, hedging and portfolio
insurance are complementary, not
competing, ways to mange investment
risk, says EDHEC Risk Institute - Asia
head of research Stoyan Stoyanov.
R
isk management is often
mistaken for risk measurement.
However, properly measuring
risk is at best a necessary precondition to
ensuring proper risk management.
Another common misconception
is that risk management is about
risk reduction. In fact, it is at least
as much about return enhancement.
Investing should be about maximising
the probability of achieving investors’
long-term objectives while respecting
their short-term constraints. This calls
for spending risk budgets optimally to
optimise exposure to rewarded risks.
One last misconception about risk
management is that it is synonymous
with diversification. Scientific
diversification is meant to reduce the
total risk of a portfolio by constructing it
in a way that eliminates unsystematic or
diversifiable risk - that is, the risks that
are specific to individual constituents and minimises the average exposure to
systematic risk factors for a chosen level
of targeted return. Diversification is most
effective in extracting risk premia over
reasonably long investment horizons
and cannot be trusted as a mechanism
to control losses over the short term,
especially in times of financial stress.
Traditional approaches relying
on static allocations lead to underspending investors’ risk budgets in
normal market conditions (resulting
in a high opportunity cost), and overspending these budgets in extreme
market conditions. What is needed is
a new form of dynamic risk-controlled
investment that exploits the benefits of
risk diversification (to extract long-term
premia), risk hedging (to manage longterm risks) and risk insurance (to respect
short-term constraints).
Diversify risk premia
Although the notion of diversification
has existed for a long time, it was
motivated scientifically by mean-variance
analysis developed by Harry Markowitz,
the main principle of which is to combine
risky assets in such a way as to minimise
variance at each level of expected return.
The focus of optimal diversification is,
thus, on risk-adjusted performance - find
the portfolio that extracts risk premia in
the best possible way at a given level of
risk.
There has been confusion in
the industry about the capacity of
diversification to limit losses. In fact,
diversification has been blamed because it
did not protect investors from big losses
in the financial crisis of 2008. In times
of market crashes, it turns out that the
average correlation between risky assets
increases, implying that diversification
opportunities tend to disappear.
It has also been argued that the
failure to limit losses can be attributed
to the mean-variance framework
itself because variance, symmetrically
penalising profits and losses as deviations
from the mean returns, is not a good
measure of the risk that investors really
care about - that is, downside risk - and,
also, that the framework cannot recognise
non-normalities in the empirical data,
as it assumes normally distributed
returns. Although these critiques of the
mean-variance framework are fair, the
inadequacy of relying on diversification
as the sole approach to risk management
goes deeper than the limitations of classic
portfolio theory.
The Markowitz framework has been
extended in the academic literature by
considering more general families of risk
measures. The most important properties
of risk measures are assumed as axioms,
and the one responsible for the effect of
diversification is, essentially, convexity
- which makes the risk of a portfolio
of securities smaller than the weighted
average of the risks of its components
Stoyan Stoyanov
Improving
the performance-seeking portfolios
through optimal diversification can
compensate
for the cost
of insurance
by extracting
risk premia
on a stand-alone basis. Deeper results
in stochastic ordering theory (see, for
example, Rüschendorf (2010)) indicate
that diversification opportunities are
determined by the way security prices
depend on one another. There exists a
dependence structure, such that the risk
of any portfolio equals the weighted
average of the stand-alone risks for any
reasonable risk measure. The worst
possible dependence structure implies
that security prices depend (non-linearly)
on only one stochastic factor, which is
a realistic hypothesis in severe market
downturns. Under such conditions,
diversification opportunities do not exist.
From the standpoint of nonclassical models, the function of the risk
measure is to translate diversification
opportunities, assuming they exist,
into actual allocations. Alternative
frameworks have the potential to extract
risk premia more efficiently than meanvariance by zooming in on the downside
of the portfolio return distribution.
However, as far as loss protection goes,
they are just as futile.
Hedging risk
Tobin (1958) showed that in the
presence of a risk-free asset, efficient
portfolios consist of two funds: the
risk-free asset and a fund of risky assets,
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manufacturing
which is efficient in isolation and provides
the highest risk-adjusted expected
excess return - in other words, the risky
portfolio with the highest Sharpe ratio.
An investor’s risk aversion influences
only the relative weight of the two funds
in the portfolio. The implication for
portfolio construction is that lower-risk
portfolios are best obtained by increasing
the allocation to the risk-free asset at
the detriment of the risky portfolio with
the highest Sharpe ratio, rather than by
selecting a risky portfolio with lower risk
but an inferior Sharpe ratio.
Presence of liabilities, however,
implies that the risk-free asset is not
cash but a portfolio designed to hedge
liability risks. The theory of optimal
asset/liability management (ALM)
indicates that efficient capital allocation
also involves a two-fund separation - a
performance-seeking portfolio (PSP)
Stocks, commodities and
real estate
can offer
inflation
protection at
lower costs
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constructed through diversification
and a liability-hedging portfolio
(LHP) used to deal with the
variability of the stream of liabilities
arising from different sources, mainly
interest rates and inflation.
LHPs can be designed in various
ways. Cash-flow matching is a
popular technique which, through
investments in suitable bonds,
attempts to ensure a perfect static
match between the cash flows
from the portfolio of assets and
the commitments in the liabilities.
Although the technique is simple,
a big problem is finding the right
bonds. The problem with bond
availability exists also in the case of
hedging interest rate risk through
duration matching. Approaches to
hedging inflation include investing
in instruments such as Treasury
inflation-protected securities (TIPS)
or derivatives such as inflation
swaps. Other asset classes may also
have inflation hedging properties.
Empirical studies indicate, for
example, that stocks, commodities,
and real estate can offer protection
from inflation at lower cost.
Risk and DAA
From an ALM viewpoint,
hedging is done to protect long-term
liability needs. It can also reduce
downside risk. The equity risk in
an equity portfolio, for example, can
be reduced trivially by increasing
the weight of the cash component,
leading to a limited downside risk
but also to limited upside potential.
The right approach is to limit
downside risk while maintaining
access to the upside potential.
Dynamic portfolio theory
allows us to do just that. The theory
has been extended with absolute
or relative constraints on asset
value that can accommodate, for
example, maximum drawdown and
rolling performance floors. Simple
insurance strategies such as constant
proportion portfolio insurance
(CPPI) or options-based portfolio
manufacturing
insurance (OBPI) arise as dynamic
optimal strategies for investors,
subject to particular explicit or
implicit floor constraints respectively.
Dynamic fund separation in an
ALM context suggests the allocation
to the PSP and LHP building
blocks is generally not constant and
depends on the market state. Thus,
in a market downturn, the closer
the portfolio value gets to the floor
constraint, the higher the allocation
to LHP becomes, limiting the
potential for further losses.
Conceptually, the functional
separation of the building
blocks provides a key insight:
diversification, hedging and insurance
are complementary techniques.
The first two are responsible for
the optimal construction of the
performance and hedging building
blocks, and the method of insurance
guarantees that the floor constraint
is satisfied through the dynamic
and state-dependent allocation
to these building blocks. Unlike
diversification, however, insurance
always comes at a cost. The cost
can materialise in different ways
depending on implementation: as
an implicit opportunity cost, if the
implementation is through dynamic
trading (for example, CPPI), or
explicitly as the price of a derivative
overlay (for example, OBPI).
The common approach to
construct the PSP portfolio is
to adopt a stock market index: a
capitalisation-weighted portfolio that
is poorly diversified and therefore
highly inefficient. This leaves
substantial room for improving the
performance of this building block
through better portfolio construction.
Research by EDHEC Risk Institute
shows that optimal diversification
based on a robust methodology
can result in consistent and sizeable
Sharpe ratio improvements over
capitalisation weighting - for
example, their efficient version of the
S&P 500 index has a Sharpe ratio
more than 50 per cent higher than
the original index. In fact, improving the
construction of the performance-seeking
portfolio through optimal diversification
can compensate for the cost of insurance
by better extraction of risk premia.
Conclusion
Broadly speaking, investment
management concerns optimal
expenditure of risk budgets. To this end,
diversification,
hedging and insurance
rethinkpassive_pi_0711.pdf
18/7/11
Diversification, hedging
and insurance are
complementary techniques
10:06:50
represent three complementary
rather than competing techniques.
Diversification should be used to achieve
efficient risk-adjusted returns; hedging
should be used to control systematic
risks such as interest rates and inflation;
and, finally, insurance should be used
to implement downside protections.
Academic research in dynamic portfolio
theory suggests the three techniques can
be used together.
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EH0711(10)1211.Aust
roundtable
Unlimited: being direct with
private equity secondaries
The secondary market for private
equity harbours a diverse range
of investment opportunities. But
how should superannuation funds
approach this market: by acquiring
commitments made by other private
equity investors or by targeting the
underlying portfolio companies
in these programs? Investment
Magazine put this question to
investment professionals in a
roundtable supported by The Camelot
Group LLC. Simon Mumme reports.
I
n the past 25 years the secondary
market for private equity has evolved
from one in which investors could
occasionally shed their commitments
into an arena where specialist managers
now target underlying companies held in
limited partnership (LP) interests.
Ray King, managing director of
Sovereign Investment Research, began
recommending secondary deals to
Australian institutional investors in the
late 1990s; and in subsequent years some
superannuation funds have committed to
specialist “secondaries” managers.
But how should investors approach
Sellers have
a lot of inside knowledge; they
are almost
insider
traders
the market as it continues to attract more
participants: should they search for the
most attractively priced LP interests on
offer from well-regarded managers; or
should they undertake some heavy-duty
due diligence and invest directly in the
underlying companies in these programs?
It’s unlikely that there will be any
shortage of deals through either channel.
The Camelot Group LLC, a private
equity secondaries specialist based in
New York, forecasts that the market will
grow to about $49.5 billion by 2014.
Some of this growth will be caused
by new legislation - such as the Basel
Delivering Returns and Liquidity to Investors
roundtable
III laws, forcing banks to hold deeper
liquidity reserves, and the Volcker Rule,
which, among other conditions, prevents
US banks from investing in private equity
- which is likely to force many financial
institutions to offer their private equity
investments on the secondary market.
Expectations of the coming deluge
in secondary deal-flow range from about
$300 billion from the US market and
$200 billion from Europe, according to
Frontier Investment Consulting.
Joey Alcock, a consultant with
Frontier, says the process will not be
smooth.
“Some of the secondaries managers
would have you believe that banks are
going to sell, wholesale, in the next few
months,” Alcock says. “I think it’s going
to take a lot longer than that. There will
be deal-flow, but it’s important to capture
the right assets.”
Allison Hill, senior consultant with
Frontier, says “sophisticated” secondaries
managers will have opportunities
to negotiate advantageous prices by
structuring direct deals, rather than
buying LP interests on offer, as assets
come to market.
However, a more significant catalyst
for growth in the secondaries market is
the undeniable need for liquidity among
defined benefit pension funds in the
US, says Lawrence Penn III, a managing
director at Camelot.
“You’re talking about tens of millions
of baby boomers who will be calling on
the police, fire, teacher and other pension
funds,” Penn says.
These funds are real forced sellers of
primary private equity commitments, he
says.
“We’re talking about city pension
funds that are underfunded. If you look
out another 15 years and ask if they can
meet their pension obligations, there is
no way, no how.”
In contrast, strong cash flows
into super funds mean their liquidity
problems are more manageable.
“Nine per cent is quite a number,”
Penn says, “and some super funds
have younger demographics and are
positioned to grow much faster.”
The secondaries market is also being
driven by the need for private equity
managers to extend the life of investment
programs, beyond their typical 10 to 12
years, amid challenging business and exit
environments, Penn says.
“The J-curve has stretched out, which
puts investors in a position to say, ‘I’m
now at year nine or 10 and my assets are
returning one-and-a-half times - it may
be time for me to get liquidity by selling
my interest in the secondary market’,”
Penn says.
This can be appealing for investors
aiming to reduce their exposures to
unlisted assets after the liquidity scares
of the financial crisis, says Ralph Suters,
executive director at Quentin Ayers.
“Liquidity is really affecting the
way trustees behave right now. They’re
being overly cautious in making new
investments and they’re trying to
seek ways to cash out their existing
investments,” Suters says.
Eugene Snyman, managing director
of Cambridge Associates in Australia,
adds that investors may not require
immediate liquidity but have “very
cumbersome portfolios” of private
equity assets, and that “secondaries
provide a good way to relieve some of
the administrative burden of non-core
positions in your portfolio”.
However, this impact will be
marginal if secondaries account for a
small portion of an investor’s private
Ben Margow
Nicole Connolly
Lawrence Penn III
roundtable
Hugo Agudo
Ralph Suters
Allison Hill
equity exposure, says Nicole Connolly,
head of alternatives in the Russell
Investments consulting team.
“Secondary managers have a drawdown period of three to five years, which
means you’ve got a small proportion of
your program that is likely to return early
funds,” Connolly says.
In the first 18 months of the global
financial crisis, secondaries managers
believed that many attractively priced
assets would come their way from cashstrapped investors. However, plenty of
deals were offered to the market but few
were struck because sellers found the
steep discounts to the net asset valuations
(NAVs) of their assets unpalatable.
Michael Weaver, portfolio manager of
private equity investments at Sunsuper,
says this shows that the belief that
investors would prioritise liquidity over
sale price is a “myth”.
“Selling private equity at 40 per cent
discounts to NAV - which hadn’t actually
been marked down - was no different
to selling equities at the bottom of the
market,” Weaver says.
“I didn’t see too many people wanting
to sell equities when they were 50 per
cent of what they used to be. So to say
equities are fantastically liquid isn’t true.”
Direct deals
King, at Sovereign, says a healthy
expectation of net returns from a
secondary investment should be 15
per cent because “a number of years
of uncertainty” have been taken out
of the asset. It follows that he expects
net returns of about 20 per cent from
primary private equity investments.
Returns from secondary investments
are a function of multiple dynamics, he
says.
“Returns aren’t based on what price
you pay. It’s the earnings growth that gets
generated, the value of the business that
gets generated and the quality of the exit
process.”
King disaggregates the market into
two sections: “mega” deals, in which the
vendor is a bank or insurance company
executing large portfolio trades; and
smaller deals, where investors group
small- and mid-sized managers together.
Some investors view secondaries as a way
to access top-tier primary private equity
managers.
“They don’t necessarily want serious
discounts to NAV; they’re willing to pay
NAV or even go above NAV,” King says.
A defining characteristic of the
market is its inefficiency.
“The sellers have a lot of inside
knowledge; they are almost insider
traders. They know so much about
these assets. They’ve sat on advisory
committees; they’ve been watching these
assets for years,” he says.
“You’re a buyer and trying to strike
a price for something where you know
the seller is all over you in terms of
information. That is a real issue that
people are overlooking.”
Sellers of LP interests are obliged
to fully disclose the quarterly business
and financial updates they receive from
the relevant private equity manager, the
general partner (GP), Penn says. This is
usually the most information they have
about the assets.
GPs keep information about
underlying portfolio companies “very
tight,” he says. “What LPs don’t get are
the audits, the investor rights agreement,
the bylaws of the company. So there is a
reliance on the GP.”
Penn says portfolio companies
often do not want a GP to release
such minutiae to their investors. The
roundtable
Ben Margow, Oliver Welsch-Lehmann, Joey Alcock, Ray King and Hugo Agudo
companies believe that this information,
if circulated among investors, could
get out into the market and hurt their
competitiveness. But investors want these
details.
“So that’s a natural fight between
companies and the GP, and the GP and
its broader partnership,” he says.
Penn believes this level of
information is insufficient for investors.
“When you run partnerships, every
three to six months there are changes.
There are companies that grow fast, have
problems or are about to go bankrupt,”
he says.
“So when we price an LP interest
without the detail of an underlying
portfolio company, pricing is really
skewed.
“Focusing on the asset, and repricing that asset at a point in time, is
really the most important thing about
the secondary market. What I’ve found
is that an LP can’t price the asset. We’ve
seen these guys price. We understand
that in two weeks they’re not getting
information on 18 portfolio companies
- and they’re still setting a price. We call
that a best guess.
“It worked really well when the
market was going up. But today it is
really volatile and a lot more work needs
to be done.”
However, such uncertainty about
It worked
really well
when the
market was
going up.
But today
it is really
volatile and
a lot more
work needs
to be done
pricing is less of a problem for direct
secondaries investors, Penn says.
Direct secondaries deals can manifest
in a number of forms, such as spinning
a management team out of a GP or
acquiring particular assets within LP
interests.
“We don’t feel LP interests are really
the assets,” Penn says. “It is a means of
owning the asset, which is the underlying
portfolio company.”
In its secondary co-investments,
IOOF has dealt with considerable
information asymmetry, says Hugo
Agudo, portfolio manager of alternative
investments at IOOF.
“As a buyer, the amount of
roundtable
Andrew Strachan, Jake Burgess, Michael Weaver and Eugene Snyman
information you’re given is atrocious,”
Agudo says.
To glean some insights about the
co-investments, IOOF spoke with
market sources in the fortnight before the
deadline for the deal. It relied on its asset
consultant and contacts in the unlisted
assets space for information.
John Eliopoulos, who oversees Telstra
Super’s Australian equities investments
but also provides input into its private
equity program, says it would take a
“quantum leap” for the fund to engage
directly with GPs and perform due
diligence on assets they are offering on
the secondary market.
“It would be a quantum leap for a
garden-variety super fund like Telstra
Super to resource up to do the heavy
due diligence that is involved in direct
secondaries,” he says.
But Hill, at Frontier, says this
extra work - if executed well - can be
worthwhile.
“The more structuring that is
required, and the more complicated it
becomes, creates opportunities regarding
who can supply the liquidity and who has
the ability to price those assets,” she says.
Some secondaries managers allocate
a small portion of their portfolios to
direct transactions. But the intensity of
the due diligence required means these
investments can, in some cases, comprise
half of their workloads, says Snyman, at
Cambridge Associates.
“You may be presented with a
portfolio with about 100 company
There needs
to be an understanding
of the contribution that
the GP can
make to the
performance
of those
assets
names in it. How do you get your head
around that?” he asks. “So the skill is
in identifying the vendor that wants to
do it quietly and then working with a
management team that is able to disclose
exactly where the jewels are in the
portfolio. The rest are pretty much valued
at zero.”
Penn says the best approach is to
“cherry-pick” assets from a range of
vendors. This gives investors a pricing
advantage.
“They are looking at a small number
of portfolio companies where they can
get the information, spend time with
management - the CEO, CFO, COO because they are more likely to buy than
an investor looking at a big group of
assets,” he says.
roundtable
Networks are important. But not all
of the great secondary deals come out
of New York or Sand Hill Road, the
renowned venture capital ecosystem in
California.
“The question is: Once you identify
the opportunity, do you have access to
the information to do due diligence
and make a good pricing decision. That
deal can be anywhere. It’s a truly global
business,” Penn says.
Managers should not take on more
businesses than they can successfully
steer towards an exit, warns Suters, at
Quentin Ayers.
“This requires skill from the GP;
and I don’t care how strongly they argue,
a GP cannot manage 100 companies.
They just don’t have the skills, the
resources or the sheer time to do it. If a
GP is managing eight or 10 companies at
different stages of their development - I
can listen to that one. But 20 companies?
They don’t have the breadth to do it.”
Sometimes vendors will group a great
asset with one or more undesirable ones
as they move to clear their books.
“The triage in a bad portfolio can
take more time and effort,” Penn says.
“You’ll spend way more time shutting
down companies than trying to help your
jewel.”
Is the price right?
Oliver Welsch-Lehmann, also a
managing director at The Camelot
Group LLC, says deals in which financial
institutions are divesting LP interests
from investment arms tend to feature
intermediaries to help sellers get good
prices. This makes pricing more efficient
than in the direct market.
But smaller deals, such as those
coming from family offices and involving
two or four direct investments, usually
provide an opportunity to structure a
“good” transaction.
“Those are the rare situations where
you can really add value as a buyer and
maintain a good relationship. You don’t
want the seller to be embarrassed. You
want everyone to walk away happy,” he
says.
Pricing trends in the secondary LP
interest market are subject to broader
market forces. In 2009, as managers
waited for liquidity-stressed investors
to relieve themselves of private equity
commitments through the secondaries
market, the median bid price was close to
a 60 per cent discount to NAV, says Jake
Burgess, partner at Quay Partners.
Now, as global markets muddle along,
the median bid price for LP interests is
about a 10 per cent discount to NAV, he
says. However, in a positive development
for sellers, NAVs have not been static in
the past two years but have increased as
markets have recovered. This means bid
discounts have become less aggressive as
NAVs have increased.
But this presents some problems to
buyers.
“The issue I’ve got is they’re
substantially the same asset. When you
look at the underlying private equity
funds, they haven’t actually dealt with any
of those assets,” Burgess says.
Frontier believes that proprietary
deals, or at least those that are not
offered to the broad market, provide
opportunities to significantly influence
pricing.
“We think there’s much more of an
opportunity to achieve discount prices,
as well as the ability to look at more
innovative ways of structuring these
deals,” Alcock says.
Hill says investors should also
consider how substantially the LP
The question
is: Once you
identify the
opportunity,
do you have
access to the
information
to do due
diligence and
make a good
pricing decision? That
deal can be
anywhere
interests on offer have been funded.
“Investors want to see pools which
are substantially invested rather than
those which may be subject to other
investments in the future and how that
can affect pricing,” she says.
However, early-stage secondaries those funded by 50 per cent or less - can
be attractive, because they offer bigger
discounts compared to more fully-funded
interests, Burgess says.
But paying a smaller discount to
NAV for a higher quality interest is
a safer bet, says Michael Weaver at
Sunsuper.
“You’ll get a better return. You might
not get it on day one - but over the threeto-five-year period you will,” he says.
Reputation matters
Many investors shopping for LP
interests will use manager reputation
as the guiding input for their search
for secondary investments, WelschLehmann says.
“People look at LP interests topdown. They look at the name of a fund
manager and often apply an arbitrary
discount associated with that name
without looking at the underlying assets.
As a result the pricing is sometimes more
of an art than a science,” he says.
However, smart investors will select
GPs with the skills to improve the value
of assets, Suters says.
“There needs to be an understanding
of the assets but also an understanding of
the skill and the contribution that the GP
can make to the performance of those
assets,” he says. “Not all GPs are equal.
There are some duds out there.”
manufacturing
Delving deep into Asian debt issues
The bullish fundamental case for Asia
ex-Japan debt should be tempered
by fears of illiquidity. SIMON MUMME
reports.
I
n late September, the worsening
Eurozone debt crisis spurred global
investors to stage a dramatic sell-off
in one of the strongest local-currency
debt markets in Asia this year: 10-year
Indonesian sovereign debt.
By October 6 they had unwound
positions worth about $3.8 billion,
according to Bloomberg. Even though
local buyers, including Bank Indonesia,
intervened by purchasing approximately
$2.5 billion in the long-dated securities to
support falling yields, the sell-off showed
one of the major risks for investors in
Asia ex-Japan debt: illiquidity.
Christopher Watson, head of
research at emerging markets funds
manager Finisterre, says the episode is a
“classic microcosm” of the dynamics of
the debt markets of emerging Asia.
“The long end of Indonesian
sovereign debt is attractive, yes,” he says.
“But is it a smart trade when almost
100 per cent of it is owned by foreign
investors?”
There may have been enough buyers
to allow foreign investors to make a
smooth exit and support the strong
performance of 10-year Indonesian
sovereign debt, which yielded 6.55 per
unts
Acco
d
e
anag
ly M
e
t
a
r
Sepa
Man
age
d Fu
nds
cent at October 13 (see figure 1). But this
will not always be the case, Watson says,
particularly because Indonesian banks,
which account for the majority of local
investors, prefer short-term sovereign
debt.
Despite being underpinned by
strong economic fundamentals, Asia
ex-Japan debt markets are too illiquid
to be considered “safe havens” in which
investors can take shelter from the
ongoing problems in Europe and the US,
Watson says.
“There is a fundamental, long-term
reason to be very optimistic about Asian
debt markets full-stop,” he says.
“Our concern is that people looked at
them and said how they are decoupling.
The reality is that these markets are very
much less developed from a liquidity
perspective than other fixed income
markets - particularly those that would
be called safe havens.”
Investors should not be awestruck
by the economic fundamentals and
remember that Asia ex-Japan debt
markets can be rough places to invest.
“Indonesia is an amazing prospect. But
from an investment perspective you have
to be very careful because the door to get
in is a lot bigger than the door to get out,”
Watson says.
“Its fundamental economic trajectory
is positive, and government policymaking is reasonably good. Nonetheless,
Figure 1: Government bond yields
Australia
China
Hong Kong
India
Indonesia
Malaysia
New Zealand
Phillipines
Singapore
South Korea
Taiwan
Thailand
US
Germany
Japan
2Y GOVT
3.75%
3.72%
0.29%
8.51%
5.70%
3.04%
2.91%
2.90%
0.14%
3.46%
0.79%
3.38%
2Y GOVT
0.28%
0.70%
0.14%
Source: Kapstream Capital
5Y GOVT
3.86%
3.60%
0.92%
8.65%
6.06%
3.32%
4.00%
5.27%
0.52%
3.54%
1.00%
3.43%
5Y GOVT
1.14%
1.42%
0.34%
10Y GOVT
4.31%
3.79%
1.40%
8.74%
6.55%
3.68%
4.58%
5.93%
1.64%
3.78%
1.27%
3.45%
10Y GOVT
2.20%
2.19%
1.00%
Indonesia remains a quintessential
emerging market.”
Indonesia has “widespread poverty,
inequality of wealth distribution and an
opaque financial system somewhat tilted
towards vested interests”, Watson says,
alluding to the political sway of oligarchic
business empires in the nation.
thirsty work
Nick Maroutsos
ASX
Shar
e Reg
istry
Liquidity is a major determinant of
fixed income returns, says Andrew Lill,
head of listed asset investment specialists
at AMP Capital Investors.
“Why is it that in 2011, US
Treasuries continue to be strong? It’s
because they still offer the best liquidity
to investors,” Lill says.
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manufacturing
However, liquidity in Asia ex-Japan debt markets has
improved dramatically since the region’s currency crisis in 199798.
Nick Maroutsos, managing director of fixed income
boutique Kapstream Capital, says the region now accounts
for about 12 per cent of global debt issuance. He says this is
not reflected in global fixed income benchmarks, such as the
Barclays Global Aggregate Index, which at September 30
attributed 3.85 per cent of worldwide issuance to Asia ex-Japan.
Lill says comparing these market capitalisation-weighted
indexes with those weighted towards the GDP of issuers
provides a more accurate picture of the supply of emerging
Asian debt.
Corporations, predominantly quasi-sovereigns and private
banks, have greatly increased issuance in the past decade.
Maroutsos says the volume of non-bank corporate loans is also
increasing and will “quadruple” in coming years.
This is making it easier to trade bonds in Asia ex-Japan
markets. “If you bought these companies five years ago you
would have to hold them to maturity,” he says.
However, Kapstream still prefers debt with shorter
maturities of up to five years because these instruments including sovereign, quasi-sovereign and corporate debt - are
more liquid and better researched by brokerages than longerdated bonds are, he says.
what Asian crisis?
Asia ex-Japan markets have also accrued deep foreign
exchange reserves since the region suffered a currency crisis in
1997-98. This helps investors in local-currency debt more easily
convert coupon and principal payments into their own home
currencies, Watson says.
“You can get bad price action along the way but there is no
sense that you can’t take your money out,” he says.
The gradual strengthening of Asian currencies is also seen
by investors as an attractive source of returns, Lill says.
“No-one really knows when Asian currencies will come
off their pegs to the US dollar but everyone has a very strong
opinion that they will,” he says.
Some investors prefer exposure to long-term currency
appreciation in Asia ex-Japan through debt instruments rather
than equities, which are viewed as being more volatile.
Fixed income instruments are often used as defensive
exposures. However, investors see Asia ex-Japan debt markets as
growth assets, alongside equities.
“We think the currency and yield opportunities in Asia
can match the return opportunities of equities but with less
downside risk,” Lill says.
Fixed income managers welcome this point of view because
it means that more growth-seeking investment mandates are
“contestable”.
distribution
Can super serve all generations?
As the superannuation industry grows
it must be flexible enough to meet the
demands of all constituents, writes
Andrew Whiley, communications
manager at Media Super*.
A
t a recent industry conference,
in one of the more interactive
sessions, a group of trustees
and staff was asked to discuss and
respond to a series of scenarios facing a
superannuation fund board in the latter
part of this decade. This sort of blue-sky
exercise is not uncommon at industry
gatherings.
One of the scenarios posited a large
fund that had made a direct investment
in a national aged care provider, primarily
as a secure, long-term investment.
The decision was being interpreted by
observers as being partly in response to
Government urgings for more investment
in the aged sector and a natural
progression for a fund with more than 15
per cent of members in pension products
that included an innovative program of
“health and lifestyle” support.
What was striking about the
discussion was the second aspect of the
scenario.
The ongoing community debate
around intergenerational equity had
gathered a head of steam through the
middle of the coming decade. It was now
being reflected within the fund, sparked
by State and Federal Government
proposals for new taxes and levies to
help meet the overall health and welfare
costs of an ageing population. Younger
members, particularly those under
45, were questioning the aged care
investment announced by the fund and
taking to various forms of social media
to express their suspicion that, along
with increased taxes, their super was also
being used to subsidise the growing costs
of the old.
Some were advocating for a
resolution at the next annual general
meeting, calling on the fund to withdraw
from the aged care investment.
While many of the session
participants thought some aspects
were far-fetched, there was growing
recognition that the industry and super
funds themselves had emerged from
being low-profile investment houses to
become social vehicles, with attendant
recognition and media profile, additional
scrutiny and increased community
expectations.
More and more, both economic
and social issues are being reflected in
super. This emergence has been driven
by diverse factors. Firstly, it’s simply as
a result of the growth in funds under
management: large pots of money attract
attention. Secondly, it’s the impact of the
financial crisis and negative returns. For
many in the media, being able to link
national and economic upheaval and
share-market gyrations with the personal
impact on super accounts was, and still is,
an irresistible temptation.
The third factor is the slowburn, decade-long discussion about
infrastructure backlogs and the need
for accelerated national investment.
While the focus has been on economic
infrastructure, the debate is shifting to
encompass social infrastructure needs
and opportunities. The common factor
has been ongoing calls and expectations
that super funds will be able to step up
and fill the funding gap.
Lastly, it’s been the misrepresentation
of superannuation in various political
campaigns. Who can forget the “Mining
Tax - Bad for Your Super” banners
held up by Gina Rinehart and Twiggy
Forrest in Perth last year, as the Rolex
Revolutionaries demonstrated their
previously unnoticed but fervent
commitment to building security
in retirement for millions of nonmillionaires. This theme was replicated
and amplified in political and media
circles as a further justification for
retaining the status quo in regard to
mineral super profits.
All in all, super is now often in the
spotlight and, with another round of
reforms and lower forecast returns, is
likely to stay that way.
Boomtown
Andrew Whiley
Can superannuation funds
remain as agnostic investment houses
or will there
be a gradual
but greater
shift into
investment in
health and
aged care?
So back to the boomers,
intergenerational equity and the longterm view.
The recent report handed down by
the Productivity Commission (PC),
Caring for Older Australians, provides
some glimpses of another aspect of our
ageing population problem - separate
from the usual, broader “how will we pay
for our retirement?” question that the
industry regularly discusses.
To recount a couple of the key
statistics: The number of citizens aged
65 or more is expected to increase from
about 14 per cent of the population to
25 per cent by 2047. A larger relative
increase is anticipated for the so-called
“old old” - those aged more than 85 years
of age - moving from about 1.7 per cent
to 5.6 per cent of the population. People
in this group tend to be the main users of
aged care services.
In plain numbers, there will be more
than 7 million Australians aged 65 years
or older by 2047, driving a burgeoning
demand for aged care services supported
by relatively fewer persons in younger
cohorts to support the provision of these
services, as working age taxpayers and as
informal carers.
Since the release of the PC report,
a range of potential solutions have
been put forward to help make up
the potential funding shortfall. Clear
separation of the costs of accommodation
from those of care is one measure that
may make investment in the sector more
attractive to both banks and super funds.
This principle has already been adopted
in some community care facilities and
services.
distribution
The report puts forward a
range of options, including discrete,
superannuation-style aged care savings
accounts, long-term care insurance and
the extension of the offerings of private
insurance providers or those available
through Medicare. Another suggestion
is a mandatory annuity component of
super, established upon retirement to
help cover aged and health care costs.
It is possible that super funds may
end up with a significantly greater role
in dealing with this intergenerational
challenge than simply as an investment
vehicle for members’ retirement savings?
Many of their advice services are
changing to specialise in navigating
through the maze of regulations, costs,
benefits and options within the current
aged care system.
Some funds already promote various
health fund options, albeit as a minor
member benefit. In the insurance space,
some funds have already moved beyond
death and total and permanent disablity
(TPD) to the promotion of household
and general insurance services to
members. It would not be far-fetched for
a fund or consortium of funds to position
themselves for the future by simply
acquiring 100 per cent of a health fund or
forming a long-term alliance with a major
provider as part of their overall value
proposition.
Can funds remain as agnostic
investment houses or will there be a
gradual but greater shift into investment
in health and aged care? Will they be
driven that way, urged on by governments
seeking greater private funding and
involvement in the sector and their
boomer members wanting a wider
range and higher quality of care and
accommodation in retirement?
Much depends on which policy
settings and options are adopted in the
remainder of this decade.
But it would seem that the super
Will super
funds end
up with a
greater role
in the longevity challenge
than simply
as investment
vehicles for
members’
retirement
savings?
industry and its constituent funds are
becoming well and truly immersed in
the social currents that will sweep back
and forth across the intergenerational
divide. As the super pot grows towards
$2 trillion, the expectations of both
members and the community will
increase. Ideas, campaigns and even
legislation as to what and how super
should be invested will be debated in the
public domain.
The young and the taxed will be
having their own say, as will the boomers.
Super funds’ role as social vehicles may
well be defined for them, ready or not.
*The views expressed by Andrew
Whiley in this article are his own and do
not represent those of Media Super.
No amount of information is ever too much
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Investment involves risks, in particular, risks associated with investment in emerging and less developed markets. Please
refer to the relevant prospectus for details. Past performance is not indicative of future performance.
Investment & technology May 2011
Half Page Horizontal
distribution
Longevity: super’s next evolution
In 20 years the superannuation
industry has learned from challenging
investment markets. The increasing
longevity of members will provide
further lessons, writes Doug
McTaggart, CEO of QIC.
THEN: 20 super years
Has it been 20 years already?
The two decades since the
Superannuation Guarantee (SG) and
Queensland Investment Corporation
(QIC) were formally established have
certainly come around quickly.
One of the most important
lessons learned along the way is that
superannuation funds, which have
a long-term horizon, need a broadly
diversified investment strategy. The
approach of allocating so much to
equities, and so much to bonds won’t
cut it anymore. That means less liquid
asset classes like direct property, private
equity, infrastructure and timberland
are increasingly being incorporated into
funds’ asset allocation plans. The past two
decades have also seen the industry shift
from generalist to specialist investment
management.
The industry has also realised that it
must abandon “set and forget” strategies.
Shorter-term asset valuations matter
and there are risks and opportunities
for funds when these valuations reach
extreme levels.
In most respects the super industry
has improved considerably since it was
sparked into being by the SG, but two
parts of it have deteriorated: investment
time frames have shortened considerably;
and the obsession with peer risk has
increased.
Superannuation is entering a
new phase in Australia as the ageing
population edges toward retirement. The
industry now has to turn its attention to
the original objective of the SG: replacing
retirement income.
The next 20 years will have much to
teach us.
NOW: longevity age
With the first of the baby boomers
hitting the official retirement age this
year, Australia’s population has tipped
over the demographic peak. We’re on the
downward slope now.
The statistics bear repeating.
According to the 2010 Intergenerational
Report, published by the Federal
Treasury, the proportion of people aged
65 or more will increase from the 13 per
cent it measured in 2010 to 23 per cent
of the Australian population by 2050.
Most of us are vaguely aware that
we’re getting older but the Treasury
figures bring a sharp focus to the image
of an ageing nation.
Given that Australia’s compulsory
superannuation system was designed
to tackle this problem - at least from a
pension perspective - the public may not
be unduly concerned by the country’s
sagging demographic profile.
But another, perhaps less wellknown, Treasury projection offers an
even more sobering thought. The number
of very old Australians - defined as 85
and over - will more than quadruple
between now and 2050, growing from
400,000 in 2010 to 1.8 million by 2050.
We’re not just going to get old, we’re
going to get very old.
The fact that Australians’ average life
expectancy has increased - even since
the birth of compulsory super in 1992 presents some interesting challenges for
those who will enter retirement in the
coming decades.
They may live long, but will they
prosper?
With current life expectancy in
Australia of about 80 (79 for men, 84 for
women) people retiring today at 65 will
need to plan their income to last 15 years
on average. As life expectancy is expected
to increase, many soon-to-be retirees
could be required to stretch their savings
over 30 years or more.
There’s a very real risk that many
Australians could run out of money in
Doug McTaggart
In most respects the super industry
has improved
considerably,
but two parts
of it have
deteriorated:
investment
time frames
have shortened considerably; and
the obsession
with peer risk
has increased
retirement. The superannuation industry
has been grappling with how to manage
this longevity risk for a number of years.
However, up until now the debate
has usually centred on creating the
singularly perfect longevity risk product.
The reality is that a one-size-fits-all
solution does not apply in a market of
multiple needs.
Different members (and by
extension, different superannuation
funds) will require longevity products
that suit their own circumstances. The
longevity solution for a low-balance
member, for example, will be different
from that for a high-balance member.
Likewise, some funds may be happy
to accept the risk of an insurance-based
solution, whereas others will prefer a
more market-based solution.
There is an opportunity in our
industry to stop trying to convince funds
that there is a silver bullet, and start
working on solutions that bring together
the best ideas across the entire industry.
Super fund trustees need to ask how
they can piece these different longevity
risk products into a coherent solution
suitable to their members.
It’s also clear that managing longevity
risk should start 10 to 15 years prior to
retirement, when the largest amount of
money is at risk, rather than at the end
of working life. It is during this period
where we have often failed to meet the
expectation of members when major
market downturns have significantly
eroded their super balances.
The industry has the innovative tools
at its disposal - such as options strategies,
downside protection and dynamic asset
allocation - to de-risk portfolios in
smarter ways and when it really matters
for members.
Now we have the opportunity to
move from a one-size-fits-all approach,
to cost-effective retirement outcomes
that meet each member’s individual
circumstances and objectives.
Isn’t it
better
working
together?
On 1 June 2011, TOWER changed its name to TAL.
You’ll start to see our new name, TAL used
in place of TOWER.
Only our name has changed.
We’re still one of the industry’s most progressive
Group Insurance teams.
TALG2127 10/11
If you’d like more information,
please call Amy Pemberton on (02) 9448 9694.
TAL Life Limited ABN 70 050 109 450 AFSL 237848, formerly TOWER Australia Limited
TAL Superannuation Limited ABN 69 003 059 407 AFSL 237851, formerly TOWER Australian Superannuation Limited
CFA viewpoint
Time to get real about returns
Mooted prudential standards give
trustees an opportunity to better align
investment strategy with fund goals,
writes RICHARD BRANDWEINER,
board member of the CFA Society of
Sydney.
A
t the end of September,
APRA released its discussion
paper, Prudential Standards
for Superannuation. This paper outlines
the Stronger Super reforms that the
Government has recommended APRA
implement through prudential standards.
The standards cover a wide array of areas
from governance to risk management and
outsourcing.
It continues the year in which the
financial services industry nervously
braces for the impact of changes in
regulation, and superannuation members
stand by confused, wondering what
happened to their balances. In the
middle of all this I can’t help but wonder
whether we are missing the wood for the
trees.
The discussion paper states: “At a
minimum, APRA proposes to require
RSE [Registrable Superannuation
Entity] licensees to articulate realistic
investment objectives in a specific and
measurable way.” I would be surprised if
there were many default superannuation
options that didn’t already articulate
measurable investment objectives.
As you might be aware, most default
“balanced” funds will have an implied
return objective of beating inflation by
5 per cent before fees and tax. Most, of
course, have not come close to meeting
this objective for some time. So the real
question is more about how realistic (or
otherwise) they are.
Herein lies the wood. The APRA
paper goes on to talk about trustees
having explicit regard for the expected
costs, taxation consequences and the
availability of timely and independent
valuation information. All very
important, but really elements that only
Richard Brandweiner
The inflation plus
5 per cent
target,
however,
remains a
challenging one for
trustees to
defend
go a small way towards achievement of
the returns members need.
It will be up to the trustees to
consider how realistic their investment
objectives are and, of course, for policymakers to deal with any shortfall in
retirement incomes that remains at the
end.
For a typical asset allocation, what
do trustees have to believe to determine
that an investment objective of 5 per
cent above inflation is realistic over a
reasonable time frame?
Firstly, given the fact that fund
returns are a simple weighted average
of underlying returns, they need to
believe that their highest returning asset,
equities, will beat inflation by more than
5 per cent. In fact, for a 70/30 fund with
no alternatives and a real return on bonds
of about 1.3 per cent (note 1) it means
they need to believe equities will deliver
towards 7 per cent above inflation. That’s
not a small feat and quite a bit higher
than the world’s realised real return for
equities since 1900.
On top of this, there is, of course,
no direct link between equities and the
fund’s real return objective. Traditionally,
trustees who believed that their real
return objective was realistic put 80-90
per cent of their risk in equities (note 2)
and just hoped that it would deliver what
they needed. In fact, it’s not uncommon
for equities to not meet their objective
over long time periods.
A final issue concerns governance
and agency risk. Superannuation trustee
boards approve an asset allocation
designed to meet their investment
objectives. They then break the portfolio
up into small parcels, often giving each
investment manager a relative return
mandate. That is, a mandate which
has no relationship to their members’
long-term objectives but rather ties
the manager to indices which are
inefficient, prone to bubbles and full of
momentum. As McKinsey (note 3) puts
it: “Institutional investors historically
optimised at the sub-asset class level
leading to a sub-optimised portfolio
overall, and one that didn’t align with
their overall objective to meet their longterm obligations.”
A lot of pension funds around the
world are now dealing with this challenge
by (re-) recognising that asset allocation
is the primary determinant of risk and
return. They are looking at diversifying
their overall approach to portfolio
strategy rather than the more traditional
tactic of relying on one asset allocation
and an over-diversified set of investment
managers. To implement this they are
developing multi-sector “inflation plus”
mandates for single managers - managers
who might have the ability to be highly
active asset allocators, think differently
about their approach to diversification
and/or perhaps use leverage.
The rationale has a lot to do with
aligning the objectives of fund managers
with members and diversifying the
most significant risks in a portfolio. The
inflation plus 5 per cent target, however,
remains a challenging one for trustees to
defend.
Notes:
Note 1: Real return on government
bonds for Australia from 1900-2007, ABN
Amro Global Investment Returns Yearbook
2008.
Note 2: Despite equities usually making
up ~60 per cent of a “balanced” fund’s
capital, due to their higher volatility they
actually contribute 80-90 per cent of the
fund’s overall risk.
Note 3: McKinsey Institutional
Investor View, August 2011.
Executive Education
for professionals in the superannuation and financial services industry
FEAL and Melbourne Business School have
developed a unique postgraduate program for
executives in the superannuation and financial
services industry.
Comprising 12 residential modules, students
can earn a Masters in Organisational Leadership
and credit towards Australia’s most acclaimed
MBA program.
Join us for the next program module:
Managerial Decision Making
28 May – 1 June 2012
Mt Eliza Centre for Executive Education
For more information contact
FEAL on 02 9299 6648 or visit:
www.feal.asn.au
www.feal.asn.au
Presented in partnership with
FSC viewpoint
Let’s complete the unfinished symphony
Proofing the Australian economy from
the budgetary burden of an ageing
3.2%
population is just one reason why the
Superannuation Guarantee should
be raised to 12 per cent, writes John
of GDP
Brogden, CEO of the FSC.
T
he turmoil on world financial
markets has had a negative
impact on the superannuation
balances of all Australians.
But while it is tempting to criticise
the system for exposing Australians to
volatile share markets, now is not the
time to blink on the need to increase the
amount we save for retirement.
Indeed, the debt crisis faced by
European countries such as Greece and
Spain is all the more reason to push
ahead with increasing superannuation
contributions from 9 to 12 per cent.
The failure of most European
countries to deal with the rising costs of
their ageing populations through private
pension systems has in fact contributed
to the debt problems they face.
Australia has been fortunate to have
some visionary leaders over the past 20
years who have helped us lead the world
in dealing with ageing.
The introduction of compulsory
superannuation under the Hawke/
Keating Government and the increase
in contributions to 9 per cent - a
policy retained under Howard and
Costello - and the commissioning of
the intergenerational reports have
all contributed to Australia’s strong
economic and budgetary position.
As a result, Australia already has
one of the lowest expenditures on
age pensions as a proportion of GDP
in OECD countries. The Australian
Government spends 3.2 per cent of GDP
on the aged pension - the fifth lowest
percentage in the OECD - compared to
11.5 per cent in Italy and 10.7 per cent in
Greece.
Increasing superannuation
contributions from 9 to 12 per cent is
The amount spent by the
Federal Government on the
aged pension
John Brogden
Paul Keating has
said his
only regret
regarding
superannuation is that
he didn’t
go hard
enough and
legislate
for a 15 per
cent superannuation
guarantee
the next step in proofing the Australian
economy against the budgetary burden
of an ageing population and the risk of
debilitating government debt.
Treasury has estimated that
increasing compulsory superannuation
from 9 to 12 per cent will result in a
reduction in total budget expenditure on
the aged pension of $10 billion each year
by 2030.
Superannuation also serves an
important macroeconomic function by
increasing national savings. As a result
of the introduction of compulsory
superannuation, Australia’s funds under
management have grown from $260
billion in 1992 to $1.8 trillion today, and
are expected to grow to $5 trillion by
2030.
While companies around the world
struggled for capital during the financial
crisis, Australia’s superannuation funds
were available for Australian companies
to draw on. It is estimated that Australia
accounted for 10 per cent of the world’s
total market recapitalisation in 2009 - a
staggering figure given the size of the
Australian economy.
For individuals, it is important to
remember that superannuation is an
investment for decades, not years or
months. There will be ups and downs
in the market, but history shows that
the long-run trend is always up. Since
compulsory superannuation was
introduced 20 years ago, the return for
a balanced fund has been around 7 per
cent each year.
The simple message for individuals
and the Government is that
superannuation works. It is not the
superannuation system that is a problem
- in fact our system is the envy of the
world. It is the economic environment in
which we are investing that is impacting
on member balances.
For individuals it will mean you have
more savings on which to retire. For the
Government, superannuation has proved
to be a boon for the economy and the
Budget, and Parliament should bite the
bullet and support increasing compulsory
superannuation.
Paul Keating has said his only regret
regarding superannuation is that he
didn’t go hard enough and legislate for
a 15 per cent superannuation guarantee
and deny the Howard Government
the opportunity to unwind this policy
decision.
It would be a tragedy for Australia
if this was the case again and the
Government did not legislate for the
increase from 9 to 12 per cent.
TO BE HELD 27th-29th
NOVEMBER 2011
AT PEPPERS MOONAH LINKS,
MORNINGTON PENINSULA VIC
The ongoing volatility in the global financial markets demands
that Chief Investment Officers maintain both a strategic
and dynamic approach to asset allocation and portfolio
construction.
The Fiduciary Investors Symposium will provide the intellectual
environment for CIOs to be kept abreast of critical investment
trends, facilitate debate of ideas, as well as analyse and
uncover new ideas for management in this increasingly
complex world.
Take this unique opportunity to join your peers - in a conducive
environment for insightful conversations on industry issues.
&
This event is limited to 40 institutional investors only
Register now to avoid disappointment
News
&
News
Please visit:
www.fiduciaryinvestors.com.au/morningtonpeninsula
&
News
2012 AIST
Training at 2011
prices!
Now is the time to start thinking about your education needs for next year, and if you get in before 31 December 2011, all training booked
for 2012 will be locked in at 2011 prices.
AIST’s courses are for all superannuation professionals, and our knowledgeable trainers can also come to your offices to conduct in-house
courses to suit your requirements.
If you are unsure about the type of training that will suit you and your staff, AIST can assist you to set your annual training plan.
This offer is available until 31 December 2011, so book now to avoid disappointment.
Contact AIST today:
Visit our website www.aist.asn.au | Email us at [email protected] | Phone us on +61 3 8677 3800
AIST viewpoint
The industry’s future has arrived
It’s taken more than two years but we
finally have a picture of what our new
super system is meant to look like.
Well, almost. FIONA REYNOLDS, CEO
of AIST, writes.
A
fter hundreds of hours spent in
consultation and many more
pages worth of submissions,
the long-awaited release of the Government’s Stronger Super reform package
has arrived.
The package, together with the
proposal to increase the Superannuation
Guarantee to 12 per cent and the Future
of Financial Advice reforms, means our
industry is heading for some big changes
in the coming decade. From how super is
recorded on the payslip of every worker,
through to the way default retirement
savings are invested - just about every
stage of the superannuation process will
be affected by the new reforms.
But while those inside the industry
know what Stronger Super’s all about,
what does it actually mean for most
Australians?
Well, firstly, it’s important to
remember that MySuper isn’t a dumbeddown product. While MySuper will
be advantageous for the disengaged, it’s
not just for them. There are plenty of
intelligent, engaged and “super educated”
people who choose to be invested in the
default or balanced option of their fund.
In fact, it’s where more than 80 per cent
of Australians are currently. Plenty of
these members will choose MySuper too.
Importantly, MySuper will provide
an important consumer safety net and see
the end to commissions on default super
contributions. While this was never
an issue for members of not-for-profit
funds, it was for many other Australians
whose retirement savings were being
whittled away by unnecessary fees.
For top-performing not-for-profit
funds, MySuper will be something of a
rebranding exercise: the transition will
hopefully be relatively seamless given
that the default members of these funds
already belong to well-managed, costeffective products.
Then there’s SuperStream. In
addition to bringing the back offices of
super funds into the 21st century, it will
also benefit many Australians by assisting
them to consolidate their super accounts.
Although this will go some way
towards solving Australia’s $19 billion
lost super problem, the reforms stop
short of having a dramatic impact, with
the imposition of a cap of $1000 initially,
and then increasing to $10,000 by the
end of 2014. If auto-consolidation is
going to have a real impact, it needs
to be applied to all inactive accounts,
irrespective of balance size.
But changes to the requirements for
payslip reporting of super contributions
Fiona Reynolds
For topperforming
not-forprofit funds,
MySuper
will be
something of
a rebranding exercise
will help workers keep track of their
actual super payments, and hopefully
encourage people to engage a little more
with their retirement savings.
Reforms to improve governance
standards in the industry will also have
benefits. The development of a new
voluntary industry code of governance,
which AIST has already been heavily
involved in framing, will ensure trustee
directors strive for best practice.
There are, of course, still some
questions as to how the reforms will play
out in practice.
We need to ensure that if and
when people leave a MySuper product,
they’re not “flipped” into expensive
options resulting in them being relatively
disadvantaged.
There is also still some confusion
as to how and when discounts can be
offered in MySuper for employers with
more than 500 employees.
Implementation costs are always
an issue and we need to ensure that the
regulator, APRA, and the ATO have
adequate resources to play their part in
all the changes.
The journey is not over yet - we’ve
just submitted our response to the draft
MySuper legislation - and there will be
plenty more tranches of Stronger Super
legislation to follow.
Who will take home the 2011 Awards for Excellence & Leader Development Scholarships?
If you have attended the Awards in the past then you’ll know that it’s a special night that is not to be missed.
Tickets are strictly capped at 250, so don’t miss out.
To book your individual tickets or entertain your team or clients with a table of 10, visit www.aist.asn.au/aist-awards or
contact us on 03 8677 3800.
AIST_QuarterPage_November.indd 1
18/10/2011 9:04:29 AM
unbalanced
the lighter side of a serious industry
NGS Super’s
catch of the day
Many people would like to think that super fund trustees are reliable. That they, figuratively speaking, are people who each have “a
safe pair of hands”.
After attending a recent industry conference on the Gold Coast,
it would seem that Steve Mathwin, investment committee chair of
NGS Super, meets this description.
In an informal cricket game among the formal conference sessions,
Mathwin was fielding at point while Matthew Hayden, former Australian test batsmen and guest speaker at the event, prepared to
face his first ball. From behind the crease, Hayden sent it flying to
the NGS Super trustee.
“He fairly belted the ball,” Mathwin says. “He picked out the oldest
man on the field and tried to put it through him. Bad luck.”
Except from a few games of beach cricket, Mathwin has not played
any games since his days on the green at Westminster School in
Adelaide. However he caught Hayden for a golden duck.
He still has the indoor cricket ball used in the game. On it, beneath
Hayden’s signature, is an inscription reading: “To the best catch in
business”.
“The ball has gone straight to the pool room,” Mathwin says.
Deni Hines … from
Channel Nine to van Eyk’s
next party
Matthew Hayden …
no match for the reflexes
of NGS Super’s Stephen
Mathwin
Mark Thomas
shows some soul
Anyone who has switched on Channel Nine recently will know
about its adoption of Donald Trump’s television brainchild, The
Apprentice.
For those who haven’t seen an episode or dodged the ads: Australia’s Celebrity Apprentice is a TV series in which a number of
famous Australians – such as Warwick Capper, Lisa Curry-Kenny
and Jesinta Campbell – strive under the tutelage of Mark Bouris,
founder of financial planning group Yellow Brick Road, to develop
business acumen.
For one of the show’s episodes, the apprentices held a charity
art auction at Harrison Galleries in Paddington, inner-city Sydney,
last month. Divided into male and female teams, they competed
to summon the most cash from the crowd. Because Investment
Magazine went to press a week before the show first screened,
Unbalanced isn’t allowed to reveal how much money was raised.
But we can tell you the outcome of another auction on the night.
To benefit Oasis Africa Australia (OAA), the non-profit for which
she is an ambassador, singer Deni Hines dangled a private concert
featuring herself, trumpeter James Morrison and a 10-piece band
in front of the crowd. Mark Thomas, CEO of van Eyk, emerged
triumphant among the bidders.
He aims to use the concert as the entertainment centrepiece
of a business event; OAA will commit the money to its community-run primary schools in the Kiberi slum of Nairobi. Stephen
O’Brien, head of Deutsche Asset Management in Australia and an
OAA director, says it costs about $150,000 each year to school
about 1000 student with 23 teachers.
Thomas’ plans to use the big ticket haven’t firmed. “I was thinking a barbeque at my place on a Sunday,” he jokes. The jazz and
soul music fans out there might want to catch up with him to
suggest a set list for the occasion, and perhaps secure a spot on
his eventual guest list.
Why the French
fluked this RWC
The Germans had Paul the psychic octopus and the Kiwis had Sonny Wool
the tipping sheep but the rugby-mad
folk at Towers Watson tried to take a
more scientific approach to predicting
who would win the 2011 Rugby World
Cup.
Using information gleaned from recent
client opinion surveys of more than
265,000 employees in 140 companies,
the number crunchers claimed to have
predicted the outcome of last month’s
quarter-final showdown between England and France based on the different
management styles of businesses in the
two countries.
While the English went into the game as
red-hot favourites, researchers claimed
the pre-match implosion in the French
camp that led coach Marc Lievremont
to label his players “cowards” was all
part of a unique Gallic talent for reinvention that their stiff upper lipped
competitors lack.
According to the survey, French employees were more supportive of “energising change”: half of the French employees surveyed answered favourably
to questions about change, compared
to 40 per cent of English workers.
“The capacity for France to reinvent
itself against expectations is a pillar of
rugby folklore and proved to be a critical driver in motivating the squad to
perform under pressure,” says Yves Duhaldeborde at Towers Watson.
Volatility is the market’s way of saying,
“Watch where you’re going.”
Who’s helping you?
To navigate today’s financial markets, you need a partner
with new insights and investor-friendly solutions. BNY Mellon.
We are world experts in securities and investing, offering
uncompromising service in 36 countries. Working together,
we’ll help you find the path to success.
For more information, please contact:
Investment Management
Sydney Office: +612 9087 7600
Melbourne Office: +613 9640 3918
Investment Services
Sydney Office: +612 9551 5000
Melbourne Office: +613 9640 3900
bnymellon.com
Products and services are provided in various countries by subsidiaries, affiliates, and joint ventures of The Bank of New York Mellon Corporation, including The Bank of New York Mellon, and in some
instances by third party providers. Each is authorised and regulated as required within each jurisdiction. Products and services may be provided under various brand names, including BNY Mellon. This
document and information contained herein is for general information and reference purposes only and does not constitute legal, tax, accounting or other professional advice nor is it an offer or solicitation
of securities or services or an endorsement thereof in any jurisdiction or in any circumstance that is otherwise unlawful or not authorised. ©2011 The Bank of New York Mellon Corporation. All rights
reserved.
EVER
CHANGING
Our industry is ever changing. Adapting to FOFA, MySuper and SuperStream is only part
of the challenge. Mobile communication for advisers, online access for members and
increased client reporting make your task tougher. Then there’s the exponential growth
in data to manage, tax changes and increasing compliance oversight, not forgetting the
imperative to reduce costs.
DST Global Solutions builds systems to adapt to tomorrow’s changes.
We offer 30 years of global experience, helping clients to drive change
and transform business models. We create long lasting, scalable
solutions that stand the test of time. They provide you with a
differentiated position in the marketplace.
We have your future solutions.
TECHNOLOGY AND SERVICES FOR INVESTMENT
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Investment success at scale

Transcription

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