Australia’s superannuation funds are amongst the fastest growing in the world following more than a decade of compulsory contributions and there are a number of trends and challenges that they face.
A number of trends have affected the superannuation industry in Australia; there was the super system review of 2010 by Jeremy Cooper, financial market changes both locally and regionally and the global financial crisis (GFC). Although the ‘Cooper’ review
was more geared around members and their interaction with superfund’s, the themes of the report (regulating efficiency, governance, systematic transparency and savings or dollar savings for members) still hold relevance to how superfund’s are managing their
investments. The impact of the GFC has seen a resurgence of conservative asset classes such as the higher income type of investments, inflation linked investments and fixed income, where funds have a greater exposure to international equities. There has also
been a move to more of the Alpha side of those funds as opposed to index tracking and international equity funds whilst exposure to alternatives and derivatives has declined or are more cautiously used.
Increasingly, super funds are seeking to gain competitive advantage and increase returns by bringing funds management in-house. This is not happening across the entire industry nor across all asset classes, but the more sophisticated super funds have begun
to build up their internal teams to bring AUM in-house. This trend seems to be due to things like the cost of entering and exiting external funds, as well as those external funds MER; but it also gives them the ability to tailor a funds mandate to their own
unique requirements while still keeping the IP in-house and proprietary. When you look at the in-house teams that some of these superannuation funds have built up, and the experience behind the personnel within those firms, it’s very clear to see there is
an appetite to bring more of this management in-house in the future.
With an increased focus on reducing costs for members and the challenges of gaining positive returns in a diversified portfolio, super fund’s are increasingly looking for different ways to reduce their management costs without reducing the investment options
to its members. Bringing funds in-house is one way that many super funds are achieving this, however this also comes with its own challenges:
- Appropriate infrastructure needs to be in place to support this change of business strategy including appropriate:
- Software technology
- Integration with trustees, custodians and fund administrators
- Compliance and regulatory reporting
- Internal intellectual property for managing direct investments
- Transparency - Reporting and exposure management becomes increasingly difficult with diverse portfolio investments across multiple outsourced managers, and the in-house funds become even more challenging with complex counterparty exposures taking into account
when you look at derivatives and unstructured products. The GFC reminded the global financial markets just how important counterparty exposure monitoring is and that many super fund’s, and managers of managers struggle to appreciate what their true exposure
is to a particular counterparty or an issuer when they consider all their deposits such as their equities, ETFs, OTC and debt instruments; or anything that they have managed externally
- Access to timely, accurate information. In-house superfund’s require a lot more information about their portfolios and need it in a more timely fashion. This places more pressure on the custodians, fund administrators, and the services providers that
are being used by the superfund’s
When looking at technology, superannuation firms should look for a front-office solution that has the ability to support its industry:
- Superfund specific functionality - funds of funds structures, counterparty exposure monitoring and derivative and currency overlay modeling
- Seamless interfaces to third-party back office systems, data providers, fund administrators and custodians allows super fund’s to monitor their exposure to direct investments as well as their fund of funds or externally managed funds for complete transparency
over all their exposures that they have within their portfolios
- Performance measurement, attribution and risk functionality should be considered to provide superfund managers and asset managers with the ability to identify where they’ve outperformed, underperformed as well as identifying the true risk of their portfolio
- A solution that brings all the different data points together into one place for a holistic view of all of their investments and gives them the ability to manage functionality across their portfolio management, modeling, order management, execution management,
performance, attribution, risk, as well as compliance across the entire spectrum of their investments
- Consider a completely outsourced managed service whereby a technology provider takes care of the infrastructure and the management of the application so that investment managers at the super fund can focus on managing their investments rather than managing
systems or technology.