Emerging

Emerging from COVID-19

BY SALLY SURGEON

The pandemic has accelerated trends for institutional funds that were already in the pipeline and some will shape the journey back to normality.

AAs we all dare to dream about the light at the end of the COVID-19 tunnel, it is increasingly clear that the institutional funds sector is already moving to codify the lessons learned from the pandemic. It was just over 12 months ago that the entire institutional funds sector, alongside the rest of the workforce, had to adapt to different ways of working almost overnight. Together, the entire financial services system has demonstrated an enormous amount of flexibility to ensure everything kept working in an efficient and secure manner. At Northern Trust, we believe the past 12 months has accelerated some trends already in the pipeline. Like most journeys, there will be twists and turns and every participant will have a unique experience. However, we believe the following trends will play a significant role in shaping the path back to normality.

Scale and efficiency considerations

As a natural reaction to uncertainty, the onset of the COVID-19 pandemic resulted in some institutional investors pausing significant projects around consolidation and changing operating models.

This pause was a temporary response and institutional investors have or are now recommencing these important projects as they seek to mitigate risk, and enhance scale and capabilities to future proof their operations.

At a macro-level, superannuation funds are expected to continue to focus on reducing costs to ensure they meet the Australian Prudential Regulation Authority’s (APRA’s) mandated standards around performance and value to members.

This will lead to further consolidation through mergers which will provide opportunities for increasing scale, operational efficiency and benefits to members.

Additionally, institutional investors are continuing the 30-year trend towards outsourcing certain functions. Beginning in the early 1990s, outsourcing kicked off with custody and fund accounting.

In the 2000s it extended to the middle office with outsourcing of post-trade execution activities, including trade matching, reconciliations and client and regulatory reporting.

Fast forward to today, where we are increasingly witnessing the outsourcing of front office functions. For example, at Northern Trust, our Integrated Trading Solutions (ITS) offering, which is outsourced trade execution, is increasingly in demand from institutional investors seeking to future-proof their operations and enhance their operational efficiency.

Overall, institutional investors are realising great value in outsourcing their back, middle and select front office functions such as institutional brokerage to service providers like Northern Trust who have a global operating model, innovative technology solutions, as well as proven scale and experience to meet the ongoing needs of sophisticated institutional investors.

Data demands to continue

Asset servicing providers are playing a key role in assisting institutional investors to meet a variety of data and reporting needs. The thirst for increased data and transparency on investments has been a theme for a number of years and the impact of COVID-19 has continued to accelerate this trend.

During the onset of COVID-19, asset servicing providers were processing and reporting unprecedented volumes of transaction activity as institutional investors responded to the evolving market volatility. During this time, the role of asset servicing providers in maintaining consistent servicing and providing up-to-date portfolio information was never more important.

Many institutional investors have been evaluating their data management governance and operating models.

The pandemic highlighted the importance of strong data governance and many are now continuing on that journey to future-proof their operating models with enhanced tools, talent and data to support decision making, oversight activities, and ongoing changes to regulatory reporting obligations.

New types of investments

Another trend is the increasing array of assets that are on offer to institutional investors. The sophistication and complexity of these emerging opportunities will require a strong ecosystem to ensure they are properly accounted for, valued, and serviced. With the potential emergence of new asset classes we can also expect a continued focus on digitalisation.

Digitalisation continues to accelerate, and institutional investors are continuing to show a strong appetite for conversations in this direction. Northern Trust developed the first distributed ledger technology solution for private equity administration, and we continue to work with Singapore-based BondEvalue

while they rollout their world-first blockchain solution for trading bonds.

We are also taking part in conversations about cryptocurrencies and their role in the portfolios of institutional investors. Like other digital assets, the creation of an ecosystem to account, value and service the asset will be required to provide investors with the requisite level of confidence and assurance. In this space, Northern Trust recently announced it had partnered with Standard Chartered to launch Zodia, a cryptocurrency custodian for institutional investors.

Separate to digitalisation, the prevalence of lower for longer returns is another COVID-19 legacy which has given rise to the trend for institutional investors investing into private assets in search of additional returns.

Regulatory conversations back in the spotlight

During 2020, financial services regulators went to great lengths to understand and accommodate the impact COVID-19 had on both the broader economy and the financial services and super funds sector, including a lightening of the regulatory change agenda.

As the economy returns to a more normal post-COVID setting, we anticipate that ongoing regulatory conversations will be front and centre for institutional investors as they adapt to new regulatory requirements.

There is no doubt that asset servicing providers will play an important role in helping clients meet these new requirements and standards.

Further from our shores, global regulatory changes, like derivatives regulations and upcoming LIBOR changes, continue at pace and will continue to impact local institutional investors as they seek returns in markets beyond Australia.

“The past 12 months has accelerated some trends already in the pipeline. Like most journeys, there will be twists and turns and every participant will have a unique experience.”

Diversity, equity and inclusion outcomes

COVID-19’s impact on the office and how we work is expected to have far-reaching impacts on diversity, equity and inclusion outcomes.

The financial services system was able to quickly adapt to the need to work from home. Temporary regulatory relief and quick thinking ensured challenges around wet ink signatures, document execution and cheques were overcome in a timely fashion. As work from home orders begin to lift, the industry is well placed to continue leveraging these efficiency gains.

On the same topic, accelerated investments in technology and online collaboration tools proved that working from home was not only possible, but in many cases supported greater inclusion because everyone was working remotely.

Whilst the lines between work and home were blurred and the hours increased, there were also the benefits of increased flexibility due to the elimination of daily travel time between home and office.

That said, many of us look forward to returning to the office and face to face meetings with our colleagues and clients.

COVID-19 has normalised working from home and challenged any perceptions of the effectiveness of remote work. Looking forward, maintaining a level of workplace flexibility will encourage and facilitate an increased participation of women in financial services and ultimately the number of female leaders within our industry.

In conclusion, the journey out of COVID-19 will have twists and turns and will be unique for each and every institutional investor. It is clear the journey will be made easier with a committed, service driven partner.

Sally Surgeon is head of client services and head of the Sydney office at Northern Trust.

Merger mania or left-foot tango

Rollover is almost as fascinated by superannuation fund mergers as the deputy chair of the Australian Prudential Regulation Authority (APRA), Helen Rowell.

Recent fund mergers have come in all shapes and sizes with the result that sometimes Rollover fully understands the rationale behind the transactions while, sometimes, he simply does not.

For instance, Rollover fully understood the rationale behind the rather mammoth merger of Sunsuper and Q Super (geography and demography) while he is still struggling to understand the rationale behind the merger of Media Super and Cbus unless it has something to do with political ideology.

Rollover remembers the origins of Media Super with the old Journalists Union Super Trust (JUST) merging with Print Super. He also remembers the journalist union merging with Actors Equity to become the Media Entertainment and Arts Alliance – sometimes known as a rare combination of scribblers and jugglers, but he is not sure how, scale aside, that all fits with a building and construction industry fund like Cbus.

Which brings us to the recent announcement of the impending merger of EISS Super and TWU Super, where at least it can be argued that both are high touch funds with members working in dangerous callings demanding highly specific insurance offerings.

That said, perhaps a fund representing those in the electrical trades might have sat more comfortably with Cbus until you consider the divide between chippies and sparkies and the factional divide between Sydney and Melbourne.

Bragging about value for money

Rollover notes the manner in which former Financial Services Council (FSC) policy operative and now NSW Liberal Senator, Andrew Bragg, made much of his time this month as the acting chair of the Senate Economics Legislation Committee.

Bragg, who has become an almost incessant critic of the existing superannuation regime, chose to ask nearly every witness to the Senate Committee’s review of the Your Future, Your Super legislation whether groups representing the superannuation industry should be rationalised.

Having drawn his salary from the FSC under the benevolent leadership of former NSW Liberal Opposition leader, John Brogden, Bragg would have been pleased to note that his former colleague, the FSC’s current deputy chief executive, Blake Briggs, believed the organisation provided good value for money for its members.

“…unlike the other associations, we don’t just represent superannuation; our members comprise of life insurance companies, fund managers, advice licensees and some in the superannuation sector. Taking that into account, our total headcount, full-time equivalent, is 15 people. But I note that we only have one full-time equivalent for superannuation—my colleague Jane. She’s worth the 40 or 50 you get at some of the other associations. And the FSC’s total budget is I think around $6 million, so I think we’re the lowest funded of the associations,” Briggs told Bragg. So, with eponymous actuarial consultancy Rice Warner being rolled into Deloitte, Rollover is wondering how many client overlaps will need to be rationalised?

It has been Rollover’s experience that many superannuation funds have not bothered to choose between Deloitte or Rice Warner but have often decided to use both depending on the nature of the project at hand so the client lists for both outfits would be remarkably similar.

Rollover knows that Rice Warner founder, Michael Rice, will continue to contribute to his firm beyond the Deloitte transaction, but he wonders how long the separate branding will remain in existence.

He also wonders whether Rice Warner will be allowed to continue with publishing its regular analyses of the state of the superannuation industry in the somewhat more constrained environment that is Deloitte.

On the upside, however, at least Deloitte superannuation partner, Russell Mason and Rice Warner chief executive, Andrew Boal, have known each other a very long time.

WILL THE SPICE OF RICE CONTINUE BEYOND DELOITTE?