Super Review - July

T H E L E A D I N G I N D E P E N D E N T J O U R N A L FO R T H E S U P E R A N N U AT I O N A N D I N S T I T U T I O N A L F U N D S M A N A G E M E N T I N D U S T RY JULY 2010

Volume 24 - Issue 6

3 IFSA REBRANDS Industry body unveils a new name and new attitude

11 COOPER REVIEW Do what you must – not what you can

12 SR INVESTMENTS

Print Post Approved PP255003/01111

Defying market trends to earn their keep

18 ALTERNATIVES Renewed focus on meaning in the wake of financial crisis For the latest news, visit superreview.com.au MANDATES

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NEWS

When time is money Rollover delays and miscommunication at the height of the global financial crisis cost a member nearly 20 per cent of his account balance, according to evidence submitted to the Superannuation Complaints Tribunal.

A

In affirming the decision of the fund trustee, the SCT also acknowledged the fact that a letter sent from the rollover fund to the member’s existing fund had taken more than a fortnight to be received. The tribunal also acknowledged the fund’s claim that it had lost an email sent from the member’s employer – something that generated a further delay of almost three weeks.

In the explanation of its decision, the tribunal said it accepted “that the complainant set in motion on 4 July 2008 the steps necessary to transfer benefits held with the fund to the rollover fund. The forms were correctly sent to the rollover fund from which the necessary rollover request was to come to the fund. It seems clear that the request from the rollover fund, together with the requisite forms, was sent by letter dated 18 July 2008.”

However, it said the fund trustee had then stated that the letter was received by the fund on 4 August, 2008.

“This reflects a gap of 17 days between the date of the letter and the date of its receipt,” the SCT said. “Nevertheless, there

superannuation fund’s delay in processing a member’s rollover request at the height of the global financial crisis in mid-2008 ended up costing him more than $4,000 on a rollover amount of less than $24,000, according to evidence given to the Superannuation Complaints Tribunal (SCT).

The evidence given to the tribunal revealed that the member’s application to undertake a rollover had ended up taking almost 12 months due to a combination of miscommunication, incomplete documentation, missing emails and, eventually, disputation before the tribunal itself.

In the end, despite the SCT acknowledging that the errors and delays had cost the member more than $4,000 on a rollover balance of just under $24,000, the tribunal affirmed the decisions and actions taken by the fund trustee.

However, in doing so, the tribunal acknowledged that events with respect to the Rollover request had started on 18 July, 2008, and not been concluded until 2 June the following year.

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is no evidence on which the tribunal can reasonably conclude that the letter was received by the trustee prior to 4 August.”

Dealing with the missing email from the person’s employer and the consequent delays which then occurred, the SCT said: “The employer’s email of 22 August 2008 appears to be correctly addressed and it is unusual, although perhaps not unheard of, for an email to ‘go missing’ in these circumstances. Nevertheless, the tribunal is not in a position to question the trustee’s statement that the email was not received on 22 August and first brought to its attention only on 10 September.”

In explaining its final determination, the SCT said the complainant might have succeeded in minimising the loss he incurred if he provided the information requested by the

ALTERNATIVES

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APPOINTMENTS

fund after he had filed his complaint with the SCT. “Whilst the stance taken by the complainant in relation to the trustee’s request for information and benefit calculation proposal can be understood on one level, it was nevertheless incumbent upon the complainant to limit any loss he might have suffered as a result of the trustee’s actions,” the SCT said.

“Compliance with the trustee’s 11 September 2008 request would have resulted in his benefit being calculated at the unit price applicable on a date prior to 11 October 2008.”

Acceptance of the subsequent proposal contained in the trustee’s 29 October, 2008, letter, and provision of the requested information, would have ensured calculation of the benefit at the 22 September, 2008, unit price of 1.9996, valuing his benefit at $23,345.75. SR 23

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www.superreview.com.au

IFSA rebrands as broader economic commentator

By Chris Kennedy

THE Investment and Financial Services Association (IFSA) has announced a major rebranding, changing its name to the Financial Services Council (FSC), effective from next month. It will use the opportunity to take on a much larger role in influencing broader economic policy in Australia.

“We are stepping out,” IFSA chief executive John Brogden said. “This is an opportunity to grow our influence and our commentary from beyond simply the core areas that we have represented in the past.”

It was important that all the superannuation bodies and other financial services bodies spoke with a unified voice, in the same way that the Mining Council has, rather than having many disparate bodies taking their views to Canberra, he said.

Brogden stressed that although he

did not have an expansionist agenda and did not envisage the FSC absorbing a number of smaller industry bodies, the new name was deliberately selected as one that encompassed the entire industry and there would have been an opportunity down the track for other organisations to come under that banner.

Brogden conceded that some of the policies the FSC would be advocating – increased migration, an increase in the GST and Australians working part time into their retirement – would be controversial.

“We think that a big Australia is a critical part of growing the economy, of sustaining our tax base, of fundamentally ensuring we don’t become another Japan where our population ages and we don’t replace our tax-paying sector of the economy,” Brogden said.

The FSC will be advocating significant tax reform with respect to the GST, proposing a 15 per cent GST tax rate in

John Brogden

Australia that would eliminate all of the “inefficient and inequitable” state taxes, such as stamp duty, Brogden said.

“We also want to talk about participation in the Australian economy,” he said. “We need to move away from the concept of full retirement.

Australians really shouldn’t expect

to retire completely – they should expect to work a couple of days a week.”

It was part of the Australian culture to work your way up, but scaling back is not part of the national psyche. By keeping older Australians working one or two days a week into their 70s, they would be extending their retirement income and massively increasing the adequacy and longevity of retirement funds, Brogden said.

From a structural perspective, the organisation will be beefing up its research and policy teams and appointing a full-time economist who will be responsible for the broader issues upon which the FSC will comment.

There will be no immediate change to the board. Brogden anticipated that outgoing Perpetual chief executive David Deverall would stay on as chairman until the FSC’s next annual general meeting in October, provided he remained at Perpetual until that time. SR

Past two months erode super returns Bowen promises prompt release of Cooper SOME superannuation fund members may enjoy double digit returns for the 2009-10 financial year, but many will have to make do with returns in the high single digits, according to SuperRatings.

SuperRatings managing director Jeff Bresnahan said that while returns might have appeared to have been headed towards double digits, the recent slump in markets had served to dampen the good news.

He said super funds had

lost almost 5 per cent in the last two months, with the result that the median return for balanced investment options would be in the order of 9.6 per cent.

The SuperRatings data pointed to a five-year median return of 3.7 per cent a year.

Bresnahan pointed to the fact that the volatility and consequent uncertainty created by the global financial crisis had prompted some people to go it alone with

their superannuation, but claimed that the mainstream funds had demonstrated that diversified portfolios had succeeded in protecting members from catastrophic losses.

He said this could be compared to someone who had either gone it alone or taken advice to plunge into international shares at the beginning of the decade – something that would have seen a $100,000 investment shrink to just $76,606. SR

Leggo to chair Telstra Super THE man who chaired Canberra-based aviation industry fund AvSuper for around 20 years, David Leggo, has been appointed as the new independent chairman of Telstra Super – the nation’s largest corporate super fund.

Leggo will take up his appointment from 1 July for a three-year term.

Leggo succeeds David Batrouney, who is retiring after seven years as chair of the fund. SR

THE Minister for Financial Services, Chris Bowen, has vowed he will not be sitting on the final recommendations of the Cooper Review into superannuation for very long.

Interviewed on radio, Bowen said he would be releasing the final recommendations of the Cooper Review panel “in the not too distant future”.

He said he would be “releasing it quite soon”, and referred to it as being the “third stage” of the Government’s reforms to superannuation – with the first stage being the Future of Financial Advice changes, and the second stage being the changes announced in the Budget.

“The third stage will be our reforms to the efficiency of the superannuation system to get fees lower, and when you put these

three reforms together, we would have over the last few months completely changed the Australian superannuation system in a way that hasn’t been seen since Paul Keating introduced superannuation in 1992, and that will be a change for the better,” Bowen said.

While Bowen has not yet released the final Cooper recommendations, its content has been broadly welcomed by the Investment and Financial Services Association (IFSA) – particularly the elements that go towards improving administration through online processing and the use of tax file numbers.

However, IFSA chief executive John Brogden has expressed his organisation’s ongoing resistance to the Cooper Review’s so-called MySuper default option proposals. SR

Mandates Recieved by

Type of mandate

Issued by

Amount

State Street Global Advisors

Australian equities, global equities, global REITs

QSuper

$10 billion

SuperPartners

Administration

Austsafe

NA

Magellan

Wholesale

NA

$45 million

Perpetual

Australian equities

NA

NA

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Undisclosed insurance premiums eat away super

By Chris Kennedy UNDISCLOSED insurance premiums could be leading Australians to pay far more for insurance out of their super accounts than they need to, according to Chant West research.

“The differences in premiums between the cheapest and dearest funds can easily run into thousands of dollars a year,” said Chant West principal Warren Chant.

Although the focus tended to be on administration and investment fees, insurance premiums could dwarf all the other fees and costs put together, Chant said.

Almost all retail funds include a com-

mission element in their premiums, which generally range from 20 to 30 per cent of the base premium, according to the Chant West report, which analysed death and total permanent disability premiums for 89 funds – 43 industry funds, 14 public sector funds and 32 retail funds.

In an example cited in the report, for the same member the highest premium could be 10 times the lowest premium at age 50, with the difference increasing to 20 times greater at age 60.

Differences like this could decrease a member’s final benefit by tens of thousands of dollars, according to the report.

“Most members wouldn’t have a clue

Industry bodies call for commitment to SG increase TWO major superannuation bodies have called for the Government to maintain its commitment to proposed superannuation reforms after Federal Treasurer Wayne Swan recently acknowledged that the reforms would be affected by the negotiations with the mining industry on the Resource Super Profits Tax. The Association of Superannuation Funds of Australia (ASFA) chief executive, Pauline Vamos, and Australian Institute of Superannuation Trustees (AIST) chief executive Fiona Reynolds said the proposed phased increase in the superannuation guarantee (SG) to 12 per cent was critical to allow the nation to compensate for an ageing population.

Vamos said the gradual timeframe of the proposed increase was prudent as it would give all parties time to build the increase into wage and salary discussions, adding that the SG “is of paramount importance and ... should remain the central plank of the Government’s superannuation policy”.

Reynolds said the Government had a clear mandate to deliver its reform package, and that working Australians would be short-changed in their retirement if the reforms were diluted or delayed.

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Fiona Reynolds

ASFA noted research conducted by Auspollthat showed more than two-thirds of Australians believed the 9 per cent SG was not enough to fund an adequate retirement, while an AIST poll found more than three-quarters of Australian workers supported the increase.

Support for an increased SG was also highlighted by Westpac’s recent announcement that it would pay the guarantee on paid parental leave contributions for its workforce, a policy supported by ASFA. ASFA also called on the Government to retain all other measures relating to superannuation announced in the Budget to be retained, including the tax rebate on contributions for low income earners and the maintenance of a higher contributions cap for those aged 50 and over. SR

whether the insurance premiums coming out of their account represent good value or not … because the level of disclosure in the whole area of insurance is so appalling,” Chant said.

The Chant West report recommended nine insurance disclosure standards should apply to all super funds.

The report recommended that premiums be shown on a fund’s website gross of tax and based on current age. It also stated that income protection premiums should be shown excluding stamp duty, insurance premiums should be separated from adviser commissions and examples should be given in the Product Disclosure Statement. SR

Warren Chant

Alternatives back in favour with institutional investors GLOBAL institutional investors including super funds, endowments, foundations and insurance providers expect to increase their alternative investments exposure from 14 to 19 per cent over the next two to three years, according to Russell Investments data.

Real estate, private equity and hedge funds remain the preferred alternative types, although commodities and infrastructure are expected to make meaningful gains from their current low allocations, according to the Russell Investments 2010 Global Survey on Alternative Investing.

The survey of 119 institutional investors in North America, Europe, Japan and Australia revealed Australian respondents

favoured infrastructure, commodities and real estate more than their global counterparts.

“Although most global regions are increasing allocations to infrastructure and commodities, they are coming from a very low base of between 0.3 per cent and 0.7 per cent respectively,” said director of alternative investments, Asia Pacific region, Nicole Connelly.

“Australian investors, on the other hand, have had higher allocations to these sectors for some time, providing inflation protection and portfolio diversification,” she said.

While real estate allocations in the northern hemisphere had dropped below 5 per cent from

7-10 per cent, Australian allocations remained relatively high at 8.7 per cent, having dropped from 11.5 per cent in 2003 – partly due to local real estate performing better during the financial crisis.

“Alternatives have proved their role as portfolio diversifiers and risk-mitigators during volatile markets, and we expect continued demand from institutional investors, even if the global recovery were to falter,” Connolly said.

Ongoing demand for alternatives is expected to drive increased use of research consultants with a focus on project based and asset allocation research, and due diligence on managers and investment funds. SR

ESI Super further increases member engagement and advice ESI Superhas seen a huge increase in the Statements of Advice provided since the fund formalised its single-issue advice process last year. ESI Super is currently looking to further build its member engagement levels with a series of educational webinars, according to chief executive Robyn Petrou.

Commenting on regulatory changes by the Australian Securities and Investments Commission (ASIC) that allow super funds to provide limited advice, Petrou said the changes allowed ESI Super to provide single-issue advice with the sole purpose test to more members. The fund was issuing 59 per cent more Statements of Advice since August 2009, she said.

ESI Super planners previously had been busy meeting the demand for full advice, but that demand had been curbed by the provision of single-issue

advice, allowing ESI to expand its advice offering and focus on younger members who might not have been accessing full advice previously, Petrou said.

ESI Super traditionally had a high level of member engagement (possibly due in part to high member balances), but a recent series of informative webinars and videos had increased that further, Petrou added.

“I did a webinar not long ago on the Federal Budget and its impact on our members, and within a week we had about 244 people hit the website.

Not only did they look at it but they went through the whole presentation,” Petrou said.

ESI Super also has a large seminar program that increased by 21 per cent over the past 12 months, and it is looking at further ways of utilising that program to engage members and tying it in with the advice program, Petrou said. SR

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www.superreview.com.au

Australians still shunning co-contribution dollars Damian Hill

Life profits boom THE rally in investment markets through the latter half of last year has been handsomely reflected in life insurance industry profits, according to the latest data released by the Australian Prudential Regulation Authority (APRA).

The APRA data showed that net profit after tax for the life industry for the 12 months to the end of March had risen by 121.7 per cent to $3,150 million, with some tapering off occurring through the March quarter.

The degree to which the recovery in investment markets propelled profitability was revealed by the fact that total assets for the industry had risen by just 0.8 per cent to total $234.9 billion.

APRA said that of total assets 50.6 per cent were invested in equities, 30.1 per cent in debt securities, 8.4 per cent in investment properties, 7.1 per cent in cash and 3.8 per cent in other investments.SR

A MAJORITY of eligible super fund members are failing to take advantage of the Government’s superannuation co-contribution scheme despite being aware that they qualify, a survey of more than 800 REST Superannuation members has shown.

REST chief executive Damian

Hill urged members to ensure they aren’t missing out on money to support themselves in retirement.

“It’s alarming to think that such a large number of Australians are missing out on a great government incentive. It’s evident that Australians are fearful

that they won’t have enough money in retirement, so why aren’t they taking advantage of this opportunity?” he said.

A voluntary contribution of $1.50 a day over 30 years matched dollar for dollar by the Government could boost a superannuation account by up to $37,000, ac-

cording to a projection commissioned by REST Superannuation.

“It’s a great way to increase the retirement money pot for low-to-middle income earners.

What other investment can offer a dollar back for every dollar you put in? It’s too good to miss,” Hill said. SR

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Hostplus expands financial advice offering

By Chris Kennedy

HOSTPLUS is looking to appoint another three full-time financial planners in Queensland, while an online financial advice tool to be launched shortly will further increase the fund’s advice offering.

The new planners will bring the fund’s national total to 11, spread across all six states. The planners will focus 100 per cent of their efforts on Hostplus and will be assisted by pool planners who service industry funds to deal with any overflows, according to chief executive David Elia.

The new online advice tool, which Hostplus is aiming to launch in July, will be integrated into the product offering. Members will be able to access the advice tool to receive advice in relation to investment options, level of contributions and insurance coverage, Elia said.

The online advice tool has the potential to revolutionise the industry, Elia said.

It will also help free up some of the fund’s existing financial planners to provide more value-added financial planning service, while accredited contact centre staff will provide advice in utilising the tool, he added.

Members would automatically be able to request changes to their key investment options level of contributions, and to the level of insurance that they are seeking to acquire. The more rounded advice offering should help encourage members to become more engaged with their super, Elia said.

The Australian Securities and Investments Commission’s guidance relief has also provided further opportunities to industry funds to be able to provide costeffective within-super advice, Elia said.

Hostplus has recently grown to about 960,000 members with 64,000 contributing businesses, Elia said. SR

David Elia

Russell has eye on SMSF trustee and adviser education RUSSELL Investments aims to work more closely with dealer groups to provide better solutions for the self-managed super fund (SMSF) sector.

Russell Investments managing director of retail investment services Patricia Curtin said the group was keen to engage in consultation as well as education partnerships with dealer groups.

She said the education of trustees was becoming more of an issue as the sector continued to grow rapidly. The

SMSF sector is growing by 20 per cent per annum, and is set to take over a third of the overall super sector.

Curtin said that while trustees had confidence in their investment decision-making, she questioned whether the majority had the competence. She said education becomes all the more important from the standpoint that asset allocation drives 90 per cent of the performance of a portfolio.

“I would say that this whole

idea of asset allocation is an area that individual investors, as they are taking greater control of their retirement, need to be concerned about,” Curtin said.

She said there was a high concentration in one or two asset classes. She added that some of the other biases that have been identified in SMSFs include a preference for local over global equities, a focus on risk over return and a focus on tax benefits rather than investment benefits.

Curtin said the propensity for SMSFs to invest in a high proportion of Australian equities and cash has stood them in good stead over the last few years.

“But is that the right proposition going forward?” she asked.

“Should they be thinking about greater diversification across all asset classes?”

She said that the SMSF sector had a good compliance track record.

“They seem to be set up for the right reasons, fee levels are

appropriate and trustees are taking responsibility,” Curtin said.

However, she added that based on the focus of the various industry reforms, it appeared that the Government wanted to see more trustee education to ensure that trustees understood their responsibility to take control of their retirement. She added that the Government also wanted to ensure that service providers were compliant, were experts in their field and could be relied upon. SR

ASFA welcomes short form PDS regulations Catholic Super updates

Pauline Vamos

NEW regulations on short form Product Disclosure Statements (PDSs) are an important step forward to a new era in disclosure for fund members, according to the Association of Superannuation Funds of Australia (ASFA).

“Fund members can look forward to an eight-page PDS rather than 80,” said ASFA SUPERREVIEW

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chief executive Pauline Vamos.

“This move, and the associated incorporation by reference provisions, will encourage and enable funds to provide information online that reflects the needs of different members and their stage of life. This is an enormous step to integrating education, advice and disclosure.”

Funds will be able to implement the changes in a cost-effective way with appropriate consumer research within the two-year transition period to June 2012, according to ASFA. Along with the upcoming regulatory changes, the final Cooper Review report and the Government’s response to Ripoll, the short form PDS regime helps provide a framework and future plan for the industry to meet ongoing changing member needs, Vamos said.

“It will also equip the industry to continue its investment in the whole of the Australian economy for the long-term growth of working Australians’ retirement incomes,” she said. SR

insurance offering THE Australian Catholic Superannuation & Retirement Fund (ACSRF) has introduced changes to its insurance offering for members to provide greater benefits and flexibility without increasing premiums.

“Australia is one of the most underinsured countries in the developed world. We hope these changes will have a positive effect in helping to reduce the size of this problem”, ACSRF chief executive Greg Cantor said.

The dollar value for each unit of death and total and permanent disablement

Greg Cantor

cover has now increased between 8 per cent and 28 per cent, depending on age, with the cost per unit remaining the same. Members are able to choose either age-based unitised or fixed rate cover, which has also been extended from age 65 to 70. SR

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Aussie banks pass stress test

By Chris Kennedy STRESS testing within major banks globally was revealed to be vastly inadequate during the global financial crisis, but Australia’s majors have emerged largely unscathed and with a far better understanding of what is required from internal stress testing for the future, according to Australian Prudential Regulation Authority (APRA) chairman John Laker.

In a speech to the Australian Business Economists, Laker said the crisis itself was far

more severe than the scenarios that were tested and stress-testing practices globally were replete with weaknesses.

“Growing recognition of the need for robust stress testing means banking institutions around the globe are seeking to enhance … their stress-testing frameworks and practices, and a number of supervisors have now conducted their own industry-wide stress tests,” Laker said.

Based on discussions between APRA and Australia’s major banks following a self-assessment of the banks’ compliance,

several areas of better practice have been identified – as well as areas for improvement.

Laker said that stress-testing scenarios applied at an enterprise-wide level were typically well communicated within institutions. He added that stress-testing scenarios were updated on a regular basis and were responsive to the changing economic environment; and at the enterprise-wide level, a range of risks other than credit risks were considered and potential correlations between risk classes were recognised in the aggregation process.

Further development could include the extension of regular stress-testing regimes to the more detailed portfolio and product level, and upgrading information and IT systems to support stress-testing exercises and reduce pressure on resources, he said.

“APRA’s recent stress-test has provided important evidence that the Australian banking system has the capital resources to weather an economic contraction much worse than that expected during the depth of the global financial crisis,” Laker said. SR

John Laker

ING opens Wollongong super operation AIST blasts THE Federal Government has congratulated ING for opening a new superannuation and investments operation centre in Wollongong, NSW. The Minister for Financial Services, Chris Bowen, said the new centre reflected the capacity of the financial services industry to contribute to job creation in Australia.

He said the centre would support an additional 250 jobs over the next three years and

would bring the centre’s workforce to 600 in the Illawarra.

Bowen said the ING centre would predominantly focus on operational administration and call centre roles.

The opening of the ING centre in Wollongong follows Pillar Administration’s commitment to the Illawarra region as the home of its call centre and administrative activities. SR

Advice changes suit Sunsuper’s new model SUNSUPER’S recently integrated advice and call centre division will benefit from recently announced changes to intra-fund advice, with the fund already seeing an increase in advice related calls since the service was upgraded.

Sunsuper announced in March that it had merged services previously provided by the fund’s call centre and Member Advice Centre, and would incorporate financial planners from the fund’s On Track retirement planning team.

The integrated advice and service centre, where investors can get general advice in relation to their super, insurance and investments, had experienced a 6 per cent spike in calls since the integration, according SUPERREVIEW

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Steven Travis

to Steven Travis, general manager of member and employer service delivery at Sunsuper.

Extensions to intra-fund advice

recently announced by Financial Services Minister Chris Bowen are well suited to Sunsuper’s On Track program, which fits squarely inside that extension, Travis said.

“One of the implications will be that there will be a range of C and D type clients who will be orphaned – who will no longer be serviced by traditional planners where planners will have to justify their service model, so I think those C and D clients will migrate to super funds and look to super funds to provide that advice and fill that gap,” he said.

The changes implemented by Sunsuper were made partially in anticipation of these changes, which Travis viewed as a big tick for Sunsuper’s new advice model. SR

resources debate AUSTRALIAN Institute of Superannuation Trustees (AIST) president Gerard Noonan blasted the “narrow and self-serving” arguments made by the resources sector in response to the Government’s initial Resources Super Profits Tax proposal and increase in the superannuation guarantee.

“It’s disappointing to come back from overseas and to listen to the pretty sterile and low level debate about mining taxes,” he said.

“Just listening to that debate, in my view, some of the large and small fibs that the industry is putting around are very disappointing, and in a lot of ways very childish.”

He added that the response from mining companies was reminiscent of the way large oil and tobacco companies around the world had tried to bully governments over the years, and was taking the focus away from the increase in the superannuation guarantee

from 9 to 12 per cent. “[The debate was] clearly crowding out the space for what I think is a major reform for Australia’s economic structure that hasn’t been given proper attention,” he said.

Noonan described the lifting of the guarantee as possibly the best idea the Government had put forth in 10 years. He said that while the 9 per cent guarantee had put Australia in a great economic position, the system was being impaired by not having taken that extra step.

With help from a 2 per cent tax cut offered by the Government, business should be able to absorb the increase in the super guarantee over the next 10 years. The end result will be that by 2020 Australia will have the world’s leading retirement income system, Noonan said.

“There’s no other country that goes near it and it’s something that is really worth doing,” he said. SR

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Aon solution helps super Select added funds with compliance to AXA and

By Chris Kennedy

AON Australia has launched a custom-designed governance, risk and compliance solution for superannuation funds to help ensure their frameworks are up to speed in the wake of more stringent regulations.

Aon Consulting’s Governance, Risk & Compliance solution assesses funds against expectations set by regulators and industry best practice, and provides examples of where they need to improve, such as monitoring programs, policy documentation, risk management assessment and the efficiency of the board.

The solution also offers assistance in making the necessary improvements.

For example, Aon’s technology arm, Aon e-solutions, provides risk management software, according to Aon Consulting principal and actuary Jenny Dean.

“Governance and risk management best practice is constantly evolving.

Members are also demanding a higher standard of corporate governance following the global financial crisis.

They’re now far more aware of their retirement savings and want to make sure they are safeguarded,” she said.

“Superannuation funds impose high standards of governance on the companies they invest in. If you’re imposing those sorts of standards, you have to make sure your own affairs are in order.” SR

MySuper will require cheaper operating systems CHANGES proposed by the Cooper Review mean super funds will need to configure backoffice systems in order to accommodate MySuper and reduce cost and complexity to members, according to Bravura Solutions.

Offering a low-cost option means funds will want a low-cost operation to manage it, putting the focus on streamlining systems

Darren Stevens

and shaving unnecessary costs, according to Darren Stevens, Bravura Solutions’

CFS platforms

SELECT Asset Management’s Alternatives Portfolio has been added to AXA’s North platform as well as Colonial First State’s FirstWrap.

The portfolio has exposure to a number of global and local alternative strategies, including hedge funds and managed futures, as well as alternative assets such as infrastructure, private equity, commodities and precious metals, according to Select.

“We are seeing strong demand for [the Select Alternatives Portfolio] from a large number of dealer groups and platforms which recognise that trying to pick individual alternative investments is fraught with potential reputation and compliance risk,” said Select Asset Management chief executive Andrew Fairweather.

Andrew Fairweather

Partnering with a firm like Select to take care of manager selection and portfolio construction was a smarter way to access alternatives, he said. Select was one of the few alternatives funds not to limit or close redemptions during the global financial crisis, he added.

The Select Alternatives Portfolio, which was launched in 2004, already appears on a number of platforms and wraps including Asgard, Navigator, MLC Masterkey Custom and Macquarie Wrap. It is available for investments of more than $25,000. SR

global head of product – wealth management.

“Electronic processes, real-time processing and straight-through-processing are going to move to the top of the list of priorities for super system selection,” he said.

“Providers are going to want flexible software solutions and will need to move quickly to take these new products to market.” SR

APRA pursues trustee victimisation charges THE Australian Prudential Regulation Authority (APRA) has initiated action against a former executive director of the Queensland Retail Traders and Shopkeepers Association (QRTSA) over alleged victimisation of superannuation trustees.

The regulator announced that Ian Frank Baldock had been committed to stand trial on two charges of victimisation laid under section 68 of the Superannuation Industry (Supervision) Act, which makes it an offence for a person to commit an act of victimisation against a responsible officer of a corporate trustee of an employer sponsored superannuation fund.

The Brisbane Magistrates Court has been told that it will be alleged Baldock victimised two trustee directors of a superannuation fund linked to the QRTSA and that he caused both individuals – a QRTSA employee and the auditor of the QRTSA – to suffer a financial detriment by terminating their employment for simply carrying out their obligations.

The fund involved was named as the Australian Enterprise Superannuation Fund, which at the time had assets of approximately $90 million and 21,000 members.

APRA took action to protect the interests of members of the fund last year. SR JULY 2010

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GESB urges Australians to get SMSF advice

By Chris Kennedy

Fabian Ross

GESB is urging Australians to seek advice to ensure self-managed super funds (SMSFs) are suitable for their circumstances after national research demonstrated that many Australians don’t understand the time, risks and costs involved in operating a SMSF. More than half of Australians thought it was appropriate to establish a SMSF with a balance of $50,000 or under, and one-quarter thought a balance of $5,000 would be appropriate, according to a national survey of 1,100 people conducted

by TNS on behalf of GESB in March 2010.

SMSFs with $50,000 or less in assets would have average annual operating expenses of 5 to 6 per cent of their total assets, while a $5,000 balance would be eaten up in the first year of

operation, according to Cooper Review findings quoted by GESB. The growth in SMSFs suggested Australians wanted to exercise more control over their super, or felt that account fees charged by the major super providers were too high, according to the general manager of wealth management at GESB, Fabian Ross.

“Access to the information required to manage super does not equate to having the ability to interpret or apply this information in an effective and efficient way to ensure an adequate income in retirement,” Ross said.

“Our research shows that only a third of people would consult a professional financial adviser to decide how suitable a SMSF is for their individual circumstances. People need to understand that the control they are seeking could come

Death benefit complaints rising

THERE was an upturn in complaints lodged with the Superannuation Complaints Tribunal (SCT) during the March quarter, with most of the increase being owed to concerns about death benefits.

The chair of the SCT, Jocelyn Furlan, said that during the quarter the total number of written complaints received by the tribunal increased by 0.5 per cent compared to the previous quarter, while the number of telephone enquiries actually declined by 15.9 per cent.

She said complaints about death benefit distributions

had increased to 37.1 per cent of all complaints received, while the complaints relating to fund administration had remained stable at 48.2 per cent.

Furlan said 18 determinations had been issued during the quarter and that, overall, the SCT had affirmed the trustee’s decision in 72.2 per cent of these cases.

She noted that while 100 per cent of death benefit distribution cases had been affirmed, only 50 per cent of disability and administration cases had been affirmed. SR

Group insurance needs defined approach GROUP insurance product developers should not simply copy retail product developers by adding “bells and whistles” to group vanilla type insurance products, according to the AIA chief distribution and marketing officer, Damien Mu. Speaking at an Association of Superannuation Funds of Australia luncheon in Melbourne, Mu hit out at the industry’s tendency to add features to insurance products “for the sake of adding them on” at the expense of the rest of the super fund membership.

“We are seeing the convergence between group and retail insurance in the last few years ... and what I call the ‘retailisation’ of group insurance with bells and whistles,” Mu said.

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Damien Mu

“We need to make sure that we are not just adding on things for the sake of adding things on, and looking to address the specific

needs of one individual at the expense of the rest of the membership,” he said.

Mu warned that proper research needed to be conducted to understand the cost involved of product development.

“We all know when it comes to super funds, we make small changes to products that can have significant [impacts on the cost] of systems, cost of processes and resources, cost of disclosure,” he said.

“We need to innovate, but let’s make sure that we are adding true value to the group insurance offering and not just try copy what’s happening in other areas,” he added. SR

at the price of greater risk, cost and personal commitment.”

There appeared to be a perception among Australians that they can deliver better returns than a full-time super fund investment team, although this was unlikely unless the individual was taking on significantly more risk or getting lucky, Ross said.

While Australians appeared to have a good grasp of some of the technical risks associated with SMSFs, many failed to appreciate the obligations of trustees or so-called ‘lifestyle’ risks, the research showed.

Individuals needed to take into account factors such as the time and money associated with administering a SMSF, and whether they would have the desire and ability to manage the fund in the long term, according to GESB. SR

Aberdeen says recovery not ‘normal’ ABERDEEN Asset Management has warned that the current recovery is far from normal and that there remain no quick fixes.

Aberdeen senior investment specialist Stuart James said his company’s continuing caution was built around global market volatility stemming from the eurozone sovereign debt crisis, concerns over China’s property market and the pace of the US recovery.

He said these illustrated that global financial crisis (GFC) related fiscal and monetary packages were only a partial fix.

“While Aberdeen has always held a more cautious view of the ‘recovery’ outlook than many others, the current state of world markets confirms that, despite the nine-month bounce we’ve experienced from stimulus measures, there is no quick fix for the underlying structural imbalances and other issues that led to the GFC,” James said.

However, he said the global equities outlook was not all gloom and doom, with opportunities still existing for investors with a long-term view and an eye for quality.

James said fears of an imminent bursting of the China bubble were premature, emerging markets continued to offer room for growth and the US economy was turning around.

He said that Aberdeen believed it was a stock picker’s market, with the upside of volatility being mispricing. SR

EDITORIAL 11

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Doing the doable Only some of the recommendations of the Cooper Review are worthy of adoption by a Government seeking re-election. The rest should be consigned to the dustbin of policy hypothesis.

Mike Taylor

rrespective of submissions to the contrary and abundant evidence that market forces have generated their own dynamic, the chairman of the Cooper Review, Jeremy Cooper, has remained wedded to the notion of industry consolidation.

Thus, as the Government mulls over the recommendations contained in Cooper’s final report, it will be presented with a stark choice. It can pursue policy initiatives that give impetus to further consolidation or, more sensibly, it can allow normal market dynamics to prevail.

In making its decision, the Government should not allow itself to be distracted by Cooper’s rather simplistic rationale: the desirability of scale. Rather, it should look at the consolidation

I

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Given the Government’s Cabinet changes and the fact it is moving towards an election, its interests would be best served by taking a pragmatic approach to the Cooper recommendations.

that has occurred within the superannuation industry over the past decade and the relative performance of funds.

The number of superannuation funds operating in Australia has diminished substantially over the past 10 years, but while mega-funds such as AustralianSuper have certainly performed well, their absolute scale has not delivered them substantial outperformance.

What is more, it would be wrong to assume that AustralianSuper had been successful simply because it has become very large. Its success has been driven as much by synergy as by scale, proving that the best superannuation fund mergers are born of mutual interest and desire rather than government policy prescriptions.

Anyone who has closely monitored the complex mating rituals that normally precede superannuation fund mergers would know that many such efforts are stillborn, floundering on the rocks of competing egos and competing interests.

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In a speech delivered earlier this year, Cooper discussed the desirability of Australia having fewer but larger superannuation funds in the context of them being able to compete for the ownership of major assets. He did so by referencing the Canadian pension funds that sought control of the Australian infrastructure giant, Transurban. However, there would be many who would argue that, irrespective of a fund’s scale, such a large investment in a single company would not be in the best interests of members.

Equally, there are many in the Australian superannuation industry who have good reason to argue that their members would gain little from entering into a merger with another, larger fund. Why would the trustee board of a fund that returned its members 15 per cent last financial year feel compelled to find a merger partner in the interests of gaining scale?

Perhaps just importantly, why should those same trustees be compelled to seek a merger just because a Government has, arbitrarily, set some sort of minima with respect to membership and funds under administration?

While Australia has a number of under performing funds (which, it might be hypothesised, would perform better if

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they were the subject of a merger), no one seems to have suggested that consolidation be forced on the basis of investment performance. If that were the case, then the former darling of the ratings houses, MTAA Super, would have to be included in the mix.

Given the Government’s Cabinet changes and the fact it is moving towards an election, its interests would be best served by taking a pragmatic approach to the Cooper recommendations and doing the sensibly doable – while discarding the disruptively conceptual.

On that basis, it is eminently sensible for the Government to adopt the recommendations that go towards simplifying and improving the superannuation back-office through ecommerce solutions, electronic funds transfers and the use of tax file numbers.

However, a much more measured approach needs to be adopted towards the Cooper Review’s recommendations with respect to the MySuper default proposals, and towards further industry consolidation.

A Government bruised by its arguments with the mining industry would be most unwise to further unsettle superannuation industry investors as it seeks re-election. SR

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Earning their keep While many predicted responsible investment allocations would be squeezed as a result of the global financial crisis, relative outperformance has ensured their future, writes DAMON TAYLOR. uperannuation funds are continuing to back responsible investment options, not just because of their commitment to underlying principles, but because they are generating competitive returns.

That is the assessment of the president of the Responsible Investment Association of Australia (RIAA), Duncan Paterson, who foresees continuing growth in the sector.

“The RIAA releases an annual report called the Benchmark Report, which looks at the size of the responsible investment sector in Australia,” he said. “It looks at how well responsible investment funds have performed, and for the financial crisis and the period immediately prior, it has shown that the average responsible investment fund has beaten the benchmark across all of the categories chosen.

“Obviously one might point to a particular product and say that one is doing better than another because of ESG [environmental, social and governance] issues, but taken as a whole, responsible investment products perform competitively,” Paterson continued. “The best way to put it is that there’s no evidence

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that implementing ESG criteria into your investment process harms returns in the short, medium or long term.

“So if there’s no evidence that it harms returns, why wouldn’t you do it.”

KNOWLEDGE But despite delivering performance that is increasingly being recognised by asset consultants and fund trustees alike, there remain significant gaps in the knowledge and research around responsible investment, and Paul Harding-Davis, head of distribution for Australian Ethical Investment, is quick to point out that it goes beyond the ESG issues traditionally referred to.

“One of the areas of responsible investment that’s getting a lot more attention over the last three years, and the global financial crisis brought it into focus further, is actually engagement with companies.

“So yes, identify the risks and opportunities coming from ESG issues, but bear in mind that ethical funds have been doing that sort of work for a long time,” HardingDavis continued. “We, as a business, have been doing it since 1986, but we’ve also

been committed to, and this sector has been a leader in, shareholder engagement as well.”

Similarly, Paterson said that if investors wanted to take a serious approach to responsible investing, they were going to have to do a number of things beyond simply basing their investment choice on the ESG cri-

teria they were interested in.

“You need to form a view about the interests of stakeholders in the process,” he said. “If you’re looking to market the product according to its ESG credentials the question is, do you represent a group of, for instance, superannuation funds that have got particular attitudes towards ESG criteria that

would need to influence your decisions.

“So taking a broader organisational approach to responsible investment is part of the process [as well as] thinking about actively engaging with the companies you’re investing in,” Paterson added. “There’s a need to communicate with them about the sorts of things you

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said that people allowed themselves to get more confused than they needed to be about what constituted a responsible investment.

“The finance sector as a whole is replete with slightly confusing definitional issues, and the responsible investment sector is no different,” he said. “What is important is that participants in the financial services industry up-skill themselves in terms of methodologies for the application of ESG criteria.

“One of the key initiatives that’s happening in this space is the launch of the Responsible Investment Academy, which is something that the RIAA is doing, and one of the key aims of that is to do away with some of the misconceptions about responsible investment and the appearance that it might be confusing or misleading,” Paterson continued. “It really needn’t be because while there are different methodologies that are used for responsible investment, the same can be said for any other space in the investment sector.

“It’s just a matter of knowing what those are.”

DEFINITIONS think are relevant from an ESG perspective.

“It’s certainly about much more than simply applying the ESG criteria to investments and leaving it at that.”

Providing the super fund perspective, Mark Delaney, chief investment officer for Australian Super, said that the focus of investment had to be on getting the best possible

return for members.

“Good responsible investing, [that considers] additional non-financial issues (including ESG issues), mitigates against the risk of corporate scandals, fraud and potential litigation against a company,” he said.

“The community’s recognition of a genuine commitment to corporate governance can

enhance the reputation of the company and raise general confidence.

“It makes that company more attractive to shareholders, employees and prospective investors.”

Alternatively, commenting on whether definitions in the responsible investment space were part of the knowledge gap that existed, Paterson

Proving the point of confusion, Delaney said that while Australian Super had a clear view of what constituted a responsible investment, terminology continued to be a problem.

“Australian Super believes responsible investment is about considering all those ‘non-financial’ issues that can impact the long-term

asset value, and that includes ESG issues,” he said.

“But the terminology used is still a source of confusion.

“For instance, people are still using the terms ‘ethical’ and ‘sustainable’ interchangeably,” Delaney continued. “At the heart of this is a lack of understanding of the different underlying selection approaches, including negative and positive screening and best of sector investing.”

For his part, HardingDavis suggested that part of the definitional confusion came from the fact that responsible investment was a reasonably broad church of investments.

“If you go to the RIAA website, you’ll find what I think is a good basis for an industry-wide definition for responsible investment,” he said. “Essentially, responsible investments differ from other investments because they have systematic ways of taking into account ESG and ethical issues within their assessment process.

“Of course, they also differ from each other in the way in which they do that,” Harding-Davis pointed out. “Some people use avoidance or negative screening, some people seek positive opportunities where you look for things that have a positive impact and there’s also an investment sector approach, where you seek to allocate capital to the best behaved in each sector.”

According to HardingDavis, though knowledge and research around responsible Continued on page 14

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Earning their keep ☞ Continued from page 13 investments is growing, that knowledge remained patchy.

“In the retail sector we have a very committed client base who are aware of these issues, but they tend [to be people] who are very environmentally and socially aware,” he said. “However, there are a lot of people in the community who don’t know that you can, in fact, invest your money in this way, and then there’s another group who actually think that you have to give up performance.

“You do get a different performance,” Harding-Davis continued. “And there are clearly times when we’ll underperform and times when we’ll outperform, and those times will always be different when compared with other mainstream funds.

“But over the longer term nearly all of the academic research paints a pretty compelling picture that you don’t give up performance when investing responsibly.”

Of course, the relative youth of responsible investment within Australia does not alter the fact that it is an area of investment that is of great interest to retail and institutional investors alike.

In the wake of the global financial crisis, the policy aspects of all investments are being examined very carefully and, according to Harding-Davis, a focus on ESG issues is likely to be a part of that.

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tandem now,” he said. “In the institutional area, the United Nations Principles for Responsible Investment has raised a significant degree of awareness and Australia leads the world per capita in signatories.

Duncan Paterson

“I think there’s no question that if anybody had any doubts that paying attention to governance, business ethics – things like selling off inappropriate products or misaligned incentive schemes – there’s no doubt that these things actually carry with them significant risk,” continued Harding-Davis.

“When everything’s going smoothly you don’t really notice them, but there’s an event dimension to it, and when things go badly they jump off a cliff.

“It’s certainly a lot easier to have a discussion with people now about the importance of good governance and ethics post the global financial crisis than it was previously.”

It’s certainly a lot easier to have a discussion with people now about the importance of good governance and ethics post the global financial crisis than it was previously.

GOVERNANCE Delany said that since the global financial crisis the key area of increased focus has been governance.

“But there are other responsible investment considerations that have been highlighted as well,” he said.

“We believe that companies that have a genuine commitment to effective corporate governance practices are better positioned to anticipate and respond to making strategic business decisions in to changing economic, ESG conditions that impact on the company.

“Well governed companies seek to maximise long-term value for the company and its shareholders and are mindful of its position in society.”

Interestingly, Paterson suggested that a renewed focus on the investment policy that came with responsible investing might be as much a result of public perception as it was of lessons learned during the global financial crisis.

“I read a very interesting report that was on Reuters the other day regarding a Japanese pension fund which announced that they were taking into account ESG issues because people had lost faith in the investment process,” he said. “The fund’s name was RENGO and it said that it was ‘preparing to incorporate ESG factors into the investment decisions of its member pension schemes as it was a way of regaining trust in investment’.

“I thought that was very interesting because it’s post

global financial crisis and people want to know that investors are taking their responsibilities seriously,” Paterson continued. “And one way of conveying to your client base that you are taking these issues seriously is to give the client an understanding that you care about the sorts of things that they care about.

“It’s a way of connecting with your clients and communicating with them at a level beyond simply the bottom line of the financial returns.”

Paul Harding-Davis

Speaking to the super industry specifically, Paterson said that there was a range of different risks that trustees needed to be conscious of if they were not considering responsible investment.

“The most obvious one is comparison to peers,” he said. “With the onset of the United Nations Principles for Responsible Investment, a Continued on page 16

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Earning their keep ☞ Continued from page 14 very high proportion of superannuation funds in Australia are becoming signatories and those funds that haven’t may well be asked ‘why’ by their members in due course.

“But becoming a signatory doesn’t make the problem go away,” Paterson added. “The principles are set up so that the requirements for signatories ratchet up over time, so it’s not one of those things that you can just sign on to and never do anything about.

“It’s structured in such a way that people who sign on will have to demonstrate in time that they are taking ESG issues into account in the way that they manage their investments.”

More tangibly, Paterson said that he was seeing investors globally starting to recognise that there was an impact on the bottom line returns of companies depending on how well they managed ESG risk.

“The obvious example at the moment is the BP [British Petroleum] oil spill,” he said. “My organisation has a lot of research about the sorts of [occupational health and safety] risks that were developing for BP, and that information is available right now to investors in Australia.

“Again, there is not a good understanding about the quantity and the quality of information that is out there on ESG issues,” Paterson continued. “There’s not a lot of reason why superannuation SUPERREVIEW

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funds shouldn’t be taking these issues into account in a practical sense.

“There’s plenty of information and sources that they can go to.”

QUALITY Yet while there is ample reason for super funds to look to responsible investments, there is still the question of quality. Responsible investment options are far outweighed by their mainstream counterparts, so is choice in terms of quality still too narrow?

The answer, according to Harding-Davis, is not anymore.

“There really is a broad church of responsible investments out there,” he said. “From mainstream funds that are saying that while they weren’t responsible investors originally, they actually think looking at ESG factors is a sensible thing to do, to more specialist responsible investment funds.

“There’s quite a range there, particularly in the equities space, for investors to choose from, and they’re all incorporating ESG criteria into their processes.”

Echoing Harding-Davis’ sentiments, Paterson said that responsible investment choice was wide enough that it didn’t need to be an obstacle for those superannuation funds looking for products in the area.

“I think that there is some ongoing resistance amongst the rating agencies, but if asset consultants aren’t able to come up with a reasonable

range of responsible investment products then the trustee should be asking why that is,” he said. “Because there are a number of products out there – both from smaller niche players and also from mainstream players.

“A smaller niche player might be someone like Australian Ethical Investment, which has been around for almost 20 years now and has a long history in this space, or you could be looking at a mainstream player like AMP or Perpetual.”

Providing a contrast to the views of Harding-Davis and Paterson, Delaney indicated that while there are a number of options and approaches to responsible investment, the exclusion of certain industries was a significant factor.

“Australian Super has three sustainable investment options: Australian sustainable shares option, an international sustainable shares

option and a sustainable balanced option,” he said. “The balanced option is identical to our mainstream balanced option apart, from the equities components.

“Each of the sustainable options invests in equities that have been selected on the basis of best of sector sustainability criteria,” Delaney continued. “And one of the reasons we take that best of sector sustainable approach over an ethical screening approach is the variation in what may be considered an ethical company.”

Delaney said that an investment universe with ethical exclusions was necessarily limited simply because entire industry sectors would not qualify.

“Australian Super has 1.4 million members from all ages, walks of life and employment backgrounds and the idea of what is an ethical company and what is not will vary widely between

members,” he said. “But that narrower investment universe also has a higher probability of volatility.”

VOLATILITY Naturally, the volatility referred to by Delaney is a key issue here. The danger seems to be that when times get tough and stability becomes an issue, funds might stop paying attention to responsible investment issues and/or drop their ESG screens entirely.

However, Harding-Davis said that he had seen no evidence of that happening through a financial crisis that was one of the most challenging many investors had ever witnessed.

“I don’t see it having happened, and given some of the performance numbers I’ve seen through that time, the indications are that there were some pretty effective performances through that period,” he said. “The sector,

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from what I can see on both an average and with respect to some individuals, did relatively very well.

“In fact, I’d say that the argument has become more compelling that it was exactly the wrong time to overlook responsible investments.”

Alternatively, Paterson said that while he had seen evidence of responsible investments being neglected in broking houses, he had not seen the trend go further than that.

“Prior to the global financial crisis, a number of broking houses invested in an ESG capacity within their organisations, but it seemed as though that ESG capacity was the first to be sacrificed when cost cutting came along,” he said. “But having said that, we haven’t seen responsible investment products shut down as a result of the global financial crisis in Australia.

“I don’t think the dropping of ESG screens or attention to these issues is a massive issue, but what is important here is that increased degree of professionalism when it comes to approaching responsible investment issues in the mainstream finance sector,” Paterson continued.

“It’s important to understand that the different types of methodologies in responsible investment are going to deliver different types of variance in return, different types of risk, different balances over time and at different phases of the market.”

As an example, Paterson said a very deep green fund

manager that excluded investment in the mining sector was always going to underperform when the mining sector was doing well and perform better when the mining sector faltered.

“However, I think the finance sector can improve its degree of professionalism in the way it considers these things,” he said. “At the moment, it’s asking for very simple solutions. At the moment, people are saying ‘just give me a [responsible investment] product’ and they aren’t worrying about the characteristics of the responsible investment component.

“They just want to say it’s a Responsible Investment product because it’s badged that way, but in reality that’s not the way things work and it would be great to see some slightly more sophisticated questions being asked.”

across all of their investments, and that is obviously a very committed way of doing it,” he said. “We’re also seeing a lot of superannuation funds signing up to the United Nations for Principles Resposible Invstment I but being quite tentative about what the next steps are going to be.

“The methodologies that are going to be used by super funds are going to differ according to the nature of their beneficiaries, according to the nature of their size and their own structure and, from my perspective, it’s fascinating to see how they’re developing.”

ADAPTING RI At this stage, there seems to be little doubt that responsible investment remains in a period of growth and, as such, investors’ understanding of the area is evolving. Where responsible investments were perhaps once a periphery concern for super funds, the challenge now is how best to fit them into portfolios.

Paterson said the super industry was already seeing a range of different approaches being taken by individual super funds.

“We’re seeing VicSuper adopt a whole-of-fund approach to responsible investment, which is applying

Mark Delaney

Paterson said he also expected there to be a lot more growth in the structuring of mandates.

“That’s the area where super fund trustees really have a direct and immediate impact on the processes being used by fund managers,” he said. “At the moment, a lot of questions are being asked

If ESG issues are to become a matter of course for investors, it will require the allocation of more thought and resources.

of fund managers as to how they’re incorporating ESG, but we haven’t seen an awful lot of inclusion of the requirements regarding ESG criteria going into mandates and feedback going to fund managers about the quality of ESG integration as well.”

Offering the fund perspective, Delaney said the superannuation industry was changing and that incorporation of ESG issues would undoubtedly become more common in the future.

“Interest in sustainable investments is gradually building and we are continuing to refine our investment choice offering to respond to member demands in this area,” he said. “As always, however, our work in this area involves balancing the needs and wishes of those who have taken up sustainable options with the bulk of members who remain in our default balanced option.”

Harding-Davis said that irrespective of how super funds fit responsible investments into their portfolios, the simple fact is that it is still an area for improvement.

“If ESG issues are to become a matter of course for investors, it will require the allocation of more thought and resources to make sure that they are actually incorporating it into their day-to-day investment management,” he said. “Some of it is a bit like an iceberg: we’ve seen some commitments but there’s still a lot of work going on behind the scenes – and not all of it is visible yet.” SR JULY 2010

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Looking for a real

Alternative investments remain at front of mind for many superannuation fund trustees but, as DAMON TAYLOR reports, the global financial crisis has served to create a greater focus on what ‘alternative’ really means.

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f there is one category of assets that continues to receive closer examination in the wake of the global financial crisis (GFC), it is that of alternative investments. Composed of assets that, in many circumstances, were considered either volatility insurance policies or countercyclical to equities, the reality was

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that a number of these socalled alternatives failed to deliver the diversity their investors were expecting.

As a consequence, transparency, governance and liquidity are all top of mind, but according to Joe Bracken, head of macro strategies at BT Investment Management, investors would be well advised to look closely

at what defines an alternative investment within their portfolio.

“Oddly enough, definitions matter more these days than they did in the past,” he said. “In the past, people referred to alternatives as basically anything outside of equities and bonds, so investing in timber or infrastructure, private equity,

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alternative

managed futures – they’re all alternatives.

“Now that was a fine definition and that was okay really until the GFC,” Bracken continued. “Out of the GFC, people have really started to say, ‘Hang on, what is actually in my alternatives bucket? What do I mean by alternatives?’. Now they’re applying a slightly stricter

definition in saying that alternatives are typically absolute return strategies that are uncorrelated with bonds and equities and have varying degrees of liquidity.

“When investors talk about alternatives, that’s really what they mean now.”

Clarifying Bracken’s definition further, Ken Marshman, head of investment outcomes for JANA Investment Advisers, said whether you called it alternatives or something else, what was important was the underlying risks and returns.

“The biggest thing about alternatives, and what really makes them alternative, is probably that they’re untraded – or at least not traded in the same way that other assets are,” he said.

“That’s a critical point. The other aspect that defines an alternative is that you expect the underlying fundamental drivers of returns, and risks to those returns, are different from your major asset classes.

“They would be the two defining characteristics of alternatives, and then the question of how much to alternatives or not is really irrelevant,” Marshman added.

“What’s important is how much you want of those underlying risks in a portfolio and how well you know those risks.

“So the third element of alternatives is getting a really good handle on those risks, and that’s more difficult because they’re new.”

Yet with respect to keeping alternatives allocations balanced and proportional and the relevance of definitions

in that pursuit, Greg Nolan, general manager of investments for industry fund Care Super, said that it was more important to worry about what was growth and what was income in the return.

“That’s the most important thing, but the need to keep portfolios balanced brings in another aspect, and that is liquidity,” he said. “That’s something we focus on because there has to be a balance.

“We’re long-term investors, so we’re focused on assets that give us that longterm risk/return profile,” Nolan continued. “But we’ve also got to be cognisant of liquidity and balance the differing requirements of our investments.

“One is obviously long term and the other is short term.”

POINT OF DIFFERENCE Of course, the balancing act referred to by Nolan and how well super funds have managed it has had a very real impact on returns post GFC. Alternatives exposure has always been a point of difference between super funds, and for Bracken, individual fund performance is likely to have reflected that.

“The point of differentiation seems to be in terms of the amount of alternatives exposure funds may have,” he said. “Some super funds tend to be very, very conservative indeed and would have a 2 per cent or 3 per cent maximum in alternatives.

“Others see the diversification benefits completely and are 10 per cent, 15 per

The biggest thing about alternatives, and what really makes them alternative, is probably that they’re untraded – or at least not traded in the same way that other assets are.

cent, 20 per cent into alternatives and typically, even through the GFC, the absolute return funds did a lot better than your standard equity fund,” Bracken added. “They might have dropped a little or indeed not at all – and some of them actually made money – whereas the typical equity fund dropped about 50 per cent.

“So clearly, alternatives exposures would have made quite a big difference.”

Marshman said the other side of the alternatives coin lay in funds’ preparedness to take on the risk of various alternative investments.

“If you want to strip it bare, some funds decided to take on more liquidity risk within their portfolio, more regulation risk within infrastructure, risk within property or the risk of appointing successful managers in hedge funds,” he said. “But whatever that risk is, I think that those risks are quite different from the risks of owning equities or different styles of equity management.

“They are a significant differentiating point and obviously those portfolios that didn’t have a lot of these less liquid alternatives suffered going into the GFC, but have bounced back post GFC.”

DISAPPOINTMENT Unfortunately, not all alternative investments performed as predicted within the environment of tight liquidity that was created by the GFC. A number of investors, Continued on page 20

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Looking for a real alternative ☞ Continued from page 19 both institutional and retail, were disappointed by hedge funds in particular, but according to Marshman, that disappointment was more a product of circumstance than the returns being delivered.

“Hedge funds, on the face of it, disappointed investors because it was expected that they would deliver positive returns in almost every environment,” he said. “But in a period where people were scrambling for cash, good assets had to be sold in a hurry, and that led to a rapid drop in the valuation of those assets.

“Furthermore, some of these assets didn’t have easy liquidity, which meant that the price fell further than it should have,” Marshman continued. “However, it’s a fact that for the entire period of the GFC and the recovery, hedge funds have outperformed those balanced structures of normal balanced liquid assets; they’ve outperformed what would be a diversified portfolio of bonds and equities through that whole period.”

Marshman said hedge funds had suffered largely because they had not lived up to investors’ expectations.

“But in saying that, they’ve actually outperformed the mainstream investment approaches, and I’d go further to say that in the biggest liquidity crisis we’ve had in 80 years, the limited default of those funds is quite remarkable, particularly given the way they’re structured,” he pointed out. “To be honest, I think they’ve stood one of the SUPERREVIEW

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Hedge funds, on the face of it, disappointed investors because it was expected that they would deliver positive returns in almost every environment.

hardest tests of all time.”

Similarly, Nolan’s assessment of hedge fund performance was that they had been significantly impacted by investor sentiment.

“From my understanding there was more to it than structure and currency movement,” he said. “My belief is that some of the trades were crowded trades – they were based on leverage – and at the fulcrum of the crisis people were trying to sell everything, and particularly the quant-based strategies just couldn’t get out.

“It was like everyone was rushing for the same door and only a limited number could get through.”

Months down the track, with liquidity concerns easing somewhat, Marshman said investors in the hedge fund space had learnt to know precisely what they were investing in.

“I think people have learned that the term ‘hedge fund’ is a broad grab bag – a label that covers a wide range of different investment strategies,” he said.

“And I think what the GFC

has taught investors and investment advisers is that people need to understand the nature of the hedge fund that they are buying when they are buying it.

“Experience has shown us that some of these assets had quite a high correlation with equities, where others had quite a low correlation with equities,” Marshman continued. “People have to work out what it is that they really want to buy when they’re acquiring these styles of assets or these styles of investment management.”

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LIQUIDITY Providing a point of comparison to the hedge fund scenario, Bracken said that by focusing on the availability of liquidity, BT’s Global Macro fund had been unaffected by the rest of the market’s liquidity concerns.

“When we put together the Global Macro fund in the first place we adopted this idea of what we call ‘TLC’, which is not actually tender loving care but instead transparency, liquidity and control,” he said. “So on the transparency side, we made

sure that we put into Global Macro investments that we understood, that we could explain to other people and that we were comfortable with.

“But more importantly, on the liquidity side, we only invest in instruments that give us daily liquidity, so futures and forwards, that’s all,” Bracken continued. “We don’t do options, we don’t do credit, we don’t do over-thecounter stuff, nothing like that – it’s all liquid, exchange-traded futures and forwards.

“So during the GFC we weren’t impacted at all by either shorting bans, liquidity constraints, margin calls, nothing like that, and that was by construction.”

Bracken said that with respect to control, the aim was to exercise good risk control.

“We have pretty sophisticated risk management tools and risk measurement tools,” he said. “Measurement so that we know what our risk is but management so that if we think our risk is getting out of hand, we can cut our positions very quickly.

“For us, the real problem during the GFC was that there was only really one bet in the market, and that was to buy US dollars and then buy US treasuries,” Bracken added. “That was it. You either got that bet right or you didn’t. And really, that’s a very difficult environment to be in because if there’s only one bet in the entire market, most people will have taken it and it’s going to be very difficult to make money.”

ILLIQUIDITY Naturally, the alternative investments story was about more than liquidity. On the other side of the coin, the illiquidity of infrastructure assets gave investors much more stable returns, but according to Marshman, they were not immune to some of the more poignant lessons delivered by the GFC. “By and large, infrastructure did have more stable returns, but the GFC has certainly exposed some methods of investing in infrastructure that were not at all stable,” he said. “What we’ve seen is that the assets themselves have been very resilient – the ports, the roads, the airports themselves.

“The revenues have tended to come through and the costs have been controlled,” Marshman continued. “But what has happened is that the highly leveraged investments in infrastructure have been hurt quite significantly and some of the very highly geared assets have produced worse returns than those that weren’t as highly geared.”

According to Marshman, that was particularly the case for those assets that were in the middle of major refinancing when banks were shrinking their lending balance sheets.

“The lesson out of the GFC in infrastructure is to be very cautious of the extent of leverage,” Marshman said. “The underlying assets are sound, but the way in which the capital structure of those investments is established is critical.”

For Nolan, the relative

They’ve actually outperformed the mainstream investment approaches, and I’d go further to say that in the biggest liquidity crisis we’ve had in 80 years, the limited default of those funds is quite remarkable.

success enjoyed by infrastructure assets was driven significantly by investor attitudes in other parts of the market.

“The market was driven to a large degree by sentiment and fear during the GFC,” he said. “And when things are priced by the minute and day by day, there’s plenty of scope for sentiment or that fear to take hold.

“But when you’re dealing with infrastructure assets that are real assets for which revenue over the long term is driven by economic growth, the situation is a bit different,” Nolan continued.

“There aren’t the trades going through on a daily basis, so there’s obviously a lot more stability there.

“It’s just a function of them not being pushed around by short-term sentiment.”

RISK MANAGEMENT Taken as a whole, moves within alternative investments post GFC seem to be towards risk management in terms of liquidity, transparency and governance.

Most people knew that some alternatives would suffer during a period of tight liquidity, but Marshman believes shrewd investors are firmly set upon policy changes that will protect them from similar circumstances in the future.

“Right across the board this question of liquidity management is top of mind,” he said. “That need to avoid overextension into less liquid assets or assets that could have significant cash Continued on page 22

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Looking for a real alternative ☞ Continued from page 21 drawdowns is now hard wired into the processes and thinking of most superannuation funds, and that is the significant change.

“Step number two in terms of the hedge funds space is that we now have the understanding and learning as to the different characteristics of hedge funds,” Marshman continued. “There will be a change in direction about what other assets they’re replacing in a portfolio, so if they’re being used to replace debt then you’ll want a different structure than if they’re being used to replace equities or property or something.

“As an industry, we’ve got a much better understanding of the role hedge funds should play in a balanced portfolio.”

In the infrastructure space, Marshman said anything highly geared with fee structures that encouraged higher leverage were also out.

“Around the rest of the world, they might want to take those,” he said. “But I think in Australia we’ll see a huge resistance to investing money in highly leveraged assets where the promoter or the manager or whoever is highly incentivised to accelerate that leverage and pass the risks off to the investor.”

Bracken suggested that change within alternative investments would not just be about policy but also about the way investors viewed individual assets.

“It’s odd that people are saying that concern over liquidity has eased,” he said. “To be honest, when SUPERREVIEW

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The GFC very quickly showed that not only do equities not always go up but that they can always fall, and they can fall very, very quickly, and over the space of a couple of months you can unwind all of the good work that was done over a number of years.

I speak to both superannuation funds and to advisers and individual investors, the first thing that they talk about and indeed the fifth thing that they talk about is liquidity, about how they never want to get into products that have quarterly liquidity or yearly liquidity, and how having daily liquidity is fantastic.

“So that’s something that really hasn’t changed, even months down the track – liquidity is still the most important thing on peoples’ minds,” Bracken added. “The second thing that’s changed, however, is that before the GFC people just assumed that Australian equities in particular, but equities in general, would always go up.

“The GFC very quickly showed that not only do equities not always go up but that they can always fall, and they can fall very, very quickly, and over the space of a couple of months you can unwind all of the good work that was done over a number of years.”

For Bracken, the wake up call for many investors had been the realisation that there was a huge amount of risk in putting too much of an investment portfolio into the stock market.

“It kind of reinforced for people the idea of diversification,” he said. “That you actually need to have more diversified portfolios and indeed these absolute return products that aren’t linked to benchmarks and that try to preserve your capital as much as possible.

“In an odd way, the GFC has been rather good for us in that it’s altered peoples’

value for the risk that was always there but they never recognised.”

Looking to the future and whether the composition of superannuation funds’ alternative investment allocations were likely to see meaningful change, Marshman said the key lay in recognising the lessons learned during the financial crisis as well as how current market trends were impacting various assets.

Ken Marshman

“The advice we’re giving is that we think that these alternatives, for want of a better term, have proven themselves through the GFC if properly executed,” he said.

“There are two other points here too. One is that there is a shortage of available funding at the moment, so many of these so-called alternatives are ripe – they’re really ready at the moment.

“Secondly, the debt overhang is a significant issue for some of the non-alternatives,” Marshman continued. “So whether you’re looking at the risks of inflation or the risks of deflation, some of the traditional assets look highly uncertain right now.

“We think some of these alternatives represent a good management strategy to deal with that uncertainty.”

For his part, Bracken predicted that the alternative investment focus moving forward would be on absolute return strategies.

“To be honest, I find it difficult to believe that people will forget the fact that they lost 50 per cent through the GFC, and even now that markets have rebounded, they’re still nowhere near the levels they were at,” he said. “To me, when I look at investors’ behaviour, they’re now extremely reticent to put all of their money in to the equity basket and just go for it again.

“The lessons of the GFC have been learned and going forward people will be far more interested in having products that offer daily liquidity,” Bracken continued.

“They’ll be far more interested and attentive to how risk is managed and they’ll be far more interested in not just having the same old equities and bonds but also having some absolute return focus as well.”

Bracken said that at the end of the day, if an investor gave him $100 and he gave them back more than that $100, he had done a good job.

“And obviously, if I do a bad job, I’ll be giving them less than that $100 back,” he said. “It’s really all about absolute return.

“It’s not about benchmarks, it’s not about relative return, it’s about absolute return and building your wealth, and I think people are going to be far more attentive to that going forward.” SR

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Events Calendar

Australian Ethical’s new CIO James Jordan named as replacement for Martin Halloran.

Super Review’s monthly diary of superannuation industry events around Australia and abroad.

JULY

ustralian Ethical has announced the appointment of James Jordan as its chief investment officer, replacing Martin Halloran, who left the organisation at the end of June.

Jordan initially joined the firm as an equities analyst in 2006 and currently holds the position of head of research.

Australian Ethical chief executive

A

VICTORIA 7 – ASFA Luncheon. Speakers: Minister for Financial Services, Superannuation and Corporate Law and Minister for Human Services Chris Bowen MP and the chair of the Review into the Governance, Efficiency and Structure and Operation of Australia’s Superannuation System, Jeremy Cooper. Venue: Park Hyatt Melbourne. 1 Parliament Square (off Parliament Place), Melbourne. Enquiries: ASFA Member Services Unit.

Ph: (02) 9264 9300 or 1800 812 798.

Vimal Gor

23 – ASFA Comms 10 Forum and Awards. Host: Comedian Peter Berner.

Venue: Crown Conference Centre, Melbourne. Enquiries: ASFA Member Services Unit. Ph: (02) 9264 9300 or 1800 812 798.

QUEENSLAND 19 – ASFA Golf Day. Venue: North Lakes Golf Club. Bridgeport Drive, Northlakes.

Enquiries: ASFA Member Services Unit.

Ph: (02) 9264 9300 or 1800 812 798.

Fax details of conferences, seminars and courses to Super Review on (02) 9422 2822

A CONSOLIDATION of BT Investment Management’s (BTIM’s) cash, credit and fixed interest resources has seen the appointment of Vimal Gor as head of income and fixed interest.

Prior to joining BTIM in November 2009, Gor spent the previous 10 years at Aviva Investors in London, where he was responsible for the management of the Global Aggregate Bond portfolios.

BTIM’s chief executive officer, Emilio Gonzalez, said it was pleasing that the best person identified for the role was an internal candidate.

COLONIAL First State Global Asset Management (CFSGAM) has appointed Andrew Cummins to the role of head of global projects and strategy.

Phillip Vernon said he is pleased with the appointment: “James has been a key part of the investment team for a number of years and is highly respected both internally and externally.”

Prior to joining Australian Ethical, Jordan worked as a senior economist with various departments of the Federal Government. SR

Cummins joins the business from Macquarie Bank, where he was division director, Macquarie Securities Group. His previous experience also includes being a key member of the management teams at BlackRock in the United Kingdom and Europe.

Reporting to CFSGAM chief executive officer Mark Lazberger, Cummins will lead the development and execution of all major business critical projects within the global CFSGAM and First State investments businesses.

Commenting on the appointment, Lazberger said: “Andrew is an extremely experienced and talented professional with a very strong project management and operations background.”

JANA Investment Advisers has announced a number of appointments that increases the size of its investment team to 48.

Domien Beckers is joining the portfolio construction research team, where he will be involved in both research and client work, while Ann Marco joins the firm in a quantitative analyst role, having previously worked at National Australia Trustees.

Brendan Donohoe has also joined JANA in a senior leadership role to lead business development and specific projects.

JANA also welcomed back Mary Power earlier this year. Power was the head of property research

James Jordan

prior to joining Warakirri Asset Management.

MERCER has announced the senior appointments of Brian Long and Luke Fitzgerald, both former van Eyk employees, to roles in which they will provide advisory and research services to financial planning organisations, private banks and platforms.

Luke Fitzgerald

Long has more than 25 years experience in investment banking, investment administration and custody, investment research and product distribution. He will lead the wealth management team in Australia and New Zealand.

Fitzgerald will also join Mercer in a senior consulting role, focusing on national financial planning dealer groups. He has a business development and distribution background within a variety of industries in both Australia and New Zealand. SR JULY 2010

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ROLLOVER

THE OTHER SIDE OF SUPERANNUATION

Follow the leader THERE are some in the superannuation industry who are clearly cynics when it comes to politics.

Rollover has no other explanation for the people who suggested that the Minister for Financial Services, Chris Bowen, would be rewarded for his support of the ascendancy of the Prime Minister, Julia Gillard, and the fall from power of former Prime Minister, Kevin Rudd.

It appears their assessment was almost entirely based upon television coverage of

The cold heart of politics ROLLOVER wonders whether there is going to be more than just a name change over at the Investment and Financial Services Association (IFSA).

As all readers should now know, IFSA has been renamed the Financial Services Council (FSC) with its chief executive, John Brogden, suggesting it will be taking on a wider policy and lobbying brief.

In those circumstances, Rollover wonders whether the next step for IFSA/FSC will be a shift from its current offices in mid-town Sydney to the

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somewhat more sterile Northbourne Avenue in Canberra.

A Canberra headquarters has always been a prerequisite for industry organisations with serious lobbying aspirations, but Rollover wonders whether the fundies sitting on the IFSA/FSC board will be comfortable making the commute.

Still, a Canberra base makes a handy launch pad for those with Federal political aspirations – even if the electorate in question is in Sydney’s northern beaches. SR

the tumultuous events in Canberra in which Bowen was apparently seen walking in close proximity to Gillard.

That being the case, these people must have made the opposite assessment of the Assistant Treasurer, Nick Sherry, who was seen to be walking in close proximity to the dethroned Prime Minister.

If careers are to be built or broken based upon the people with whom you brush shoulders, Rollover will understand if Labor politicians choose to avoid Rudd. SR

A merry-go-roundtable THE award for helping the media in extremis must surely go to the president of the Responsible Investment Association of Australia (RIAA), Duncan Paterson.

Rollover hears that Paterson went to extraordinary lengths to participate in a roundtable exercise conducted by Super Review’s sister publication, Money Management, including closeting himself in the darkened recesses of a building.

It seems that while the majority of the roundtable participants were sitting

comfortably in Sydney, Paterson and Australian Ethical’s Paul Harding-Davis dialled into the conference from New Zealand.

But while Harding-Davis was participating from the comfort of his hotel room, Paterson found himself on the go and using his mobile phone amid the clatter of a busy Wellington cafe.

With the cafe noises serving to overwhelm all other conversation on the conference call, Paterson was all consideration, politely exiting the eatery and bravely ensconcing himself in a dark, but reasonably silent, corridor. SR