Super Review (June, 2011) by Cirrus Media

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 June 2011

Volume 25 - Issue 5

Preparing Australians for retirement 3 MERGER TALKS Statewide Super and Local Super are conducting merger talks.

As the debate about retirement incomes gains momentum, the issue is expected to be a key part of the agenda at the Federal Government’s proposed October Tax Forum.

10 PUT OPTIONS Utilising put options can protect investors from major downswings.

Print Post Approved PP255003/01111

12 ASSET ALLOCATION The GFC has caused funds to reconsider their asset allocations.

Print Post Approved PP255003/01111

18 MYSUPER The devil is in the detail when it comes to the MySuper changes. For the latest news, visit superreview.com.au COMPANY INDEX

NEWS

he Federal Government needs to ensure that the tax treatment of post-retirement incomes is appropriately handled within the framework of its planned October Tax Forum, according to the chief executive of the Association of Superannuation Funds of Australia (ASFA), Pauline Vamos. Participating in a Super Review Retirement Incomes breakfast in late May, Vamos reflected the broad view of panellists at the breakfast by claiming successive Australian Governments had failed to appropriately address the postretirement phase as part of the broader superannuation policy debate in Australia. She said the tax treatment of retirement incomes products needed to be a cornerstone of the debate and that the debate had been started on the issue. “It is my understanding that it will be part of the October Tax Forum and, flowing from that, we would be hoping changes might be announced in next year’s Federal Budget,” Vamos said. For his part, Mercer retirement incomes specialist David Knox urged both the industry and the Government to adopt a graduated approach to the implementation of any policy changes relating to superannuation. 3

EDITORIAL

The Coalition recognised the challenges with respect to retirement incomes, but added that the state of the Budget precluded any significant moves with respect to tax relief.

ASSET ALLOCATION

Pauline Vamos

Knox said he believed policy certainty was essential. “Confidence in the system is a crucial element,” he said. “That is why we believe there is nothing wrong with moving towards significant change over 15 to 20-year transition periods.” The Super Review breakfast had earlier been presented with new research funded by Metlife, which confirmed Australians are still ill-prepared for retirement, with only one in four saying they have achieved their retirement goals or are likely to do so. The new research found only four in 10 Australians have planned for retirement in terms of utilising investments over and above those contained within their superannuation fund. “Sixty per cent of Australians are relying solely on their superannuation for their retirement planning,” Metlife chief marketing and distribution officer Eric Reisenwitz

MYSUPER

APPOINTMENTS

told the breakfast. However, he said that most employees had not accumulated enough towards their retirement, with the average superannuation balance for Australians aged over 50 sitting at $52,500 for men, and less for women. Reisenwitz said women were at greater risk due to longer life expectancy and less planning. The good news contained in the research is that people who had actively planned for their retirement appeared confident in their ability to reach their goals in the next five years, with fewer than a third of such people feeling they were still behind. The Opposition spokesman on Financial Services, Senator Mathias Cormann, said the Coalition recognised the challenges with respect to retirement incomes, but added that the state of the Budget precluded any significant moves with respect to tax relief. SR 23

ROLLOVER

2 PAGE TWO

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MANDATES MAY 2011 Received by

Type of mandate

Issued by

Amount

Received by

Type of mandate

Issued by

FiH2O Asset Management

Global fixed income and currency

Colonial First State

$270 million

Mercer

Administration and client facing

The Retirement Benefits Fund

Financial Synergy

Administration

Energy Super

GBST

Investment technology

Unisuper

Perennial Investment Partners

Global equities

Australian Catholic Superannuation

$100 million

SimCorp

Investment technology

Schroders Australia

SuperChoice

Clearing services

SuperBPO

and Retirement Fund

Now starring H2O

ASSET MANAGEMENT LLP

We’re delighted to offer you another leading name in global funds management. H2O Asset Management LLP’s forte is to capture alpha between and within all asset classes globally, and deliver high risk-adjusted returns with daily liquidity and total transparency. To obtain more information about H2O or any of our other star performers, call us on 02 8224 2900. www.apostleam.com.au

MH Carnegie & Co.

THE NAME BEHIND THE NAMES Issued by Apostle Asset Management Limited (“Apostle”) (ABN 60 088 786 289) (AFSL No. 246830). Please contact Apostle to obtain more information about the products and services we offer as not all products and services may be suitable for you.

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Amount

NEWS 3

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Statewide Super and Local Super conducting merger talks By Milana Pokrajac TWO South Australian superannuation funds, Statewide Super and Local Super, have confirmed they are having detailed discussions about a merger. But due diligence would need to be completed and shareholder approval re-

ceived before a merger between the two companies could take place, according to the chair of Statewide Super, Nicholas Begakis AM, and chair of Local Super, Juliet Brown. Begakis and Brown said the recent release of the Federal Government’s Cooper Review into the governance, efficien-

cy, structure and operation of Australia’s superannuation system had encouraged super funds around the country to consider merger and acquisition opportunities. A merged entity would manage more than $4 billion in funds, with Statewide Super’s $2.4 billion and Local Super’s $1.7 billion in funds under management. SR

Russell ups industry fund offering By Ashleigh McIntyre

Chris Corneil

RUSSELL Investments has targeted industry and government funds with the launch of a new consulting service. Russell Future Proofing Consulting (RFPC) will offer advice and solutions to assist industry and government funds

retain members during this period of regulatory change. To lead the new service and a team of 15, Russell has appointed former AMP Capital Investors executive Michael Clarke as managing director, industry and government funds. Chief executive for Aus-

tralasia, Chris Corneil, said the new appointment and service will help funds with governance issues, developing retirement solutions for members and MySuper requirements. He said one of the major issues for funds leading up to legislative change has been the prospect of scale requirements

Quality trumps cost in MySuper debate By Benjamin Levy THEsuper fund industry debate has been sidetracked, in the opinion of Stronger Super consultative group chairman Paul Costello, who attempted to redirect the debate back towards quality of products rather than on lowering costs. Speaking at a Financial Services Council/ Deloitte lunch in Melbourne, Costello told the audience that the industry was too focused on lowering costs in the belief that that would solve all their problems.

“That is too premature; I don’t for a moment think that there was anything from Treasury or government to indicate that lowering costs was the final outcome,” Costello said. MySuper is fundamentally about improving the quality of what super funds did, and cost was just a part of that, he said. The structure of super fund products should be made simpler for investors, and that alone would reduce costs, he said. Active management or high costs market assets should not be binned in favour

of lowering costs, he added. Costello also warned the industry not to “publicly voice their differences” over aspects of the MySuper legislation. The government wanted to implement their agenda without industry criticism of what they are trying to do, he said. “There is little value in your time and my time, spending three or four months simply reiterating differences and presenting [them] to the government,” Costello said. R

UniSuper moves into after-tax realm UNISUPER has delved into the after-tax investment world by appointing technology firm GBST to provide after-tax benchmarking solutions designed to boost member portfolio returns by up to two per cent each year. The new partnership will come into play from 1 July, and would see UniSuper’s Australian shares managers have their performance calculated on an after-tax basis. Excess returns would then be measured against a GBSTcalculated S&P/ASX series of after-tax indicies. As super fund members accumulate their retirement savings and retire on after-tax returns, this could significantly boost the funds available to them on retirement, according to UniSuper’s head of portfolio analysis and implementation, Dharmendra Dayabhai. He said the fund had been considering an after-tax benchmark and return methodology for some time and that the Cooper Review had heightened the issue.

“We recognise the importance of post-tax considerations and assessing after-tax performance means we are further aligning our investment managers to the best interest of our members,” Dayabhai said. UniSuper noted the Cooper Super System Review by Gordon Mackenzie of ATAX University of NSW claimed the aftertax benchmarking and returns methodology could boost member portfolio returns by as much as two per cent each year. The quantitative data services business, GBST Quant, provides benchmark solutions both pre- and post-tax. The custom benchmarks could range from slight variations to standard industry indices through to completely custom calculations, according to Neil Detering, head of GBST Quant. “As the industry moves towards after-tax measurement and performance becoming the norm, the next challenge is for fund managers to make tax considerations an integral component of their investment process,” Detering said. SR

for MySuper products, which has left some funds feeling that mergers are the only option. Corneil said one alternative could be keeping the existing fund but outsourcing fixed costs, while areas like product development and member services can be made more cost-effective. SR

Mergers could hang on member votes MERGERS may not all be up to super fund trustees if the Federal Opposition has its way on making mergers the subject of member ballots. The opposition spokesman for Financial Services, Senator Mathias Cormann, has flagged such a move amid reports that a merger of two major industry superannuation funds – Vision Super and Equipsuper – had collapsed. Commenting on the failed merger, Cormann said reports suggested trustees may have been putting their own interests ahead of the best interests of their members. “To scuttle a proposed merger because union-backed trustees don’t want democratic elections but want guaranteed union-nominated positions smacks of institutionalised self-interest,” he said. Cormann said he believed there should be better regulatory supervision and review of merger arrangements and more adequate remedies for members when the handling of a merger by trustees ended up disadvantaging those members. “Superannuation funds hold the money of their members on trust,” he said. “Those members should have a say as part of the merger process instead of relying on the trustees doing the right thing in satisfying their trustee fiduciary duties to act in the best interests of their members.” SR JUNE 2011 * SUPERREVIEW

4 NEWS

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Trio levy unfair for smaller funds: ASFA, AIST By Ashleigh McIntyre SUPERANNUATION associations have come out in support of the Government’s $55 million levy to assist victims of the Trio Capital collapse, but question the fairness of the proposed calculation. Earlier this month, the Government announced the levy on regulated funds would be calculated by multiplying the rate of 0.0001977 by a fund’s assets, with a maximum levy set at $500,000.

Both the Association of Superannuation Funds of Australia (ASFA) and the Australian Institution of Superannuation Trustees (AIST) have queried this calculation, stating it creates inequity between larger and smaller funds. In a submission to the Government, ASFA stated that very large funds would pay comparatively less than smaller balance funds, which would impact greatly on members’ balances. “A fund with $5 billion in funds under management would have their levy

(calculated as $988,500) capped at $500,000. If this fund has 750,000 members, the levy payable by each member would be $0.67. “In contrast, a fund with $1 billion in funds under management would be subject to a total levy of $197,700. If this fund has 15,000 members, the levy payable by each member would be $13.18,” said the submission. ASFA stated that greater equity could be reached by increasing the maximum levy and decreasing the applicable rate,

Bendigo Wealth to add MySuper product By Chris Kennedy BENDIGO Wealth will be looking to add a MySuper-compliant product to its low-cost Trinity3 platform in the first quarter of the next financial year. The group has its own separately managed account with the Trinity3 product that is getting good traction with its retail customers and independent financial advisers want to know if they can provide the same sort of product to their clients, said Bendigo Wealth executive John Billington. Billington also said he would be looking to sign off on a new income fund to build the group’s funds capability that

John Billington

would be launched in the next month or two, and an index fund that would be available in the first quarter of the next calendar year. The changes come on the

back of strong interest in the unified Bendigo Wealth brand, which was launched early last month and brought together the bank’s previously separate wealth management services, including Adelaide Bank, Leveraged Equities, Sandhurst Trustees and its low-cost investment platform Trinity3. Billington said he was surprised by the level of interest, with the site recording three times the average number of click-throughs. “We’ve had a great mix of existing Bendigo retail customers and new customers and also financial advisers wanting to know about the products and services we’re offering,” he said. SR

APRA-regulated schemes on Government’s radar THE Federal Government is planning to tighten regulations surrounding public sector superannuation schemes that have become regulated funds. An exposure draft proposes to review the list of funds which are exempt from regulation under the Superannuation Industry Regulations 1994, as they are already subject to regulation under their enabling legislation. The changes are in response to a number of public sector schemes becoming regulated by the Australian Prudential Regulation Authority (APRA), yet still remaining on the SUPERREVIEW

JUNE 2011

list of exempt funds. The proposed regulations would remove those schemes that have chosen to become APRA-regulated from the exempt list, and would amend legalisation to ensure that schemes remain exempt where their enabling legislation has been amended. It would also insert a new sub-regulation to specify that a scheme ceases to be exempt at the time it is registered as a registrable superannuation entity, and therefore, becomes APRA-regulated. Submissions on the exposure draft can be made until 14 June, 2011. SR

so as to spread the burden across fund members. One thing the associations disagreed on, however, was the amount of time given to funds to pay the levy. AIST said the Government’s proposed time limit of 28 days from the commencement date of the regulations would be enough time for funds to meet the payment. ASFA stated it believed the payment date should be set at a minimum of six months from the start of the regulations. SR

CFS hands H2O first Australian mandate COLONIAL First State has awarded H20 Asset Management a global fixed income and currency mandate of $270 million as an allocation within its FirstChoicemulti-manager funds. The London-based fund manager was sourced through Apostle Asset Management. Apostle’s director of sales, Richard Borysiewicz said H20’s fixed interest capabilities have found strong resonance in international markets, with this being their first Australian mandate. H20 was launched in July last year in partnership with Natixis Asset Management by

Richard Borysiewicz

Bruno Crastes and Vincent Chailley, formerly of Amundi Asset Management. SR

SuperChoice teams up with SuperBPO

Michael Houlihan

CLEARING HOUSE SuperChoice has announced it will partner with back-office administration provider SuperBPO to deliver payment infrastructure support for clients. SuperBPO is the newly re-branded institutional arm of Mainstream BPO which

provides member administration, unit pricing and accounting services to super funds. SuperBPO chief executive Michael Houlihan said the partnership will streamline back-office activities for SuperBPO and increase focus on other value-added and front-office services. “We see opportunities in the market with many larger super funds taking a hands-off approach to servicing employers struggling with administering choice-of-funds.” SuperChoice general manager Mike Fielding said his company had chosen to work with SuperBPO as they had an existing non-cash payment licence and other clearing house infrastructure. “So it made sense for them to stay front and centre in servicing their fund and employer clients,” Fielding said. SR

6 NEWS

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Inflows prove bigger isn’t always better: Proebstl By Ashleigh McIntyre LEGALSUPER has reported a 15 per cent jump in employer contributions for the nine months to 31 March, which it says is proof that smaller industry funds are still viable against larger multi-industry funds.

Chief executive Andrew Proebstl said increasing inflows demonstrated that while some industry experts believe funds must be large to work best, this was not necessarily the case. “As a smaller fund, Legalsuper can in some respects be a more agile investor relative to mega super

funds, is more responsive to the needs of its target market, and is better able to build engagement with our members,” he said. Proebstl said members of the fund valued its close association with, and knowledge of, the legal profession. “These continued increases in

inflows are evidence that specialised funds like Legalsuper, which serve a well-defined target market, will continue to be attractive to that target market by providing an environment in which member’s savings thrive,” he said. Legalsuper now manages more than $1.5 billion. SR

Andrew Proebstl

Strong Australian dollar dents super returns By Chris Kennedy

Warren Chant

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The median superannuation growth fund returned 0.2 per cent in April, but would have returned more had further appreciation of the Australian dollar not reduced the unhedged returns of international shares, according to Chant West data. It brought the cumulative return for the median growth fund to 10.2

per cent in the financial year to date, meaning a likely second straight year of positive returns for fund members, said Chant West director, Warren Chant. The inflated Australian dollar appreciated against all major currencies over the current financial year, including a 30 per cent rise against the US dollar, he said. “Unless you hedged against that currency movement, it took

a big chunk out of the value of your overseas investment returns,” Chant said. “We estimate that currency detracted about 3.5 per cent from the typical growth fund return over the financial year to date, with the better-performing funds being those that hedged more against the rising Australian dollar,” he said. International shares returned 2.5 per cent in hedged terms in

April but recorded a loss of 1.4 per cent in unhedged terms, and the Australian share market was down 0.3 per cent for the month. Australian and global real estate investment trusts grew by 0.3 per cent and 4.4 per cent respectively, Chant West stated. Industry funds just edged out master trusts, returning 0.2 per cent against 0.1 per cent for the month, Chant West stated. SR

NEWS 7

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Instos attracted to EM and alternatives INSTITUTIONAL investors are increasingly interested in emerging markets and alternative assets to enhance portfolio diversification, according to Mercer’s Global Manager Search Trends 2011 report. The report revealed that globally manager search activity increased in 2010, with activity in Australia al-

most doubling, from 120 in 2009 to 216 in 2010. The report noted that in Australia there was a sharp rise in assets placed, from US$7.7 billion to US$14.9 billion. The survey also revealed an increased interest in real estate, emerging market equities and niche areas, like commodities. Investors

also sought diversification through international and domestic equity. “We saw a lot of manager movement in Australian equities last year and search activity focused on smaller fund asset managers with highly rated teams,” said Mercer head of manager research for Asia Pacific, Marianne Feeley. “Our

clients have also been looking for small cap managers, as small cap outperformed large cap in 2010. Another possible driver behind the increase in Australian equity searches is the tendency of some managers, particularly boutiques and small cap, to close to new investments.” SR

Marianne Feeley

Food, transport push up cost of retirement By Ashleigh McIntyre NEW figures show a couple looking to have a comfortable retirement will need $53,879 a year, up 0.3 per cent over the December quarter. The Association of Superannuation Funds of Australia (ASFA) Retirement Standard also found couples wanting a modest retirement will need to spend $30,708, up $150 on the previous quarter. The rising costs included food, alcohol, tobacco, transportation and domestic holidays – of which, food, transport and recreation spending form a large part of retiree budgets. Retirees had to face a 2.2 per cent increase in the cost of food over the last quarter, but fortunately price rises over the year were a modest 2.5 per cent. Meanwhile, the cost of health services, clothing, audio visual and computing equipment decreased over the quarter. ASFA measures a comfortable retirement as enabling retirees to be involved in leisure activities and afford private health insurance, a reasonable car, good clothes, and domestic and occasionally international holiday travel. A modest retirement is measured as being better than the age pension but still only allowing retirees to afford fairly basic activities. SR JUNE 2011 * SUPERREVIEW

8 EDITORIAL

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The political clock is ticking A strong perception exists that forthcoming changes to financial services regulations will unduly benefit the industry funds, writes MIKE TAYLOR, but the political pendulum is capable of swinging the opposite way.

Mike Taylor

ow many people hold positions on multiple superannuation fund trustee boards in Australia today? And, of those people, how many could be described as political or union operatives? While, for the vast majority of members of Australian superannuation funds, these may seem obscure and possibly irrelevant questions, they are nonetheless issues that should be focusing the minds of superannuation fund executives – particularly those who keep a close eye on the ebb and flow of Australian politics. On the conservative side of Australian Federal politics, two of the most often-mentioned issues over the past three years have been trustees serving on

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multiple superannuation boards, and the ability for superannuation fund trustees to act on mergers without any direct reference to fund members or particular oversight by a regulator. Anyone working in the superannuation industry will know that those references point directly to a concern within the Federal Opposition parties about the power and influence of industry superannuation funds. Further, the reference to multiple trustee board memberships directly refers to the power believed held by around a halfdozen industry fund luminaries. What has prompted the particular attention of the Federal Opposition is that most of those half-dozen industry fund luminaries can be viewed as being linked to either the Australian Labor Party (ALP) or the Australian trade union movement, or both. What the critics of people holding multiple memberships of superannuation fund trustee boards often overlook is that, not so long ago, the Australian Prudential Regulation Authority

EDITORIAL Managing Editor – Mike Taylor Ph: (02) 9422 2712 Fax: (02) 9422 2822 email: mike.taylor@reedbusiness.com.au Features Editor – Angela Faherty Ph: (02) 9422 2210 Fax: (02) 9422 2822 email: angela.faherty@reedbusiness.com.au News Editor- Chris Kennedy Ph: (02) 9422 2819 Fax: (02) 9422 2822 email: chris.kennedy@reedbusiness.com.au Journalist - Ashleigh McIntyre Ph: (02) 9422 2815 Fax: (02) 9422 2822 email: ashleigh.mcintyre@reedbusiness.com.au Contributing Reporter – Damon Taylor email: damon.taylor@c-e-a.com.au Ph: 0433 178 250

acted to lift the bar on what was required to become a superannuation fund trustee director. However, notwithstanding any tougher requirements imposed by the regulator, the make-up of superannuation fund trustee boards is never the subject of a member ballot, with industry funds boards being made up of employer and employee-appointed representatives. Of course, no one ever comments or objects to business luminaries with political affiliations holding directorships on the boards of multiple publicly listed companies, but the rules pertaining to the duties of company directors and those pertaining to superannuation fund trustees are somewhat different. Unlike superannuation fund members, shareholders in publicly listed companies hold voting rights. It is an accident of history and the evolution of the superannuation funds in Australia that, notwithstanding the billions of dollars being managed by trustee boards, the transparency of their conduct falls short of that expected of the boards of

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publicly listed companies. Notwithstanding these issues, a person’s political affiliations and background should have no particular bearing on their capacity to deliver good and objective service as a member of any well-run trustee board of a superannuation fund adhering to the broadly accepted principles of corporate governance. The problem, of course, is the legislated, compulsory nature of the superannuation guarantee; the beneficial taxation status superannuation funds have been granted; and the bloc that many of the industry funds have formed, which is perceived by many as having direct linkages to both the ALP and the trade union movement. It is in these circumstances that the Federal Opposition has signalled that, were it to gain power in Canberra, it would be looking to alter the rules applying to superannuation fund trustees boards, including giving fund members a greater say by way of the ballot box. The Opposition spokesman on Financial Services, Senator Mathias Cormann, made his views plain when he late last month suggested the scuttling of a merger between Vision Super and Equipsuper may have been the product of union-backed trustees acting to defend their position. He made reference to perceived conflicts of interest on

the part of trustee board members, “especially where some trustees serve on multiple superannuation boards or where the trustees have not directly been appointed by the members in the first place”. Cormann’s words should be regarded as a shot across the bows of the superannuation industry, and a signal that a Coalition Government would act to change the current regulatory environment relating to the make-up of trustee boards. At least a part of the motivation for such changes is the belief that it would act to strip away the perceived power of a number of individuals seen as influential in the industry superannuation funds movement. For better or worse, the financial services industry changes being pursued by the Gillard Labor Government are being perceived as helping the industry superannuation funds. It follows that if the political pendulum swings the other way, the industry funds will find themselves being viewed in a very different light. The industry funds movement will have every right to defend its position, but it may find it very difficult to argue against giving individual superannuation fund members a greater say in appointing those they want to run their trustee boards. SR

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ABN 80 132 719 861 ACN 132 719 861

Average Net Distribution Period ending Sept '10 2,300

10 OPTIONS

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The safest option T

he global financial crisis (GFC) ravaged the retirement savings of most Australians. A lot of us are looking at 10-year super returns barely above the returns from cash, and certainly below returns from bonds. A tough pill to swallow if you’re over 10 years from retirement – and a devastating outcome if your twilight years are closer. There is no doubt the traditional risk management approaches of diversification and tail risk hedging failed dismally as markets fell. I argue a new approach to managing risk and volatility is essential to ensure future generations are protected. One such solution is constructing a portfolio of highly liquid, exchange-traded options to dynamically adjust portfolios based on a fund’s risk profile. This approach provides superior outcomes to diversification and tail risk hedging by reducing volatility

and ultimately benefiting longterm investors such as superannuation funds. Options are often misunderstood, but they are the most effective tool to manage volatility because they can reshape portfolio distributions more reliably than simply diversifying assets.

HOW OPTIONS CAN REDUCE VOLATILITY Because index options are often not fairly priced, options can be

global market declines of 2001 and 2008 when correlations spiked and the weakness of diversification was exposed. These events seem to suggest that portfolio diversification is not enough to protect returns during extreme market events. There has been interest in recent times for strategies such as tail risk hedging, but the results show this approach also falls short.

is overpriced 87 per cent of the time – demonstrating the level of mispricing and therefore available alpha. For those with the appropriate experience, capturing this alpha can help to reshape profit profiles and reduce portfolio volatility without diminishing expected returns. The other side to this strategy is that, technically, an investor could keep portfolio volatility the same and use options to increase returns. The advantage of an optionbased solution is it can be totally customised for an investor’s risk and return profile, ultimately leading to better outcomes than diversification or simple put buying strategies provide (ie, tail risk hedging).

A strategy that utilises put options can cushion investors against dramatic market downswings, writes SIMON HO.

a highly effective tool for volatility management. A persistent overvaluation stems from a shortage of those willing to supply options versus those wishing to buy them, opening up opportunities for skilled investors to find sources of alpha. As an example, since 1990 the implied volatility (used in pricing options) was greater than the volatility subsequently realised by the S&P500 87 per cent of the time. In other words, the put option on the S&P500

THE PROBLEM WITH TAIL RISK HEDGING Tail risk hedging strategies buy put options to cut the distribution of returns to the left, avoiding extreme losses. However, buying put options month after month becomes very expensive (they are overpriced 87 per cent of the time). Most importantly, the solution is static and does not accommodate specific portfolio requirements, as shown in figure 1. Figure 1 plots a strategy investing in the S&P500 over a 10-year period, together with a tail risk hedging strategy comprising one unit of the S&P500 and one unit of a one month 90 per cent strike put.

DIVERSIFICATION FAILS WHEN YOU NEED IT MOST While risk reduction through diversification of a portfolio’s assets still has merit, ultimately it is a blunt tool. Crosscorrelations between assets and markets have steadily increased during the last few decades eroding the benefits of diversification. This was apparent during the

FIGURE 1: PERFORMANCE OF A TAIL RISK HEDGING STRATEGY

FIGURE 2: PERFORMANCE OF DYNAMIC OPTIONS STRATEGY

1.2

2.5

S&P500 Tail risk hedge strategy

1.1 1 0.9

S&P500 Dynamic options strategy

2 1.5

0.8 1

0.7 0.6

0.5

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09 /0

08 02

07 02

06 8/

05 /0 02

04 02

03 02

02 8/ /0

00 8/ /0 02

8/ 0 7/ 0 3/ 15 01 /1 0 21 /01 /5 23 /02 /1 2 30 /02 /7 /0 4/ 3 3 7/ /04 10 12 /04 /5 14 /05 /1 2 21 /05 /7 27 /06 /2 1/ /07 10 /0 6/ 7 5 8/ /08 12 15 /08 /7 18 /09 /2 /1 0

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OPTIONS 11

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Although the strategy reduced volatility of monthly returns by 40 per cent, it also severely impacted returns. Looking at the graph more closely, very rarely did the tail risk hedging strategy exceed the S&P500 and actually underperformed for large periods. The reason tail risk hedging does not work can be explained by the way options are priced. While the one month put option cushioned the portfolio initially

from a downturn, subsequent one-month options become expensive during volatility and are purchased at exorbitant prices, impeding returns.

OPTIONS IN ACTION Instead of cutting off the left hand side of the distribution through tail risk hedging, a new approach using a mix of index options can achieve superior volatility management. The strategy is based on the

principles of dynamic asset allocation in that it takes a flexible and customisable approach to portfolio weights depending on economic conditions, maximising returns subject to pre-defined levels of volatility. If we take a portfolio comprising of the S&P500 and add a basket of call and put options to dynamically reshape the distribution curve, volatility reduction and superior long-term returns can be achieved.

Ultimately, this strategy is designed to cushion a portfolio from extreme fluctuations â&#x20AC;&#x201C; making it incredibly valuable during flat and bear markets. Of course in contrast, the strategy is likely to underperform its benchmark during extreme bull markets (as can be seen in figure 1 between 2003 and 2007). But thatâ&#x20AC;&#x2122;s the price you pay to avoid devastating market losses like those recorded in 1987, 2001 and 2008.

Options are a formidable tool in managing volatility and risk if used in the correct way. Although often misunderstood, funds with long-term horizons should consider using a dynamic options strategy, as it can be an optimal way to ensure long-term returns for investors. SR Simon Ho is executive director of volatility management specialists Triple 3 Partners.

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12 ASSET ALLOCATION

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Smoothing out the bumps Asset allocation has been the key differentiator with respect to superannuation fund returns but, as DAMON TAYLOR writes, the continuing fallout from the global financial crisis has caused many funds to re-examine their settings.

s Australia’s superannuation industry contemplates what will undoubtedly be a very different superannuation environment come July 2013, it seems the one certainty is that competition will continue to be a constant. In line with that reality, funds’ asset allocations have evolved markedly in recent years and according to Frontier Asset Consulting managing director Fiona TraffordWalker those funds seeking to differentiate must, and therefore will, evolve them further. “Over a number of years there’s been a fairly natural evolution in asset allocations as people realised that reliance on equity markets to deliver the goods was probably going to give you a pretty bumpy ride,” she said. “So the main desire is producing smoother and more diversified return patterns over time and, from that we’ve observed, an allocation to things like infrastructure and property and private equity are becoming key parts of what clients are doing to do that. “There’s also been further diversification into investments like hedge funds and commodities,” Trafford-Walker continued. “More global investments as well, and that’s not only in equities, because there are a broad range of asset classes that people are investing in overseas. “But the key development

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in asset allocation is that there’s now far greater diversification in portfolios than there was ten years ago.” Russell Investments director of consulting and advisory services Greg Liddell said that his main observation had been that many within the industry, Russell included, were moving away from growth/defensive splits in asset allocation. “They’re looking at different markets now and having a different nomenclature for defining the characteristics of their portfolio building blocks,” he said. “So at Russell what we’ve done is move to five buckets, those being equities, fixed interest, other real assets like commodities or property or infrastructure, alpha-driven or skill-based strategies and finally opportunistic investments. “So in the case of the latter, those are things that you don’t necessarily want to have a permanent exposure to, through a full market cycle,” Liddell added. “That said, there are going to be times when the risk/reward to be had from those asset classes or investment strategies is going to make them attractive.” Like Trafford-Walker, Liddell said that he had also seen moves towards less reliance on equity risk premium to drive returns. “Equities are still very substantial components of asset

allocation in most funds, particularly most default offerings, but over the last few years there’s been a trend to move more into alternatives,” he said. “For instance, the Chant West numbers show that at the end of 2007 the overall average for alternative asset exposure was 6.2 per cent.” “Contrast that to the end of 2010 and it had increased to 10.2 per cent,” Liddell continued. “So people are clearly buying more infrastructure;

David Stuart

they’re buying more hedge funds and that certainly seems to be a global trend. “So, just the way that funds think about asset allocation has changed and, within that, there’s been small but significant movement at the edges in terms of asset exposures.”

DYNAMIC ASSET ALLOCATION Yet while investment into alternative assets has undoubtedly become more common, following on from times

of uncertainty, Liddell’s opportunistic investments category is arguably as favoured. For some time now, the industry has had a number of proponents of dynamic asset allocation or strategic tilts and according to the head of Mercer’s Australia and New Zealand dynamic asset allocation team, David Stuart, such strategies remain well used. “This was probably a trend in place before the global financial crisis (GFC) and, to be fair, some funds have been adjusting their asset allocations for quite some considerable time,” he said. “But around the middle of the last decade I think it began to get more impetus and, following the GFC, I think those that were still standing by static asset allocations wondered whether it was the right thing to do, given the sheer scale of the market moves around that time. “There certainly seems to be a strongly increasing trend towards varying your asset allocation through time, in response to perceived valuation anomalies in markets.” Trafford-Walker said that dynamic asset allocation continued to be popular, simply because the thing that most determined the future performance of an asset was the price at which it was bought. “Obviously the environment that you end up having is important but if you can buy

high-quality investments at good, cheap prices then that should set you up for a pretty good return over the life of that investment,” she said. “That’s the heart of dynamic asset allocation; it’s trying to find investments that are good quality but a little bit out of favour, and therefore cheap. “Secondly, it’s about identifying risks so that if something is very expensive and you’ve made a lot of money on it, it’s time to move on,” Trafford-Walker continued. “But the difference between strategic asset allocation

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(SAA) and dynamic asset allocation is really a willingness to look at how much you pay for something. “The old SAA approach was basically ‘set and forget’ and we just think that that sets you up for a pretty rocky ride.” Of course, the key question here is not about the popularity of dynamic asset allocation but rather whether the strategy’s effectiveness has been borne out in superior returns over time. Stuart said that the aim was not just return-enhancing but riskdampening as well.

“We do measure the performance of our own recommendations and obviously we believe that our tilts have added value but we also educate our clients not to expect it to add value in every shortterm time period,” he said. “So that may include a year in which you adopt a position and the markets continue to move against you. “The other thing we would stress is that not only would we hope to add value by enhancing the returns of the fund but we’d also hope to lower the overall risk of the

fund and I think that did come through in the GFC,” Stuart continued. “We felt that a variety of assets had become quite expensive and, of course, they tended to fall significantly, so those who were adopting a more dynamic approach probably cushioned the scale of the falls. “And that’s really one of the most important things for super funds – to realise that avoiding really poor returns is just as crucial as enhancing returns over time.” According to Trafford-

Walker, the return advantage yielded by dynamic asset allocation was most noticeable when viewed over longer time horizons. “We look at how our clients have performed and the clients that we’ve had for a long time – say more than ten years – and we see about a one per cent excess return above the average fund,” she said. “And when we look at what has led to that one per cent, the asset allocation positioning has been a key part of it. “We think it works and, if

you look at the market, you know that there are other funds that follow the same process and you can see that they’ve done pretty well over time as well,” Trafford-Walker continued. “The important thing is not to look over the short-term but to look over the medium- to long-term. “That’s how you can know that this stuff works and our strong view is that it’s a very important way to manage the portfolio, a very good source of value over time and we feel Continued on page 14 ☞

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Smoothing out the bumps ☞ Continued from page 13 that fact is well borne out in the numbers.”

WORKING POPULATION CHANGES The one issue that has yet to meaningfully impact super funds’ asset allocations, but one that has been flagged by a number of industry pundits, is the impending retirement of an ever-increasing number of baby boomers. The premise is that as this demographic enters retirement, they will be in need of income-generating assets rather than the growth assets which now dominate super fund allocations. But for Stuart, the issue isn’t that straightforward. “The first thing to point out is that demographics, although they’re imminently forecastable compared to most forecasts that we make in economic markets, do change pretty slowly,” he said. “They’re very gradual changes, almost glacial [in speed]. “So, in Australia, while there is this retirement of baby boomers, we’ve also got positive immigration that tends to be of a lower age range,” Stuart continued. “And Australia is like the rest of the developed world, in that it’s going to see changes, particularly in the size of its working population relative to the retired population, but it isn’t going to happen overnight.” Stuart said that when it came to moves towards income-generating assets like bonds, again it would not happen overnight. “But the other thing that will hold it back is the fact SUPERREVIEW

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That’s the dilemma here – what asset allocations ought to be in the retirement phase versus the accumulation phase.

that life expectancy is now getting longer and longer,” he said. “When people retire, typically they’ve probably got a life expectancy of at least another 20 years and that’s actually a time horizon which we would say most normal balanced funds are probably quite good for.” “If you switched immediately into a substantially fixed income-focused portfolio upon retirement, the risk is that you will run out of money before you run out of life,” Stuart continued. “So we would say that you still need a fairly balanced mix and, again, the income requirement may mean that you make different changes. “You might change your growth assets to higher income-producing assets but still potentially retain a reasonably significant weighting to growth assets.” Similarly, Trafford-Walker said that the big picture issue wasn’t as much about increasing allocations to income-generating assets as it was about what asset allocations in retirement ought to be. “That’s the dilemma here – what asset allocations ought to be in the retirement phase versus the accumulation phase, because there’s no doubt that they should probably be different,” she said. “There also ought to be some consideration given to the tax position because that’s obviously vastly different in those two phases as well. “And this is probably a key thing that funds learned out of the global financial crisis – that you do need to build tailored options for people in

that phase,” Trafford-Walker continued. “They could well be balanced options or growth options but consideration needs to be given to offering the products that people want to buy that give them that comfort in retirement. “For a lot of people, that will be something that’s lowerrisk, maybe more of a guaranteed-type structure. Maybe it’s more bond-type investments, maybe it’s more floating rate-type investments but

Fiona Trafford-Walker

whichever one it is, making sure people have effective allocations in retirement is rapidly becoming a priority.” Naturally, the asset allocation issue waiting in the wings for all super funds relates to how fees will enter into the allocation equation. The upcoming MySuper environment has put fees centrestage and front of mind, so it will undoubtedly be interesting to see how allocations develop as a consequence.

THE SIMPLE VIEW “I have the view that all assets should be justifiable on an after-tax, after-fees basis,” said Liddell. “What’s important is the net return in the

pocket of the member and I think that all investment strategies should be predicated on that basis. “In saying that, I think as result of the Cooper Review and MySuper, there certainly seems to be a push for MySuper funds to be more cost-conscious, more costaware,” he continued. “And the response from a number of the retail houses has been to come out with superannuation offerings that are largely passive with few, if any, alternatives.” Liddell claimed it would be interesting to see how such passive options fared when compared to funds employing property assets, private equity or similar illiquid alternatives. “Because if the fee is appropriate, they do bring diversification benefits to portfolios,” he said. “Sometimes the fees are too high but, at the end of the day, a premium is warranted for exposure to good assets in that space.” Trafford-Walker said while fees were definitely a hot topic, Frontier clients had been negotiating with managers, both in the unlisted space and with listed managers as well. “It’s really just about making sure that you pay what’s a fair price for a fair service and you’re getting decent value,” she said. “In fact, the reality is that some listed managers are really bad value and some unlisted managers are really good value. So, while unlisted and alternatives for the most part will be more expensive, there’s no hard and fast rule here.” Continued on page 16 ☞

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Smoothing out the bumps ☞ Continued from page 14 CONSOLIDATION CONTINUES “From a helicopter view, this issue of fees is definitely ongoing and it is definitely gaining momentum with a lot of funds, especially the big funds that are really looking to benefit from their scale,” Trafford-Walker continued. “So what we’ve said to the funds management community is that you need to be innovative with how you think about your fee structures because the consolidation that’s occurring in the superannuation industry today is just going to continue.” “We’ve made it clear that there are going to be fewer and fewer mandates for them to fight over and that they need to think carefully about how they want to be paid and, more importantly, how they want to be rewarded in terms of performance fees.” Looking specifically at the focus on investment fees that would result from MySuper, Trafford-Walker said that whatever fee guidance was provided had to be practical, implementable and had to reflect the nature of the businesses that offered these products. “There are some small businesses which manage very small amounts of money and charge higher fees because they need to have a certain amount of dollars coming in the door,” she said. “If that protects the ability of that manager to deliver excess returns to clients – well you might consider that that’s worth paying for. “But if there was some prescription around what the fee SUPERREVIEW

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could be, then those sort of products will become much harder for the funds to access,” Trafford-Walker pointed out. “In terms of any likelihood that there will be greater allocations to passive investments, one of the big reasons behind why our longterm clients have done pretty well is that they’ve had good asset allocation but also they’ve tended to use active managers – not for the whole portfolio but for most of the portfolio.

Greg Liddell

“Good manager selection can add quite a lot of value, so if it’s just for cost reasons that people start to say ‘no more active management’, then there is definitely a risk that returns will be lower.” Yet when it comes to asset allocations, the constant question lies in what constitutes the yardstick by which their efficacy can be measured. Within the industry, there is often talk that research house ratings on super fund performance are of limited use, since past performance is no measure of what a fund’s returns will be like in the future. If that’s the case, what dictates whether a given asset

allocation has done its job and fulfilled a trustee’s objectives? Trafford-Walker said that it was a question to which there was no easy answer. “The way that I think about it is that the market gives you what the market gives you,” she said. “It’s like there’s the god of the market and he wakes up one morning and says, ‘it is going to be this today’. “Most people have no control over what that number is, so the inclination is for people to try to change the things they can control – fees and things like that,” TraffordWalker continued. “But when you look at asset allocation, you can have the best faith in the world in what you think is a good asset allocation and in any one year it might not perform very well at all.” For Trafford-Walker, if a client gets a good return over seven-to-10 years, that’s telling you something. “So you then have a look at what makes up those numbers, have a look at the shorter-term numbers and see

whether it was just one year where they’ve shot the lights out, or was there a steady pattern of doing okay year after year, with the odd good or bad year?” she outlined. “It’s really about trying to pull apart the numbers to see where they come from and what they can teach us.”

PEER COMPARISONS Looking at the issue of peer comparisons in the super industry and how it related to asset allocation decisions, Stuart advised funds to be very careful about focusing solely on relative performance. “One thing we will do is look at where a client fund’s nominated peer group may have different allocations to them and we’ll assess why it is they may wish to retain their points of difference or maybe converge more,” he said. “But ultimately the danger is that whoever is at the top of the table will be in the assets which performed best most recently and to have a policy whereby you constantly chase

the table-topping fund is a dangerous chasing-tails type of approach. “We constantly look at whether there are new ideas which maybe this fund hasn’t taken onboard and, if we think that they’re long-lasting and durable, then potentially the fund should incorporate them,” Stuart continued. “But that shouldn’t be just because they’ve done well recently.” “That’s really the source of most market misevaluations – people start chasing assets that have gone up and, to some extent, chasing the funds at the top of the table makes for a risk that you’re doing exactly that.” According to Trafford-Walker, peer risk and peer competition was one of the biggest negatives to come out of fund choice. “It creates this continual ‘looking over the shoulder’ by some funds at what other funds are doing and the reality is that they’re looking at a number of funds that have nothing to do with their industry or business,” she said. “You have to say to yourself, ‘this is what I’m going to try to achieve for my members, this is my philosophy, this is how I’ll invest and this is my roadmap for investing’. “That way, when things get a bit tough they can go back to their roadmap and say, ‘why am I doing this? Okay, yep that’s right. Do I still want to do that? Yes, let’s press on’,” Trafford-Walker said. “And you tend to find that those funds doing that are the ones that do better over time. They don’t get sidetracked by noise in the market or noise from competitors.” SR

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The heart of the matter The Australian superannuation industry may have accepted the inevitability of MySuper but, as DAMON TAYLOR writes, many trustees and executives are looking for more detail.

oming out of the 2011 Federal Budget, it has become very clear that the industry will be facing an entirely new superannuation environment in a little over two years. Yet while 1 July 2013 (and the MySuper legislation set to launch on that date) is just around the corner, the industry’s primary concern is the details of the changes. Trustee of industry fund NGS Super John Quessy said that he had a number of concerns about MySuper and for a range of different reasons, but that his greatest concerns revolved around a lack of clarity. “As with so many of these things, the devil is still in the detail and we haven’t seen anywhere near enough of it,” he said. “I’m obviously talking about nitty gritty detail but in this day and age, if you want to do something in 18 months to two years’ time, the lead in to the systems and a range of other things to cope with that is about that same length of time. “Even this far out, we really ought to have had a lot more detail from the Federal Government about what is and what is not going to be okay in MySuper.” SUPERREVIEW

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Providing a counter view, Mercer Worldwide partner and head of defined contribution consulting for Australia, Russell Mason, said that like it or not, MySuper was coming and that it was time for Australia’s super industry to accept it. “At this point, I think we’ve got to accept it,” he said. “Like all change, there is some the industry likes and some it doesn’t like. “But the Government has stated its intention very clearly. It wants MySuper in place and it believes it’s a consumer protection that allows members to make fair comparisons,” Mason continued. “So, subject to it being in a form that’s fair to the industry, then I think my view is that we accept it and let’s move on with it.”

GETTING DOWN TO WORK Fortunately, ‘getting on with it’ seems to be something that funds are already on top of. According to Pillar chief executive Peter Beck, most funds are specifically thinking about their value propositions in the market. “In my view, funds all need to be thinking about where they want to position their products in terms of fees, in

terms of investment options, investment approaches, and in terms of advice,” he said. “We think they should be thinking about insourcing versus outsourcing, and not just in their accumulation product, but in their pension product as well.” “MySuper seems to be going in the direction of people being asked to demonstrate that they’ve got scale and efficiency and that they

can create value for money,” Beck added. “So it seems to me that a lot of them need to be thinking about how they can demonstrate that they have sufficient scale to do that.” According to Mason, there is no doubt that funds wanting to succeed in the new MySuper environment have to be preparing now. “In fact, I’ve already seen one fund that’s resolved to get the ball rolling by putting in

place a very low-cost option that will work on about five basis points, a balanced-type option with everything indexed and using extremely low cost products,” he said. “And their view, subject to it getting some traction with members, is that that will become their MySuper option. “So I think funds have got to start looking at their balanced option, or whatever is their current default option,

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and asking themselves whether that’s going to be their MySuper option or not,” Mason continued. “If it is, they need to ask themselves where they need to tweak it and what they need to do to make sure it meets with the requirements of MySuper.” Of course, one of the key premises of MySuper is that most super funds – and industry funds in particular – will need to do little to alter

their current default funds in order to satisfy the new requirements. Yet Mason said that minor tweaking, at the very least, would still be necessary. “A lot depends on the current structure of their default offering and its suitability,” he said. “I’m aware of one fund that is actually looking at creating their new MySuper option right now because they either can’t change the current default or it becomes too messy and too costly in terms of redemptions and lost returns to do so. “So I think this is where funds are still in the early days, in starting to think what they’re going to have to do to satisfy MySuper, what changes are going to have to be made,” continued Mason. “But while the vast majority of corporate and industry funds won’t have to make a lot of wholesale changes, there is clearly an impact on the master trusts in terms of pricing models. “We’re yet to see the final outcome of that but, again, that needs to be fair to everybody.” Similarly looking towards MySuper’s impact on the wider superannuation marketplace, Beck agreed that any change by industry funds would be minimal – although change on the retail side would be interesting to watch. “The retail funds clearly have to do something,” he said. “So they’ll separate their product from the advice and they’re already introducing cheaper versions of their products and, as far as we can tell, AMP, BT and Colonial have all got products now with the advice unbundled that are essentially MySuper-lookalikes.

Ticking the boxes isn’t going to be enough if, in fact, what you’re then going to have is some website that has a comparison of MySuper funds based on costs.

“So I would suggest that most of them would be ready to launch a strong campaign into that MySuper space, but that’s where this interesting dynamic comes in,” Beck continued. “Industry funds have always been positioned as the low-cost product, but MySuper will mean that they’ll be competing against the retail funds in a way they haven’t done before.

Peter Beck

“Add to that the fact that the retail funds do have scale – manufacturing scale – that means they can produce product very cheaply and I think you’ve got an interesting tussle on your hands.” However, for Quessy, the fact that industry funds need only make small changes or that retail funds are likely to require larger changes is not the point. “I’m taking that as a given from comments made my members of the committee at the ASFA [Association for Superannuation Funds of Australia] conference last year,” he said. “And if members of the committee are publicly making that statement, then I’m assuming that to satisfy the requirements of offering a MySuper product, our fund’s

and most other funds’ default products will tick the boxes. “But ticking the boxes isn’t going to be enough if, in fact, what you’re then going to have is some website that has a comparison of MySuper funds based on costs,” Quessy continued. “And that’s simply because most trustees have not developed default products on the basis of what they cost.” Using NGS Super as an example, Quessy said that the executive had developed a default product on the basis of the best possible returns to members given the variety of risk appetites that existed among clients that who in the default fund. “That can be everyone from people starting to work in their very first full-time job right through to those who are weeks away from retirement,” he said. “It’s still a pretty ‘onesize-fits-all’ product that’s aimed at getting good returns and it has achieved that. “It is, however, actively managed,” Quessy pointed out. “Now, if that’s going to be compared on the basis of its returns, then I’ve got no problem with that. If, however, it’s going to be compared on the basis of costs, which are already absorbed anyway, then I have serious concerns about that because (a), it’s saying to people, superannuation is all about costs and that’s the only thing you’ve got to give consideration to, and (b), it’s an unfair comparison. “If something costs 20 basis points and gives you a CPI [consumer price index] return and then something else costs 60 or 80 basis points and Continued on page 20 ☞

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The heart of the matter ☞ Continued from page 19 gives you 3 per cent above CPI, which one do you want to be in? We all know the answer to that but we’ve got an unengaged group of people who don’t and therein lies the problem.”

THE VALUE PROPOSITION The importance of value and, furthermore, communicating that importance to members, is the key here. But with regard to investment options, the reality is that the concept of value is open to interpretation. According to Mason, funds are conscious that cost is a focus but there is no set formula when it comes to implementation. “If cost does become a driver, I suspect that while a lot of funds may not move entirely to passive investments for their default MySuper option, they will certainly look at removing their high-cost products,” he said. “So some of the infrastructure and private equity products are quite expensive and they will perhaps move out of performancebased fee products where their MER [management expense ratio] can be pushed up quite significantly by good performance, though I realise that it’s almost a contradiction that those investments are the ones that will be penalised.” However, Mason said that one interesting point was that in all the documentation thus far released for MySuper, there had been no explicit statement that a MySuper fund had to be a low-cost product. “Certainly, it must be sustainable, but I think the industry has taken it, and some SUPERREVIEW

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in Government have said this, that it needs to be pretty low cost,” he said. “So most people are assuming that the option they offer for MySuper won’t necessarily be the one where they have performance-based fees or high cost investments like private equity or infrastructure. “But if that did eventuate, it would be a little bit of a shame because it means that this will be a product that may or may not produce the sort of returns that trustees are trying to achieve,” Mason continued. “My concern is that we don’t make it so simple or so low-cost that it underperforms what the typical balanced option does today. “If that’s the case, that will quite obviously be a step backwards.” Illustrating his fund’s own preparation, Quessy said that NGS Super’s executive was thinking through the potential implications of whatever scenario eventuated. “We’re not going to start making serious changes to our current default investment portfolio on the basis of what we don’t know,” he said. “However, it may well be that one of the things that we do is we start building a portfolio in another option, either a new or currently existing option, that is very mindful of costs, fees and MER. “We will try to have something that will be based on an index, so that’s in place and we can therefore market that immediately if that’s what happens,” Quessy continued. “But I would also point out that there’s a fundamental problem with concentrating on fee-free or

cheap investments for people who are disengaged and in this for the long haul.” Quessy said that if someone wasn’t engaged in their superannuation and yet were nonetheless going to be in it for a long time, they were a classic example of someone who was never going to make any switches or liquidity demands on their superannuation provider. “So that person is just never going to ring them up and say, ‘get me out of equities, move me into cash’ and then ring them up a couple of weeks

Russell Mason

later and say, ‘okay, the market’s down, now’s a good time to buy,’” he said. “They’re just not going to do that. So here is a group of people who you can really afford to take some illiquidity risk premium with because they’re not going to say that they want their money in something liquid. They’re going to say, ‘I don’t care what you do with it, I don’t know what you do with it, just give me a good return and don’t charge me too much’. “You’ve got an opportunity to get a great return for the illiquidity investment, but often that illiquidity investment is one that does have

Now, if everyone goes down the cheap and nasty option, then there’s going to be no single-issue advice included in MySuper products and I don’t think that suits most Australians.

fees attached to it,” continued Quessy. “So if fees are all you’re worried about, I think you’re going to miss out on some great potential returns.” Bringing another perspective on value to the table, Beck suggested that there was also a question around which services funds would incorporate into their MySuper products. “I think if we go back to what the objective of MySuper is, it’s to have default funds that suit most Australians,” he said. “Therefore, it’s important to have a product that’s not just the cheapest but that offers value for money for most Australians. The classic example is that you can either offer singleissue advice in the product or you can actually make that a choice on top of the product. “Now, if everyone goes down the cheap and nasty option, then there’s going to be no single-issue advice included in MySuper products and I don’t think that suits most Australians,” Beck continued. “So there’s this debate taking place between whether you have a ‘cheap and nasty’ and then you let everyone dial up under choice or whether you go for something that’s got more value for money in it as your MySuper product and dial up from there. “You could envisage a very low-cost product which has got indexed investment options, no advice, limited services, minimum insurance and minimum options but the danger is that if that becomes the MySuper product or the Continued on page 22 ☞

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The heart of the matter ☞ Continued from page 20 default option, that’s probably not going to suit most Australians.”

MEMBER ENGAGEMENT Naturally, the last piece of the MySuper puzzle is member engagement. Over a number of months, any number of industry pundits have expressed the view that MySuper will entrench member disengagement and undo much of the hard work done by the super industry to this point. Yet while he admitted that engagement needed to remain a trustee priority, Beck said that he did not foresee a negative impact from MySuper. “My view is simply that there’s a certain amount of people who are disengaged and will end up in a default option,” he said. “And I don’t think that the introduction of MySuper is going to change that. “What’s happening is that over time, as SG [superannuation guarantee] contributions mature and as members’ account balances start getting higher, people are showing more interest in super,” Beck continued. “And that’s a secular trend towards a little bit more engagement. “MySuper or no MySuper, there will be more engagement over time, but it’s a longterm proposition.” Alternatively, Quessy said that he had grave fears that MySuper would take the industry backwards in terms of member engagement. “My concern is that MySuper will end up being something that essentially ‘dumbs down’ superannuation and potentially undoes all of the SUPERREVIEW

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work that the industry has tried to do to engage members,” he said. “I think this is an opportunity for complete and total disengagement because, if we’re not careful, what it will mean for some people is that they’ll be over there in some MySuper option they know nothing about, it’s not going to give them great returns but the message will be, ‘look, you don’t have to worry about it’. “I think one of the things that people have underestimated in regard to member engagement and basic financial literacy is that this is an evolutionary process,” added Quessy. “It’s not a revolution. You’re not going to change peoples’ knowledge and attitudes to anything financial overnight. “This has got to be a process that the community and the funds and the lawmakers undertakes for the long haul, knowing that it’s going to take a generation.” Providing an example, Quessy said that when he was growing up, the television news consisted of what was happening in the state, what was happening in the nation, what was happening overseas, the weather and the sport. “There was no finance report and I don’t think newsreaders ever mentioned the word ‘sharemarket’,” he said. “But sometime in the last 15 years, or thereabouts, the Australian people have started to have a bit of an interest in that. “Now, it didn’t happen suddenly one day. The fact of the matter is that people are gradually taking an interest in these things and I think we’ve

got to take the same attitude to making people aware of their superannuation,” continued Quessy. “I don’t think we’re ever going to have a situation where an 18-year-old is excited about his superannuation and really wants to talk about it over lunch. “That’s not going to happen, but that doesn’t mean we just give it up and don’t engage in those conversations. They still

are more easily understood and compared. “The first point here is that the intent is to create a more competitive environment and I think that will happen,” he said. “Retail funds are already positioning to compete against industry funds at a product level, and I think the industry funds have got to now start thinking about how to compete at an advice level.

have to happen and my concern is that under MySuper they may not.”

“Traditionally, the retail funds have offered their products with advice and there’s been no competition for it and the industry funds have offered their product without advice and they haven’t really been competing against retail,” Beck continued. “But now I think both retail and the industry funds are going to compete both at a product level and at an advice level, and there’s no doubt that that makes for an entirely new super industry dynamic.”

PLAYING THE WAITING GAME Yet when all is said and done, the reality is that the super industry will have to wait until the final MySuper legislation is released for firm answers to all of its questions. And for Beck, what does seem clear is that the industry is heading towards an even more competitive superannuation environment in which products

For Quessy, however, the fact that so many of the industry’s questions remain unanswered is a concern. “We will get answers to these questions but I just cannot believe that the Government have had the Cooper Review’s findings for as long as they’ve had it and we still don’t have detailed answers as to what they want MySuper to look like,” he said. “Clearly we’re going to have it; whatever the industry thinks about whether it’s going to happen or not, it is going to happen. We just want to know what it is that’s going to happen. “And there are some positive aspects to it. We might, in fact, get a whole series of really no-frills superannuation products and there are a whole lot of people who might be attracted to a simple, lowcost product,” Quessy continued. “These might be the people who chase bargains around supermarkets for whatever reasons, some because they just love getting a bargain even if it costs them an awful lot to go and chase it and others because the household budget just requires them to shop at the cheapest place even if it’s not convenient.” But according to Quessy, there would also be others who not only wanted but valued convenience, choice and a whole range of services that inevitably came at a cost. “And my concern is that everywhere I go, I go to the politicians, I go to the members of the committee, I hear fees, fees, fees as though that was the only thing,” he said. “But if it’s all about fees, I think we’re coming at things from the wrong angle.” SR

APPOINTMENTS 23

www.superreview.com.au

Events Calendar

Aurora nabs Wickremeratne

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

Aurora Funds has a new chief financial officer, with Chrys Wickremeratne stepping into the role.

JUNE AUSTRALIAN CAPITAL TERRITORY

WESTERN AUSTRALIA

2 – ASFA Policy Roadshow. Light at the end of the tunnel? Venue: Hyatt Hotel Canberra. Assembly Room, Commonwealth Avenue, Yarralumla. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

15 – ASFA Policy Roadshow. Light at the end of the tunnel? Venue: Pan Pacific Perth. Golden Ballroom North, 207 Adelaide Terrace, Perth. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

NEW SOUTH WALES

SOUTH AUSTRALIA

3 – FSC Economist Briefing. Venue: Financial Services Council. Level 24, 44 Market Street, Sydney.

16 – ASFA Policy Roadshow. Light at the end of the tunnel? Venue: InterContinental Adelaide. Blake's Room, North Terrace, Adelaide. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

6 – ASFA Policy Roadshow. Light at the end of the tunnel? Venue: Wesley Conference Centre, Wesley Theatre. 220 Pitt St, Sydney. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798. 7 – FSC CEO Breakfast. Venue: Financial Services Council. Level 24, 44 Market Street, Sydney. 9 – FSC Insurance Capital Review Seminar. Venue: Perth Room. 61-101 Phillip Street, Sydney. 21 – ASFA Luncheon. Speaker: Paul Costello, chair of the Peak Consultative Group. Venue: The Westin Hotel, Ballroom, Lower Ground Floor. No. 1 Martin Place, Sydney. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

QUEENSLAND 9 – ASFA Policy Roadshow. Light at the end of the tunnel? Venue: The Sebel & Citigate. King George Square, Kennedy Room. Cnr Ann & Roma Streets, Brisbane. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

TASMANIA 22 – ASFA Policy Roadshow. Light at the end of the tunnel? Venue: Salamanca Inn. Churchill Room, 10 Gladstone Street, Hobart. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

VICTORIA 8 – FSC CEO Breakfast. Venue: Deloitte. Level 10, 550 Bourke Street, Melbourne. 27 – ASFA Policy Roadshow. Light at the end of the tunnel? Venue: Sofitel Melbourne on Collins. Arthur Streeton Auditorium, 25 Collins Street, Melbourne. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

NORTHERN TERRITORY 28 – ASFA Policy Roadshow. Light at the end of the tunnel? Venue: Northern Territory Superannuation Office. Conference Room, 3rd Floor. 38 Cavenagh Street, Darwin. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

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

FUNDS management group Aurora Funds has appointed Chrys Wickremeratne to the position of chief financial officer. The company stated that the appointment of Wickremeratne would strengthen the management and oversight of the financial and risk controls

of the group and its various investment schemes and mandates. Wickremeratne has over 18 years of experience in the financial services industry, specialising in corporate and trust accounting, operations, compliance and risk management for a number of

global financial institutions. Most recently he worked as chief operating officer at Natural Capital Funds Management, before which he was a business unit manager in the Perpetual Corporate Trust’s investor services division.

RUSSELL Investments’ global consulting division has strengthened its presence in the region with two key appointments in Australian and Asia. Frank Russo will join the team as a senior consultant at Russell Consulting in Australia, based in Melbourne. He comes to the role from independent asset consultant Access Capital Advisers, where he served on the board of the AMP Infrastructure Fund of India. Russo previously held senior positions at Equipsuper and Westpac Banking Corporation. In a second move, Trevor Persaud will take on the role of practice leader for consulting and advisory services in ASEAN, India, Hong Kong and Taiwan. He will be responsible for leading the strategic development and delivery of investment consulting services for Russell’s clients in the region and will be based in Singapore.

fair marketplace and ensuring an efficient and cost-effective licensing system.

The Federal Government has recommended Greg Medcraft be appointed the new chairman of the Australian Securities and Investments Commission (ASIC). Medcraft joined ASIC as a commissioner in February 2009, with responsibility for investment banking, investment managers, super funds and financial advisers. Treasurer Wayne Swan said Medcraft was widely respected among financial markets, regulators and governments around the world after almost 30 years experience at global investment bank Société Genéralé. If approved by the Governor General, Medcraft will be appointed for a term of five years. He will take over the position from the incumbent Tony D’Aloisio, who was appointed ASIC chairman for a four-year term in 2007. In his new role, Medcraft said that he would be concentrating on disclosure to consumers, creating an efficient and

UBS Global Asset Management has expanded its Australian fixed income team with the senior appointment of Ben Squire as head of credit research for Asia Pacific, and the appointment of Christian Baylis as portfolio manager. Squire joined the bank from Société Genéralé in London where he was a senior credit analyst, while Baylis’ most recent role was senior analyst investments at the Reserve Bank of Australia. With over 17 years of experience in credit research and credit portfolio management both domestically and globally, Squire will take responsibility for credit research and issue selection for Asia Pacific issuers. He will also be a member of the UBS Global Asset Management global credit research team. Baylis will work on inflation-linked portfolios, undertake market analysis and execute credit and related over-thecounter derivatives. SR

Jonathon Armitage has joined MLC Investment Management as portfolio manager, moving from Schroders’ global equities division in London. He had worked as global equities expert for Schroders, gaining 18 years of experience in equities across several international markets including New York. Most recently he was head of US equities and global portfolio manager as part of a team managing US$12 billion in assets. Armitage will start on 1 August and report to MLC chief investment officer Nicky Richards, who joined MLC in January from Fidelity in London. According to Richards, the appointment of Armitage completes a wave of enhancements to MLC’s portfolio management team across the major asset classes.

JUNE 2011 * SUPERREVIEW

ROLLOVER

THE OTHER SIDE OF SUPERANNUATION

The corporate spin cycle AS an old hack working in the financial services industry, Rollover can only imagine the fabulous salaries paid to the corporate communications chaps employed by the likes of the Financial Services Council (FSC). Thus, Rollover has concluded that the FSC’s director of communications, Stephen Woodhill, must have been offered a fabulous amount to depart the role he has been filling for most of the past two years as spin-meister-in-chief to FSC chief executive, John Brogden. Woodhill, who had toiled in the service of such major organisations as the Civil Aviations Safety Authority and the Australian Securities and Investments Commission, is heading off to spin in the interests of a major retail-related corporate. Rollover understands the head-hunters are already searching for Woodhill’s replacement, but that things are already in good hands thanks to the FSC’s media relations manager and former Rollover colleague, Sara Rich. Another former FSC spin-doctor, Simon Disney, can be found working for Bendigo and Adelaide Bank. Ah, the corporate relations merry-go-round keeps turning. SR

Analyse this AS hard as life may be for superannuation fund executives in explaining declining returns to some angry fund members, Rollover believes life is very much harder for those running the administration of the various Commonwealth Government superannuation funds within the peculiarly labelled ‘Australian Reward Investment Alliance’ (ARIA). Not only do the guys at ARIA have to accommodate the odd angry shot from public servants, they must also endure the rigours of an appearance before Parliamentary committees wherein they find themselves at the mercy of politicians hungry for information. And it seems to Rollover that life must have been particularly difficult for the ARIA staffers who had to fend off questions from Opposition senators about the likely impact of the Government’s proposed Mineral Resource Rent Tax and carbon tax on investment returns. He offers the following torrid exchange as an example: Senator Ryan: Before, you stopped mid-sentence and then started another sentence. You were alluding to discussions you may have had about the impact of this tax upon this sector, not just now but over the last six weeks. The second phase I would like to explore is what discussions you have had about the impact of this tax upon your investments if it were to be introduced. What would you expect to happen to the share price of your investments if this tax were introduced by this parliament or a subsequent parliament? Mr Crafter: Sorry, it is important to make a clear distinction. This is not analysis that ARIA has done. This is analysis which was SUPERREVIEW

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done by ARIA’s investment managers. They are engaged in securities valuation on a daily basis. Senator Ryan: Presumably you pay them for that purpose. Mr Crafter: Yes. So this is not ARIA’s analysis; this is ARIA’S investment managers’ analysis and the analysis of other security analysts in the market. From our understanding and interrogation of those financial market participants, the impact of the tax would be in the order of 10 per cent. The Parliamentary fishing expeditions will no doubt continue. SR

Job protection ON the subject of musical chairs, Rollover notes the number of ex-Metlife personnel who have turned up at new income protection insurance outfit, Windsor. While former Metlife head of institutional business, Michael Burke has emerged as a consulting director to Windsor, one of his old Metlife colleagues, Aaron Stokeld has emerged as Windsor’s general manager for sales and operations. Of course, when Burke retired from Metlife he first turned up at Australian Income Protection (AIP) and it seems a number of other Windsor players also put in time at AIP. It was announced in early April that AIP would be acquired by Beazley Group, in what was described as a significanct expansion of its presence in the Australian group disability market. All of this has occurred at much the same time as the changes at one of Australia’s other income protection insurance specialists, International Underwriting Services, which saw its life team head over to Zurich. SR

Got a funny story? about people in the superannuation industry? Send it to Super Review and you could be raising a glass or two. Super Review is giving away a bottle of bubbly for the funniest story published in our next issue. Email editor@superreview.com.au or send a fax to (02) 9422 2822.