Super Review (July 2011)

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 2011

Volume 25 - Issue 6

Delivering benefits through super 4 SETTING THE TERMS Equipsuper and VIsion Super hammer out merger details.

New research has pointed to a growing need for employers and super funds to go beyond the standard default model to deliver more benefit options to members.

By Mike Taylor

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12 RETIREMENT TALK Super Review/Metife retirement incomes breakfast photos.

14 REGULATION Super funds prepare for the impact of MySuper.

Print Post Approved PP255003/01111

18 EQUITIES Super funds are tweaking their international equities allocations.

For the latest news, visit superreview.com.au COMPANY INDEX

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NEWS

ew research undertaken

by US-based insurer Metlife has suggested that instead of focusing on lowcost answers such as MySuper, Australian superannuation funds and employers should be focusing on providing members and employees a greater range of benefits.

The Metlife analysis, contained in the company’s 2011 International Employee Benefits Trends research, pointed to a “disconnect” between Australian companies and their employees in terms of loyalty and expectations.

The research clearly pointed to the existence of a need for both superannuation funds and employers to deliver employees more options and benefits capable of providing greater income security and a higher level of self-funding with respect to retirement incomes.

“The majority of Australians have not taken steps to address their financial security concerns, and ownership of financial protection products beyond simple life insurance and some income protection coverage is quite low,” the study said.

“Contributing to this low ownership rate is the fact that few products are owned 3

EDITORIAL

The most important benefits for Australian employees are in the noninsurance area.

through the workplace, primarily because most superannuation funds and employers do not offer such benefits, including those to supplement retirement savings,” the research said.

It said that as Australians decided where to deposit their superannuation contributions, both superannuation funds and employers had an opportunity to provide access to information that would help them make decisions on their future savings choices.

“There are a variety of disconnects on both sides about the value of benefits in the workplace. About two-thirds of employers are not aware of the role benefits can play in achieving their objectives and of the value they bring to employees.

“Similarly, only one-third of those surveyed see the value in offering a wider array of voluntary benefits to employees,” the survey analysis said.

11 ANALYSIS

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INT. EQUITIES

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APPOINTMENTS

“Helping employees make better benefits decisions and improving their financial choices are also ranked very low by employers.”

However the Metlife research said the link did exist between benefits and loyalty, pointing out that 57 per cent of employees with benefits had higher job satisfaction.

“The most important benefits for Australian employees are in the non-insurance area.

Specifically, they place high value on flexible working hours, training, and employer contributions over and above the required 9 per cent to their superannuation fund,” the analysis said.

“For their part, only one in five employees said they are satisfied with their benefits.

And nearly all Australian employees say that benefits are not what attracted them to an employer or what keeps them there.” SR 23

ROLLOVER

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COMPANY INDEX Received by CommInsure Five Oceans Asset Management State Street Corporation Plum Financial Services CommInsure Decimal Colonial First State Global Asset Management Pillar Administration

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Type of mandate Insurance Global equities Global securities lending Corporate super management Insurance Advice technology After-tax Australian equities Administration

Issued by HESTA Local Government Super REST Industry Super Lend Lease Corporation Limited TWUSUPER LGsuper NA ComSuper

Amount NA $150 million NA $300 million NA NA $400 million NA

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MetLife study confirms retirement concerns

By Mike Taylor AUSTRALIANS are still not doing enough to ensure a comfortable retirement, according to new research released by major insurer MetLife.

The MetLife study has confirmed that more than half of all Australians will outlive their retirement savings, with most acknowledging they are not accumulating enough wealth and have fallen behind

in reaching their financial retirement goals.

According to the MetLife study, sections of which were released to a Super Review retirement incomes breakfast, Australians also tended to be-

come more fearful about outliving their funds the closer they moved to retirement.

It found that 52 per cent of Australians over the age of 51 were extremely concerned about outspending their savings.

Confirming other research, the MetLife study found that the root cause of concern for those aged over 50 was their comparatively meagre superannuation balances, with the average totalling only $52,500. SR

ASIC, APRA act on Trio Capital directors

By Ashleigh McIntyre A FORMER Trio Capital director has entered into enforceable undertakings with both the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC).

Natasha Beck was a non-executive director of Trio from June 2008 and was the licensed trustee of five registered superannuation entities, as well as the responsible entity of 24 managed investment schemes.

APRA has stated Beck acknowledged concerns that she failed to carry out her du-

ties properly as director of a superannuation trustee, and will now be disqualified from acting in this capacity for four years.

However, Beck has sought to resolve APRA’s concerns at an early stage and has agreed to assist its investigation, which may result in a reduction of the ban to two years.

Beck’s enforceable undertaking with ASIC also states that she will not work in any role within the financial services industry for two years.

The former chief executive of Trio Capital, Rex Phillpott has also entered into an enforceable undertaking with ASIC to not act in any role within the financial

Underinsurance problem reduces signficantly: Rice Warner INSURERS are seeing Australia’s life insurance problem reduce significantly over the last few years, but a new survey has found that levels of insurance are still half of what they should be.

Rice Warner Actuaries found as at June 2010, the overall level of underinsurance in life risk was at $669 billion, which compares favourably to $1,000 billion of underinsurance in 2005.

On an income replacement basis, the level of life underinsurance is $3,073 billion, while for total and permanent disability (TPD) it sits at $7,182 billion. Income protection underinsurance sits at $437 billion.

Managing director and head of strategy Michael Rice said these increasing levels of personal insurance have been driven by increasing default cover within superannuation, a greater focus on risk insurance by financial advisers, and the growing direct life insurance market.

Rice said the changes to the financial and life insurance market over the past six years has led to an increased focus on personal financial

services industry for 15 years.

As well as being chief executive, Phillpott also acted as director and secretary of Trio from October 2005, and was a member of the risk and compliance committee.

The current enforceable undertakings follow the guilty plea of former Astarra Strategic Fund director and investment manager Shawn Richard. Richard is currently on bail awaiting sentence.

The Astarra fund wound up in April 2010, under a NSW Supreme Court order. Since that time the liquidator of Trio has been unable to recover the vast majority of the investments made by the fund. SR

Fix default funds, says Legalsuper

Michael Rice

risks after the global financial crisis.

But Rice said that while the life underinsurance problem had lessened, the level of cover was still only half the amount it should be.

“Apart from individual detriment, underinsurance also comes at a substantial cost to the Government. Currently,the total cost to the Government of life underinsurance across Australia is calculated to be $140 million per year as publicly funded social security benefits fill the gap,” he said.

Rice suggested there were numerous options the Government could take to reduce the underinsurance problem.

These include removing stamp duty from policies, removing GST from TPD and income protection policies sold by general insurers, making the tax treatment equal for risk insurance inside and outside of superannuation, and implementing the ‘scaled advice’ model with a focus on risk insurance. SR

THE Federal Government has been urged to tighten the rules around how default funds are selected by employers to make them more effective and beneficial to the employees affected.

Legal industry fund Legalsuper chief executive Andrew Proebstl said the changes were needed in circumstances where the current primary legal obligation of employers is to have a default fund but not necessarily to choose a “good” default fund for their employees.

“New rules are needed because most Australians continue to accept the default fund chosen by their employer assuming their employer has followed due process when selecting it,” he said.

Proebstl said Australia’s superannuation system was only as good as the default super funds

Andrew Proebstl

chosen by employers.

He said Legalsuper was recommending tightening four key areas with respect to the default fund appointment process including requiring employer to review their default fund at least every five years, banning the selection of funds with which the employer did business, requiring staff to be involved in the default fund process and requiring the upfront disclosure of any corporate deals. SR

Bob Henricks

Industry Super Network expands joint marketing campaign NEWLY merged fund Energy Super has reaffirmed its connection to the Industry Super Network (ISN) by joining its joint marketing campaign.

According to Energy Super chairman Bob Henricks, the move is part of the fund’s plan to retain existing members, attract new members and bolster funds under management.

Energy Super was formed on 1 April this year from the merger of ESI Super and SPEC Super, which was previously involved in the joint marketing campaign.

“Energy Super and the Industry Super Network … share the same philosophies and principles, and we look forward to working together to promote the benefits of industry super funds and advocating on behalf of our members,” Henricks said.

ISN deputy chief executive Alison McIvor said she welcome Energy Super to the fold, as it would further enhance the ISN’s ability to advance the sector and interests of industry super fund members.

Energy Super is a $3.8 billion industry super fund with 45,000 members. SR JULY 2011 * SUPERREVIEW

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Equipsuper-Vision Super merger confirmed, but much work still to do

By Ashleigh McIntyre THE Equipsuper and Vision Super merger may have been signed off by the funds’ boards, but there is still much work to be done on turning the two $4.8 billion funds into one entity.

The funds plan to bring together operations in February 2012, with Equipsuper’s assets to be transferred into the funds’ pooled superannuation trust in September this year.

But after assets are rolled over, the merged fund will then have to make decisions regarding consolidation of administration, insurance and investment consultant mandates – all of which are currently through different providers.

Equipsuper currently has administra-

tion provided by Mercer, investment consultancy with JANA and most aspects of insurance with Hannover Life.

Meanwhile, Vision Super is administered internally, uses Frontier for investment consultancy and is with CommInsure for insurance.

The final shape of the new organisation will also not be revealed until closer to the merger is completed, with the new chief executive of the fund not yet known.

However, it is known that the board will initially consist of all 17 board members of both funds, but will then be whittled down to nine once assets are rolled over in September.

A spokesperson for Equipsuper said the final board would be largely a hybrid

Michael Strachan

of the two current boards.

It will consist of an independent chair, along with two member directors from the Australian Services Union,

Act now or risk higher costs: Mercer SUPER funds must start making changes now before Stronger Super legislation is implemented or risk being caught short, according to new research

by Mercer.

A new paper called Stronger Super: What will it mean for superannuation funds and members argues that despite not knowing precise legislation, funds should start planning how they intend to operate under the new regime.

This planning should include thinking about strategic, operational and member engagement issues, said David Anderson, Mercer’s managing director and market leader for Australia and New Zealand “From a strategy perspective, funds and providers should be

David Anderson

asking what the gaps are between where they are now and where they’ll need to be post Stronger Super,” said Anderson.

Questions funds should also be asking include how can they differentiate themselves under MySuper and how can they demonstrate a fair and reasonable allocation of costs between MySuper and other products.

In terms of operational issues, funds should think about how and when to apply for approval from the Australian Prudential and Regulation Authority, through to managing auto-consolidation and reviewing and transitioning insurance arrangements, Anderson said.

Member engagement will also be critical and funds should be considering how to retain existing members and attract new members, and how this will be the same or change with MySuper, he said.

“We’re seeing many funds and providers keen to start the planning process … There are definite steps they can take now which will benefit the fund regardless of the final [legislative] outcome,” Anderson said. SR

SimpleWRAP launches flat fee wrap

By Milana Pokrajac SIMPLEWRAP has launched a full service administration wrap with a flat fee pricing model, which the company claims is a first in Australia for both superannuation funds and retail investors.

The new service charges a flat fee, irrespective of account balances, which would mostly benefit investors with larger investments, according to simpleWRAP director, Krystina Weston.

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clients for administration based on a funds-underadvice model is outdated, and the flat fee approach is necessary in the current investment and regulatory environment.

"Given the direction of government reforms and the recent announcements from various industry bodies, we believe it's timely for the industry to rethink fees at every level, including wraps," Weston said.

This service was launched in conjunction with Equity Trustees Superannuation, which would provide superannuation support. SR

two elected member directors, one water industry appointee, one Municipal Association of Victoria appointee and two employer directors from those not already represented.

It is also known that the investment team of the merged fund will consolidate under Equipsuper’s current chief investment officer Michael Strachan. But it will be some time after funds are pooled in September before decisions are made on investment strategies.

The name of the newly merged fund is also still being decided, according to a spokesperson for the funds.

He said that while there was a possibility of retaining one of the fund’s names, they were leaning towards a new name to be made public in February next year. SR

Focus on stable investments: Towers Watson

By Benjamin Levy THE industry needs to move beyond diversification and invest in more durable and structurally sound investment products to avoid risk, according to Towers Watson head of investments, Graeme Miller.

Speaking at an Australian Institute of Superannuation Trustees lunch in Melbourne, Miller said the industry could not rely on diversification alone to survive uncertain markets, but needed to focus their investment on products that could sustain themselves through several market cycles.

“In our view, many investment propositions simply do not stack up when subjected to stressed environments,” Miller said.

Investors have to assume that when they invest over the long term, their assets are capable of going through two or even three market cycles, he said.

Investors and super funds needed to investigate whether the capital structures of their assets were sound enough to withstand stress, how in-

Graeme Miller

vestors would behave in those times, how debt would be retired, and what incentives managers would be given in times of stress, Miller said.

Miller encouraged the super fund delegates to analyse the structures they had in place to make and implement investment decisions.

“The long-term winners in investment are those that take the time, the effort and the hard work to set themselves up to make better investment decisions,” he said.

In a question and answer session, Miller told the audience Tower Watson was resisting making short-term tactical moves to profit from unpredictable market dynamics, and was rather making sure that the time frame over which investment decisions were made was appropriate. SR

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CommInsure picks up HESTA insurance mandate

By Ashleigh McIntyre COMMINSURE has picked up a significant new insurance mandate from industry fund HESTA, with coverage from previous insurer OnePath to continue until the end of the year.

The new agreement includes a first for the industry, in that members will now be offered default income pro-

tection up to age 67. The new offering will also include improved death benefits for members.

HESTA chief executive AnneMarie Corboy said that while negotiating the new insurance offer, the fund focused on changes that would benefit the largest concentration of members.

“Our typical member is a female in

her 40s with a median balance of $9,000,” Corboy said.

“Our research tells us given her low super balance she intends to keep working as long as possible, and our new default income protection benefit will help protect her income right up to the new pension age.”

The deal closed last week and will commence in the new year, accord-

ing to head of industry funds segment for CommInsure, Frank Crapis.

“This is a major win for the CommInsure team and is welcome recognition of the quality of our product and service offering,” Crapis said.

“We are particularly excited to be launching a range of new services to HESTA members when this business commences.” SR

Direct investing in hedge funds up globally: survey GLOBAL institutional investors have taken to direct hedge fund investing following the global financial crisis, with $820 billion from pensions and sovereign wealth funds now directly invested in hedge funds, according to a new survey.

The Citi Prime Finance Survey found that small to medium hedge funds managing between $1 billion and $5 billion experienced the largest net growth in 2010.

The survey found that pensions and sovereign wealth

funds have not only been increasing their hedge fund investment programs, but are taking a more active and “direct” approach to allocating these investments, as opposed to using traditional fund of funds.

Size, maturity and stability were found to be equally important in reaching institutional investors.

The survey looked at 60 major investors representing $1.65 trillion in assets under management, as well as hedge

fund managers representing $186 billion in assets under management. SR

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AustralianSuper adds new governance position

By Ashleigh McIntyre

Mark Delaney

AUSTRALIANSUPER has signalled its intention to increase its focus on environmental, social and governance (ESG) issues, with the creation of the new role of governance manager within

the investment team.

Former Goldman Sachs head of ESG research, Andrew Gray, has been recruited to the position and will start in July.

Chief investment officer Mark Delaney said the new role would enable the fund to

be more pro-active in identifying and addressing critical governance issues that may impact the value of investments.

“As a long-term investor, AustralianSuper has a responsibility to assess and manage all foreseeable risk factors effectively, and ESG is considered

as an investment-related risk,” Delaney said.

“We believe that companies which employ good governance practices and actively consider environmental and social issues will ultimately provide better value than companies that do not.” SR

More detail needed on Coalition’s super policy: AIST THE Australian Institute of Superannuation Trustees (AIST) has called for the Coalition to give more detail on its own superannuation policy, especially if the party refuses to accept the proposal to raise the superannuation guarantee.

“It’s not good enough for the Coalition to simply quote selected comments from the Henry Tax Review, when Dr Henry himself warned that the Review should be considered in its entirety,” said AIST chief executive Fiona Reynolds.

Reynolds questioned how future

generations of taxpayers would be able to fund the needs of Australia’s rapidly ageing population.

“If the Coalition has the solution to these demographic challenges, then let’s hear it,” she said.

AIST modelling shows that the vast majority of taxpayers would have less super and experience a drop in take-home pay under Henry Review recommendations compared to the Government’s super reform package, which includes a super rebate for low-income earners, Reynolds said.

Henry recommendations also include the need for complex data matching requirements on behalf the Australian Taxation Office, she added.

An increase in the SG would not overly harm employers and history has shown businesses were not unduly affected by past SG increases, which were far greater and less gradual, she said.

The first 0.25 per cent rise would not take effect until 2013 and would amount to $3 per week for the average wage earner, Reynolds said.

“It’s hard to argue that such a rise

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30 June 2012.

The Government was proposing to extend this measure for individuals aged 50 and over with account balances below $500,000, which had previously been supported by many industry associations.

ASFA chief executive Pauline Vamos said one of the reasons for the change in position was that there had been so many other changes to the system that the implementation of a $500,000 threshold was going to be too hard at this time in terms of administrative burden.

“So we thought $35,000 was a good holding point and it still helps a lot of low-income earners,” Vamos said.

The submission further states that should the Government adopt this measure, it should undertake to increase

will be a huge impost on either wage costs or take-home pay, particularly when real wages are expected to have increased by more than 6 per cent by 2013-14,” she said. SR

Funds should engage with employers

Associations change mind on concessional caps A NUMBER of industry associations have banded together to urge the Government to adopt a concessional contributions cap for members over 50 of $35,000, regardless of their account balance, with an undertaking to increase the cap to $50,000.

The Association of Superannuation Funds of Australia (ASFA), the Financial Services Council, the SelfManaged Super Fund Professionals’ Association of Australia and the Association of Financial Advisers have all joined forces to support a new position on concessional contributions caps in a supplementary submission to Treasury.

Currently, members aged 50 and over can make concessional super contributions of up to $50,000 a year, until

Fiona Reynolds

Pauline Vamos

the cap for individuals over 50 to $50,000 at the first possible opportunity, possibly in incremental amounts.

The submission stated the cost of increasing the caps for all people over 50 would be partially offset by the cost savings associated with not implementing a balance limit.

But the further cost of increasing the caps would be subject to the Government’s fiscal position at the time.

While Vamos said the new position would disadvantage some people with lower account balances in the first instances, getting the policy through was a priority. SR

SUPER funds should develop their services to employers to increase member engagement, according to the head of retirement services at Equipsuper, John Farrington.

Speaking at the Australian Institute of Superannuation Trustees Member Engagement Symposium in Melbourne, Farrington said employers were the natural gateway to super fund managers and were natural fund promoters.

Super funds also shouldn’t underestimate the role employers play in the administration of the fund, Farrington said.

Administration problems are frequently the result of payroll problems, and therefore can be solved by going through the employer. Super funds should ‘empower’ employers to help out the super fund in event of a problem, he said.

Farrington disagreed with industry commentators that said there were things super funds could not influence about members.

Super funds need to be as pro-active as possible with employers, develop multiple contact points with them, use targeted education programs for their workers, and put out targeted newsletters for different age brackets among their members, he said. Employers were looking for a good relationship with super funds, and wanted members to be educated, he added.

Very few of their members were switching super funds during the global financial crisis because they had educated them about what they would get from the super fund, Farrington said.

Processes should be kept as standard as possible to avoid problems, he added. SR

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MySuper should include stricter risk and return targets: Costello

By Ashleigh McIntyre THE superannuation system has not delivered the kind of returns members in default funds are entitled to expect, according to Paul Costello, chair of the Stronger Super Peak Consultative Group.

“We have created a system – and we are all part of it – which has sub-optimally managed the assets of those people,” he said.

Costello argued in order to fix

this, MySuper funds should be required to be measured on more than just the monthly leagues tables published by the Australian Prudential Regulation Authority (APRA) – they should also be required to meet both risk and performance targets.

“The trustee offering of MySuper should be required to set out what they determine an acceptable level of risk is and set out what they expect to be the

risk-adjusted 10-year rolling return,” Costello said.

He also said trustees should ask what is an acceptable level of risk-taking they would deliver against, and then uphold the expectation to manage portfolios accordingly.

Trustees should also communicate these targets with members to make the process both more accountable and transparent.

Costello said the challenge now

for trustees was to come up with better, clearer, more effective and more accountable MySuper products that incorporated these ideas.

“I would argue that that represents both an extraordinary challenge and opportunity for the industry,” he said.

Costello said that consultation on the proposed regulations ended on 30 May, and trustees could expect to see legislation in the second half of the year. SR

Franklin Templeton to acquire Aussie equities manager FRANKLIN Templeton Investments Australia has announced it plans to acquire Australian equity manager Balanced Equity Management in a cash and stock transaction in early July.

Chief executive of parent company Franklin Resources, Greg Johnson, said the planned acquisition was an excellent

strategic fit for the business, which had been looking to expand its local presence.

Balanced Equity Management was founded by Andrew Sisson in 1988, who said the acquisition would ensure the long-term continuity of the two-decade old business in terms of both investment team and process.

Based in Melbourne, the firm has a strong

long-term track record of managing large cap Australian equity portfolios, and it initially invested solely in top 50 stocks for wholesale investors.

In 2003, the firm expanded its investment universe at the request of clients to include the top 100 Australian stocks. Today, the firm manages close to $10.3 billion. SR

Implications of MSCI’s emerging market rebalancing THE MSCI world index will announce overnight whether Korea and Taiwan will be reclassified from emerging markets to developed markets, with implications for both active and passive managers.

Kerry Series, chief investment officer of boutique Asian equities manager Eight Investment Partners, is hopeful the rebalancing will occur.

With Korea and Taiwan being available to developed market investors the increased demand for those companies could have

a positive impact on valuations, he said.

Because Korea and Taiwan make up about 25 per cent of the emerging markets index it would reduce the opportunities for emerging markets managers, hence reducing the diversity of

that index given the weighting of technology stocks in those two countries, he said.

However other emerging markets such as China would benefit as their weightings increase, he added.

State Street Global Advisers head of exchange-traded funds for Asia Pacific, Frank Henze, said the move has been on the cards for several years and if it does happen it won’t come as a surprise to investors.

Many investors in Asia already do not view these two markets as

emerging, although a reclassification would mean a lot of money on the move with regards to readjusting portfolios, particularly for index and exchange-traded fund (ETF) investors, he said.

It would also have implications for other mandates and for active investors who invested in that universe, although in different proportions, he said.

A potential move would likely be less of an issue for larger houses who will have developed in house strategies to manage the shift, he added. SR

Gov hits back, but clearing house still too expensive THE Federal Government’s Medicare-based clearing house for small businesses has sparked a war of words with the Opposition, which claims it is costing $177 for every transaction.

In a statement justifying the Coalition’s plan to establish an alternative clearing house, the Opposition claimed that at a cost of $16 million per year for 90,000 transactions, this equated to $177 per transaction.

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that the clearing house cost $16 million over three years, not $16 million per year.

This would still equate to almost $60 per transaction.

Both the Small Business Minister, Senator Nick Sherry, and Minister for Superannuation, Bill Shorten, teamed up for the joint release stating the Coalition had its figures wrong and that the clearing house had received a high level of satisfaction.

“Yet, the Coalition wants to spend up to $368 million of taxpayers’ money to set up

Nick Sherry

a duplicate scheme,” Shorten said.

“The coalition is incapable of coming up with effective policies, all they come up with is sloppy maths and mindless negativity,” he added. SR

Paul Costello

Consolidation to save members $250m a year: ASFA NEW research on the impact of superannuation account consolidation has found the elimination of six million unnecessary accounts could save members around $250 million a year in fees.

The Association of Superannuation Funds of Australia (ASFA) has released a new research paper that explores the potential impacts of auto-consolidation of unnecessary accounts.

The paper found that although many people have good reason to hold more than one superannuation account, there are numerous instances where this is not the case.

ASFA estimates there are currently more than 14 million Australians holding superannuation accounts, with an average of just over two accounts per person.

But it seems that work to encourage members to consolidate their accounts themselves has paid off, since the growth of new accounts has dropped off from 5 per cent per year a decade ago, to about 0.6 per cent today.

ASFA chief executive Pauline Vamos said her organisation had seen over the past 12 months that measures relating to temporary residents and unclaimed super have reduced the number of accounts by some 3.6 million.

“We believe that trend will continue downwards with the Stronger Super changes,” she said. SR

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Rules for SMSF collectibles still too lenient: AIST

Industry funds only just ahead SUPERANNUATION fund returns look likely to end the financial year in the high single digits, despite faltering in May, with the industry funds just edging out the retail master trusts, according to Chant West.

The data revealed industry funds and master trusts performed broadly in line with each other returning 0.2 per cent and 0.3 per cent respectively in May and by 10 per cent and 9.9 per cent in financial year to date terms.

Chant West director, Warren

Chant said that while the median growth fund return had retreated 0.2 per cent during May, the return for the financial year to date was 10 per cent.

Chant warned, however, that the data for June suggested that super fund members might have to settle for high single digit returns.

“This is still a pleasing result and can be viewed as a year of consolidation on the back of last year’s 10.4 per cent return,” he said.

“West estimate the return to the

By Ashleigh McIntyre

Chant West

end of June will be about 8 per cent after investment fees and tax, which is above the long-term expected return of about 7 per cent a year for growth funds,” Chant said. SR

Collectibles debate blown out of proportion: SMSF Academy

INDUSTRY reactions to the draft regulations on collectable investments in self-managed funds have been labelled as “making a mountain out of a molehill”.

Self-managed super fund (SMSF) education provider SMSF Academy’s managing director Aaron Dunn said concerns about the additional compliance costs are valid, but that the changes are necessary to improve the integrity of the system.

The changes will prevent trustees from enjoying the benefits from their investments in collectables and

are designed to ensure the investments are made to derive a retirement benefit.

“It is a better outcome than that proposed by the Cooper Review, which sought a blanket ban on the acquisition of all collectables and personal use assets within SMSFs,” Dunn said.

He added that the hype around collectables was disproportionate to the amount of money the SMSF sector currently has invested in them, with only 0.1 per cent of the $430 billion of assets invested in collectibles.

Dunn said one area of change that will impose greater costs of more SMSFs was the proposed ban on acquiring shares from related parties, but there had been little debate on the topic.

“While the industry has a right to have input in the future direction of superannuation policy within Australia, arguing the toss on collectibles is really making a mountain out of a molehill,” Dunn said.

“Trustees and their advisers should be happy that they are here to stay – albeit with tighter regulation.” SR

THE Australian Institute of Superannuation Trustees (AIST) has used its submission on the draft regulations for collectibles and personal use assets in selfmanaged super funds (SMSFs) to ask for further tightening of the rules in the interests of all superannuation fund members.

In particular, the association wished to see assets that were similar to those commonly accepted, but not included in the list, brought under regulation by a ‘captureall’ subsection that had been left out of draft regulations.

The AIST also said there were still loopholes in the legislation that it would like to see closed, including the ban on leases to related parties.

The association wrote in its submission that the regulations did not go far enough, and that it would like to see further bans on sub-leases to prevent related parties getting around the legislation.

“Furthermore, we believe that even if these assets were being sub-let legitimately to non-related parties, such a ban would assist in the prevention of loss, theft or damage,” the submission said.

The AIST also suggested the ban on the storage of items by a related party was too prescriptive. It said that rather than using the term ‘private residence’, it should be substituted with ‘any premises owned by’ to prevent circumvention of the legislation.

Furthermore, the AIST said it strongly supported the proposal requiring items to be insured, although felt it was unfair to suggest trustees should be liable in the instance that they are unable to insure them in the given timeframe of seven days through no fault of their own.

It said trustees should not be blamed for delays in processing by brokers, underwriters or third parties and should only be penalised if an application had not been made in the timeframe. SR

Super funds seen as the Government’s ‘honey pot’: ASFA THE Government is increasingly viewing regulated superannuation funds as a ‘honey pot’ and industry associations are fighting the further use of members’ accounts to fund compensation levies.

In a submission on the review of compensation arrangements, the Association of Superannuation Funds of Australia (ASFA) said it would be “inappropriate” for superannuation funds to be levied other than where misconduct has caused a superannuation fund to fail.

Rather, it said financial services providers should be segregated into different classes, and only pay a levy where that type of provider is both guilty of misconduct and insolvent.

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if a particular class exceeds its annual maximum levy threshold, other classes would be required to ‘top-up’ funding.

In this case, ASFA also said it would be inappropriate for superannuation funds to cross-subsidise other financial products, given that super funds represent the deferred salaries and wages of employees.

But the idea of a universal levy across all product providers does not sit well with ASFA, who say this would create further inequitable outcomes.

It said this model would mean inherently risky financial services products would be cross-subsidised by less risky ones, especially in the case of prudentially regulated superannuation funds.

If this type of levy were to be introduced, ASFA argued regulated super

funds should not be required to pay the levy unless it was due to the misconduct of another regulated fund.

In all cases, ASFA suggested that any type of levy should be both statutory and last resort – meaning, it should only apply where the financial services provider is insolvent and there is no

other avenue for compensation.

It also suggested the levy have clear parameters as to the process and speed with which it would be paid, and that further, there should be a full review as to the regulatory gap through which misconduct resulted, citing the example of the Trio Capital collapse.

“Little, if anything, has been explored to date in relation to the possibility of failure by [the Australian Securities and Investments Commission] or [the Australian Prudential Regulation Authority] or both with respect to Trio Capital,” the submission stated.

“There appears to be a growing perception that levies should be applied first and questions asked later … This is an unfair treatment of members of superannuation funds,” it stated. SR

11 EDITORIAL

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Blasting out of the past The Government’s ‘modern award’ process sits most uncomfortably with the superannuation industry that has evolved in Australia over the past 30 years. The Government must address the mismatch.

Mike Taylor

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t is all too easy to forget that industry superannuation funds had their genesis in the award superannuation regime, which was the predecessor of the superannuation guarantee that grew out of the Prices and Incomes Accord between the Hawke/Keating Labor Government and the Australian Council of Trade Unions.

It is therefore hardly surprising that the industry superannuation funds that emerged out of the old award super regime of the early 1980s managed to dominate the list of default funds named as part of the Rudd Labor Government’s socalled ‘modern awards’ process in 2008-09.

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The dates here are significant. Award superannuation was a product of the industrial relations and economic environment which pertained nearly 30 years ago – the era before the advent of the superannuation guarantee, before the introduction of choice of fund and before the introduction of the Superannuation Industry (Supervision) Act. By allowing superannuation to be handled under the modern award process, the Government effectively turned back the clock with respect to a significant segment of a mature and successful industry.

Not only that, the Government then allowed an industrial relations judiciary (totally lacking in any particular superannuation expertise) to become the arbiter.

The Government should be grateful that the vast majority of Australia’s industry superannuation funds have proved highly successful and highly resilient, because its modern award regime has un-

EDITORIAL Managing Editor – Mike Taylor Ph: (02) 9422 2712 Fax: (02) 9422 2822 email: mike.taylor@reedbusiness.com.au Features Editor – Milana Pokrajac Ph: (02) 9422 2080 Fax: (02) 9422 2822 email: milana.pokrajac@reedbusiness.com.au Reporter - 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

questionably given rise to a system based more on industrial history and allegiances than to investment performance.

If the Government needed any proof of the dangers of its modern awards regime, then it need only have examined the controversy which has swirled around MTAA Super over the past several months. MTAA Super is deemed an eligible default fund within the modern award process, yet its investment performance over a key period has left a great deal to be desired.

While recent reports have centred on the manner in which the likes of some AMP funds have been prevented from becoming part of the modern award process because of the opposition of particular employer and employee groupings, a number of industry funds have also found themselves disadvantaged.

Notwithstanding the fact that a number of industry funds and retail master trusts have, over the years, become integral

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to particular industries and sectors, their lack of an original affiliation to particular awards has seen them left off the lists overseen by the successor to the Australian Conciliation and Arbitration Commission – Fair Work Australia.

What has become evident over the past 18 months is that while the delivery of the modern award process may have served to mollify sections of the labour and trade union movements, it has stood at odds not only with the natural 30-year evolution of the $1.3 trillion Australian superannuation industry, but also the policy directions indicated by the Cooper Review.

The successful evolution of the Australian superannuation has been based on performance and choice. Where performance has been concerned, it has been the industry funds that have chalked up the most consistently positive record – although it has been the retail master trusts that have offered members the most choice.

While some significant differences continue to exist between the policies of the major political parties with respect to superannuation, they have been bipartisan in their support for funds that deliver their members security and solid investment returns.

While the Assistant Treasurer and Minister for Financial Services, Bill Shorten, has said that the question of default funds will go before the Productivity Commission next year, recent events suggest that the best interests of the superannuation industry and individual super fund members would be served by having it referred much sooner than that.

Superannuation never really needed to be a part of the updating and modernisation of industrial awards. It now seems clear the Government has created some dangerous distortions, including allowing the industrial relations judiciary to be a part of a process which should, properly, reside with the Australian Prudential Regulation Authority (APRA).

The bar should, unquestionably, be set high before funds can be deemed as appropriate ‘default funds’, but the essential criteria should be based on investment performance and security and the ultimate arbiter should be APRA, not Fair Work Australia.

If the Government cannot acknowledge it made a mistake with respect to superannuation and modern awards, then it should at least allow an objective judgement to be made by the Productivity Commission as soon as possible. SR

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12 RETIREMENT INCOMES

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Retirement Incomes Breakfast With retirement incomes, products and strategies at the forefront of superannuation industry debate, Super Review joined with MetLife in May to host a breakfast forum to debate the issues.

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1. Eric Reisenwitz from MetLife; 2. Mike Taylor from Super Review; Peter Smyth from MetLife; Pauline Vamos from ASFA; David Knox from Mercer.

3. Mario De Bono and Jeff Humphries from MetLife.

4. The breakfast attendees.

5. Peter Wilby from AMP; Sonia Currey from Financial Review Professional Education.

6. Peter Smyth from MetLife.

7. Greg Vaughan from Ankura Capital; Peter Skalkos from MLC - Retirement Solutions.

8. Josef Pilger from Ernst & Young; Bruno Di Mattia.

9. Tony Bofinger from Challenger; Grant Albiston from Munich Reinsurance.

10. Michael Gaffney and David Cox from Challenger.

11. Colin Sultana and David Heine from Cuscal.

12. Michelle Tate and Lisa Backo from CommInsure.

13. Phillip Dewhurst from MetLife.

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14 ANALYSIS

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Getting the house in order The superannuation industry is continuing to change and, as DAMON TAYLOR reports, governments and trustees boards are being forced to make pivotal decisions about future directions and the best interests of members.

A

s Australia’s superannuation industry continues to prepare for the upcoming MySuper environment, its three dominant players continue to be industry funds, retail master trusts and the rapidly growing self-managed super fund (SMSF) sector.

Yet the players often forgotten in the Federal Government’s super industry overhaul are actually the very public sector funds in its own backyard – and recent developments indicate that both the Federal Government and state governments are keen to position them well.

The most recent of these developments has come with the recent outsourcing of administration for the Federal Government’s Public Service Sector accumulation plan (PSSap) to Pillar Administration.

Commenting on the successful tender, Pillar chief executive Peter Beck said that it had been was important win, since the Government sector of superannuation was considered to be an area of expertise.

“Our main market segment is the Government sector, and SUPERREVIEW

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Peter Beck

PSSap is one of the two accumulation schemes for Federal public sector employees, the other being AGEST,” he said. “We already administer AGEST and so it was really important to us to get PSSap as well.

“It’s a natural fit for us, given that we’ve got the NSW Government accumulation scheme and we’ve got one of the two Federal Government schemes,” Beck continued. “We see this as an area of specialisation.”

RUTHLESS EFFICIENCY But while the acquisition of PSSap’s administration is undoubtedly significant for Pillar, it is also significant with respect to the fund’s

own positioning. With the Stronger Super initiatives, the Minister for Financial Services and Superannuation, Bill Shorten, is pushing hard for a super industry that is both competitive and efficient. However, at some point the focus must turn to whether the Government has its own house in order.

It would, after all, be an interesting turn of events if the efficiency the Government has been such a proponent of was not observable within the

day-to-day running of its own public sector funds.

Commenting on the motivations behind outsourcing PSSap’s administration, Mercer worldwide partner Martin Stevenson said that efficiency had undoubtedly been the key driver in the Government’s decision-making process.

“A report from PricewaterhouseCoopers found that the PSSap administration could be delivered more cost effectively by accessing the available competitive market,” he said. “And my un-

derstanding is that the cost savings involved made the decision a simple one.”

“The efficiency argument was compelling.”“And my understanding is that the cost savings involved made the decision a simple one. It was an efficiency thing, pure and simple.”

In a similar vein is the Federal Government’s recent establishment of the Commonwealth Superannuation Corporation (CSC). Designed to consolidate the trusteeship and modernise the administration governance of the

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trustee operation and better services for all members,” Sherry said.

Once again, the focus for the Government seems to be getting its house in order by obtaining scale and efficiency in whatever ways are most effective.

The final development of note for public sector super funds comes in the form of a review into a number of superannuation reforms that were proposed by public sector fund, GESB. Commissioned by the Western Australian state Government and undertaken by Federal public servant Rod Whithear, the focus of the review was the proposed mutualisation of GESB, an initiative which was subsequently abandoned based on Whithear’s recommendations.

LEARNING FROM EXPERIENCE

Commonwealth’s main military and civilian superannuation schemes, such a move again seems aimed not just at efficiency but at increased investment scale.

Commenting on the passage of legislation that allowed the creation of CSC, the Minister for Finance and Deregulation, Senator Penny Wong, said that the trustee consolidation was an important reform that would benefit all scheme members.

“The establishment of Commonwealth Superannuation

Corporation as the consolidated trustee will help secure increased superannuation benefits for thousands of military and civilian scheme members,” said Wong.

Similarly, the Minister Assisting on Deregulation and Public Sector Superannuation, Senator Nick Sherry, said that the changes would combine more than 680,000 members and pensioners, with funds totalling more than $21 billion.

“Consolidation of the funds will produce a more efficient

But the interesting thing to note is that despite the way in which mutualisation was undertaken, a precedent exists for this kind of change.

After all, New South Walesbased First State Super, which became a public offer fund in 2006, has effectively become an industry fund – and it continues to thrive as a competitive force within the industry.

And this, of course, is the opposite end of the public sector spectrum. Where funds such as PSSap are open only to Commonwealth public servants and, prior to PSSap’s outsourcing, were also wholly administered by public sector entities, First State Super has for some time operated with entirely different means and objectives.

New South Walesbased First State Super, which became a public offer fund in 2006, has effectively become an industry fund.

So is this an equally valid direction for public sector fund positioning?

Reflecting on First State Super’s history, Stevenson said that he doubted its trustees even thought of it as a public sector fund anymore.

“The thinking in the NSW Government back in 1992 when they started First State

Nick Sherry

Super was pretty much to move out of the superannuation business,” he said. “So they created First State Super, which was initially staffed by the same executive that did the large defined benefit fund, and then, as time went on, the two funds’ different objectives meant that separation became a good idea.”

“Obviously, First State Super is now a public offer fund and is less and less a public sector fund,” Stevenson continued. “For all intents and purposes, its an industry fund; it just happens to have the NSW Government as an employer that uses it as its default fund.”

According to Stevenson, though that position as major employer gave the NSW Government a measure of power Continued on page 16

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Getting the house in order ☞ Continued from page 15 and influence, it was a market power and not a power by legislation.

“Then, of course, we’ve all seen that First State Super has just now merged with Health Super,” he said. “And that demonstrates First State Super’s strategy as being one of looking to the future.”

“If you look at where the industry is headed in the next 10 to 15 years, it is likely that there will be five or six large funds remaining plus a number of niche players and I think First State Super has made it clear that it would like to be one those large funds and a major player.”

the industry – was hardly inadvisable.

However, while First State Super is undoubtedly proof that a move from public sector fund to public offer industry fund is one through which scale and efficiency can be achieved and achieved well, the question both state and Federal Governments will be asking themselves: Is making super funds efficient core business?

CONSOLIDATION Clearly, the challenge facing all funds is how to compete and how to survive in an industry where rationalisation has become a certainty. And though MySuper and broader legislative change may, at times, be blamed as the cause of this new reality, super fund consolidation and mergers are hardly new.

In fact, in seeking mutualisation, there seems little doubt that GESB was looking to face that very challenge. Yes, the numbers and justification for such a reform have been called into question and yes, the fact that former chief executive, Michele Dolin, has since departed show that the means with which the fund pursued that direction were probably less than ideal. But pursuit of a model similar to that of First State Super – a fund acknowledged as having good performance, strong economies of scale and some of the lowest costs in SUPERREVIEW

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Penny Wong

Is this something that Governments, irrespective of whether they are Federal or state-based, need to be doing?

And the answer, if recent developments are any indication, is no.

In choosing to outsource superannuation administration, in choosing to consolidate trusteeship and, in the case of Western Australia, in choosing against mutualisation, state and Federal Governments have made it clear that while they are cognisant of the necessity of efficiency, they are also intent on sticking to the basics.

It seems public sector funds are to become focused and efficient retirement vehicles and, according to Beck, administration provided from a position of scale can enable that.

“There’s scale at different

levels and there’s no questions that there’s scale efficiencies in administration,” he said.

“But I guess the issue for super funds is whether that’s enough or whether they need to get more efficiencies across the funds they’re managing.

“Let’s say there are people in the middle, who may be able to survive this drive of scale and efficiency by outsourcing,” Beck continued.

“There are still going to be those that are too small even when they outsource.

“They may have to look for mergers and look for merger partners, but certainly there’s that middle group that clearly won’t have efficiencies if they don’t outsource.”

So in terms of where these developments place the super industry as a whole, it seems pertinent to examine what the industry’s makeup is now and, more importantly, what it is likely to become. From industry fund to retail master trust to SMSF to public sector fund, for a number of years now the lines between super funds have been quite clearly delineated. But are these developments, on the part of public sector funds, a sign of further delineation?

For Beck, quite the opposite is occurring.

“No, if anything I think the lines between industry funds, retail funds and public sector funds are starting to blur,” he said. “In many cases, the public sector funds are morphing into public sector/industry funds.

“Take, for example, the merging of First State Super and Health Super; Health Super does have public sector health employees in it,

Like it or not, efficiency is currently the main driver in superannuation.

there’s choice and so they can go to funds like that, but its also got a lot of private sector health workers in it,” Beck said. “So in that merger we’ve actually got a fund starting to morph into a combination of a public sector fund and an industry fund.”

BLURRING THE LINES Certainly, the lines between specific sectors of superannuation are getting harder and harder to define. And with MySuper products yet waiting in the wings, that is a trend unlikely to reverse.

The position taken by both state and Federal public sector schemes is that they are first and foremost the default funds for all public sector employees. Yet just as evident is the fact that they are benefiting from the Government’s push towards efficiency, lowering costs and increasing scale with MySuper.

According to Beck, like it or not, efficiency is currently the main driver in superannuation.

“All industries go through this development where there are a lot of players because it’s an attractive market,” he said.

“But as the competition heats up and the pricing points come down, the smaller funds find it harder and harder to compete and then industries do rationalise.

“It’s a natural cycle in a market that says competition is good and it drives prices down, but it also means that the smaller and weaker players in the market, unless they’ve got a particular niche in the industry, probably won’t survive,” Beck continued. “You’ve either got to find the niche or you’ve got to grow and get efficiencies.” SR

18 INTERNATIONAL EQUITIES

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Finding the right settings Australian superannuation funds are finding fine-tuning their international equities allocations a challenging task but, as DAMON TAYLOR writes, those that get the settings right seem likely to deliver significant returns.

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With significant uncertainty and recession in a number of offshore economies, global equities are an interesting topic of conversation within the super industry. In giving investors access to industries that are not available within Australia, global equities always been a good portfolio diversifier – but economic turmoil can give pause to even the steadiest investor.

Giving an insight into how global

equities had fared over the last 12 months, Perennial Investment Partners head of international equities Clay Carter said that up until November of last year, markets had been acting reasonably positively.

“Your so-called emerging markets started rolling over in October/November due to concerns about higher interest rates and inflation and that’s pretty much continued through into 2011,” he said. “Now if you look

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at what markets have done year-todate, your so-called developed markets, like the US, UK, and Europe, have done okay; whereas the emerging markets of India, Brazil and China have been lagging.

“What we’ve found is that markets have become a lot more difficult – not necessarily volatile – but there are a number of issues that investors are dealing with on a day-to-day basis at the moment,” Carter continued. “One

example would be the ongoing drama in Greece, but then there’s also the increasing number of central banks that have had to raise interest rates to staunch their respective countries’ inflationary pressures.”

Yet while he highlighted Greece and rising interest rates as investors’ two main worries, Carter added the state of flux that existed in the Middle East and some of the softer economic data coming out of the US to investors’ list of concerns as well.

“So those are the issues that investors are dealing with, but our sense of it is that things become a bit clearer in the second half,” he said. “In other words, from now until the end of the year, we see interest rate rises being fewer and farther between. We think inflation has probably peaked in India, China and Brazil. And although the Middle East remains a question mark, it probably has less of a market effect with oil somewhere between US$95 and US$105 per barrel.

“Overall, we’d expect some of the things that have been dogging markets for the last eight months to moderate somewhat going into the second half of the year and that equity returns, particularly in those emerging markets that have lagged, will improve.”

A sudden change of heart Offering a similar take on recent global equities movement, Aberdeen Asset Management senior investment specialist for international equities, Stuart James, said that up until the last two weeks the world had been increasingly optimistic – particularly about US growth and about a European solution.

“I guess I would say that the world is male – it can only focus on one thing at a time,” he said. “So last year, at one moment it was US growth concerns and then it was concerns about

I expect that as we move towards the end of this financial year, we’re probably going to witness a lot more volatility as we continue to digest a faltering US economy and an increasing likelihood of further problems in Europe.

the European situation and then back to US growth.

“And you can really see that in the exchange rate between the US dollar and the Euro last year as that kind of focus switched between the two,” James continued. “But as we got through to the final quarter of last year, the focus actually began to switch to emerging markets and increasing concerns about inflation and, as a result, people gradually became more optimistic about developed markets and probably slightly more cautious towards emerging markets.

“Yet in the last two weeks, I think that’s changed again and, regrettably, I expect that as we move towards the end of this financial year, we’re probably going to witness a lot more volatility as we continue to digest a faltering US economy and an increasing likelihood of further problems in Europe.”

However, while international markets have consistently seen the returns ball bounce back and forth between developed and emerging markets in recent months, offshore investment has not been without its highlights.

According to Carter, this particular cloud’s silver lining has been strong corporate earnings and that, coupled with the long time horizon of super funds investors, has kept traditional international equities allocations relatively steady.

“Corporate earnings have been good and that’s the one bright spot here,” he said. “And we expect that to continue because at Perennial we don’t so much buy markets as we buy individual stocks.

“Our focus is always the companies behind those stocks and recently they’ve been delivering more than anticipated growth, particularly on the top line, and that’s a function of what’s Continued on page 20

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Finding the right settings going on in the global economy.”

Talking specifically about whether overseas market turmoil had been dissuaded super funds from global equities investment, Vanguard chief investment officer Joseph Brennan said that most funds were trying to set an allocation to meet a longer run need and mindset.

“Typically, a fund will have around 20 to 30 per cent of their portfolios allocated internationally, and market volatility in the short run doesn’t really change that,” he said. “Having said that, institutional investors will often control a separate hedge ratio on their currency exposure as a subset of their overall international allocations, and sometimes they will use prolonged moves in currency relationships to adjust it.”

“So, if anything, where we’ve seen a little bit of movement is through some unwinding of hedging within international equities as the Aussie rallied towards US$1.10,” Brennan continued. “But there have been no wholesale changes to international portfolio allocations, and we wouldn’t expect them.”

Blurring the lines Similarly seeing little, if any, movement in global equities allocations, James instead said that the key area of change had been an increasing awareness that allocations on a traditional MSCI-world basis were not the best approach.

“Global equities are still a good diversifier and, on that basis, they’re playing the same role within portfolios – but the problem is that we’ve naturally been very overweight to places like the US and Europe and, traditionally, institutional investors and super funds have been underweight emerging markets,” he said.

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Global equities are still a good diversifier and, on that basis, they’re playing the same role within portfolios.

that basing your investment criteria on a backwards-looking benchmark isn’t necessarily going to give you the optimum returns.

“So I think it’s more that the makeup of international exposures that’s changing rather than overall allocations.”

Of course, the largest aspect of any re-examination of international equities allocations is in the market’s traditional terminology. As outlined by both James and Carter, strength and value has ebbed back and forth between developed and emerging markets for some years, but according to Carter there may be merit in doing away with the terms ‘emerging’ and ‘developed’ altogether.

“In some ways, we’re probably not the best people to make a broad call between emerging and developed markets, simply because we don’t differentiate,” he said. “We have a universe of roughly 9,000 stocks and we don’t differentiate according to whether they’re so-called ‘EM’ or ‘DM’ or whether the companies or large or small – everything is done on a company by company basis.

“Even the term ‘emerging markets’ is a bit old-fashioned to a number of the more sophisticated institutional investors around the world,” Carter continued. “It’s a bit redundant, because these so-called emerging markets emerged long ago.

“Even if you look at the MSCI-world,

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The key thing investors need to be more aware of is that we operate in an increasingly global economy and companies themselves are increasingly global.

the ‘rest of the world’ portion of that is less than 5 per cent, but if you look at some of the longer term studies, probably 50 to 60 per cent of global GDP is going to come from that 5 per cent and the other 95 per cent is a bit ex-growth with high deficits and various sovereign problems.”

In comparing emerging and developed markets more directly, James said that investors needed to remember that labels could be misleading.

“The big difference between the two is really that structurally, emerging markets simply don’t have the same levels of debt as developed markets,” he said. “Having said that, I think one thing that investors need to be aware of is that labels can often be very misleading.

“So, for example, often you can be overweight to the UK, and given the UK is rapidly approaching emerging market status – albeit from the wrong direction – on the face of it that would look to be potentially a poor allocation,” James continued. “But what people forget is that many companies listed in the UK, such as Standard Chartered Bank, which is a UK-listed bank, may have 90 per cent of their revenues from emerging markets.

“The key thing investors need to be more aware of is that we operate in an increasingly global economy and companies themselves are increasingly global – where a company is listed is sometimes pretty irrelevant compared to where its actual revenue exposures are.”

For Carter, it is also significant to note that Korea and Taiwan, two of the largest markets within Morgan Stanley’s emerging markets index, had recently been reclassified as part of the developed world.

“Morgan Stanley, in its wisdom, have probably realised that Korea and Taiwan are not emerging markets,” he

said. “And that’s not surprising because when you go to Korea and Taiwan and you look around, you find yourself saying ‘I’m not in an emerging market here’.

“So I don’t think there’s any doubt that we’re going to see a lot of changes in and around global equities terminology,” Carter continued. “For investors to say that they want to have a global fund or want to have an EM

fund, we think that’s going to be blurred and we also think that people like us who don’t make any distinction is a better way to play the fact that, in truth, the only emerging markets out there are what we call frontier market, which are places like Nigeria and Cambodia, the wild and crazy parts of the world.

Continued on page 22

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Finding the right settings ☞ Continued from page 21 “You only have to look at markets like Brazil and India and China – there’s some giant companies with market caps of US$200 billion to US$300 billion and you simply can’t ignore them in a global portfolio.”

The task at hand Yet while it is obvious that global equities fund managers and investors have a number of challenges before them, the background issue for all fund managers servicing the super industry is the upcoming MySuper environment.

Now, more than ever before, cost is top of mind – and according to James, that fact is something all fund managers are well aware of.

“Obviously MySuper puts a much higher focus on the cost of investing and passive approaches or ETFs have generally been more cost-effective, certainly insomuch as their annual management charges are lower than traditional active fees,” he said. “So I can see the attractiveness of a more passive or ETF approach gaining in popularity even if we ourselves are, potentially, a victim of that trend given that we’re an active manager.

“However, the thing that I would caution here is that if you take a passive approach, you get market returns and you do get that index approach,” continued James. “And if you do that, you will be overweight places like the US and Europe and potentially underweight emerging markets which, as I’ve argued, is potentially very short sighted.

“But what I would also say is that as a group of active managers, we’ve probably let ourselves down.”

James said that one of the unpalatable realities of funds management was that many so-called active managers were actually what he would deem ‘closet benchmark-huggers’.

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I think our enemy is those active managers who potentially give the sector as a whole a bad name.

“And by that I mean that they charge active fees but they’re benchmark plus or minus 1 per cent,” he said. “So they deliver passive returns, but at an active fee cost.

“They do it because they’re managing their risk of underperforming,” continued James. “But while it’s true that if you copy the benchmark you can’t underperform it, the flipside is that you can’t outperform it either.”

For his part, Brennan said that prudent fund managers had already put significant thought towards what sort of investment products would be attractive in such an environment and whether their own products would have to be changed in any way to remain attractive.

“As I’m sure is the case for a number of fund managers, we’ve had a lot of discussions on this internally, externally and with individual clients specifically,” he said. “And in the MySuper protocols and recommendations, though the main focus is on lowering costs, we’ve stood for that for many years.

“So we’re in agreement with much of what’s proposed,” Brennan continued. “Costs are generally regarded as the biggest headwind to investing, so keeping the headwinds down obviously allows for a better path to your investing goals.”

Looking specifically at active versus passive investment in the global equities space, Brennan said that although indexing was the purest form of low cost investing, the terms ‘active’ and ‘low cost’ were not necessarily mutually exclusive.

“You need to find managers with talent and someone who has a really reliable way of picking stocks,” he said. “If they’re an active manager who adds value and has a strong team and a repeatable process and you can acquire those services at a low cost, then that will be an asset in any portfolio.”

According to James, the battle lines

in any upcoming MySuper environment would be drawn between an understandable demand for passive funds and the ability of active managers to demonstrate value.

“For those truly active managers, where we need to focus is demonstrating our skill and ability to add excess alpha after fees,” he said. “And I think those managers who can demonstrate that they’re truly active and actually can add enhanced alpha and enhanced returns for investors after fees, I think there will undoubtedly be a place for them in the MySuper world.”

“But that is our challenge. I don’t think our enemy is passive funds, I think actually our enemy is those active managers who potentially give the sector as a whole a bad name,” James continued. “And we need to do a lot of

Joseph Brennan

work there to demonstrate there’s a difference between being truly active and simply calling yourself active.”

James said that when it came right down to it, there would always be a difference between value and price.

“Yes, passive funds are much cheaper but you’re going to get a market return,” he said. “If we can demonstrate that while our fees are higher, the upside outcome is much greater, then it’s worth paying those higher fees. The ball is in our court on this.” SR

APPOINTMENTS 23

www.superreview.com.au

Events Calendar

BT Financial appoints Greenhalgh Super Review’s monthly diary of superannuation industry events around Australia and abroad.

JULY VICTORIA 13 – ASFA Luncheon: Fixed income in a post-GFC world Speakers: AustralianSuper head of income assets John Hopper; Mercer senior portfolio strategist Phil Graham; Frontier senior consultant Ashley O’Connor.

Venue: Grand Hyatt Melbourne. 123 Collins Street, Melbourne.

Enquiries: ASFA Events Department.

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

NEW SOUTH WALES 19 – ASFA Luncheon. Infrastructure: the national debate Panellists: Mercer partner Karen Chester; Industry Funds Management global head of infrastructure Kyle Mangini; Colonial First State Global Asset Management infrastructure investment asset manager Mark Rogers.

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.

TASMANIA 27 – ASFA Seminar. Better outcomes for fund members Venue: Salamanca Inn, 10 Gladstone Street, Hobart.

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

Challenger’s Rodney Greenhalgh has moved to BT Financial Group as head of retirement.

BT FINANCIAL Group has appointed Rodney Greenhalgh as its new head of retirement.

Greenhalgh will be responsible for driving the implementation and execution of the group’s re-

tirement strategy. He will also lead the retirement team and report directly to David Lees, general manager super, investments and retirement.

Greenhalgh brings 17 years of

AMP CAPITAL Investors has announced that Scott Davies has been appointed as AMP Capital’s new global head of infrastructure.

The appointment came after Phil Garling, AMP Capital’s current global head of infrastructure, decided to retire next month from full-time executive roles.

Davies has over 20 years of financial services experience, having previously performed the role of chief executive officer of Macquarie Communications Infrastructure Group.

Prior to this, he held senior investment roles for Macquarie Capital in New York and London between 1995 and 2002, where he was responsible for Macquarie Group’s cross-border asset financing activities.

Davies will report to AMP Capital managing director Stephen Dunne and will commence his new role in July.

Commonwealth Bank of Australia in various global locations.

Frerer will be based in Sydney and will work with head of PIMCO Australia, John Wilson.

Wilson said Frerer’s appointment came at a particularly interesting time for the superannuation industry, as the need for industry participants to provide reliable income streams for members is becoming a higher priority.

“This trend will accelerate as the Australian population ages, providing impetus for innovation within the super sector to ensure appropriate strategies are provided,” he said.

PIMCO Australia has added to its institutional servicing team with the appointment of Eric Frerer as executive vice president and account manager, with a focus on institutional clients – including large superannuation funds.

Frerer has 24 years of industry experience and comes to the role from ANZ’s global markets division, where he was global head of institutional fixed income distribution. He has also held senior investment banking positions with JP Morgan, Deutsche Bank and

RUSSELL Investments has expanded its team with two new hires, and announced its intentions to double its investment consulting business in the next three years.

Former head of research at Van Eyk Research, Dr Jerome Lander, has moved to Russell as director of consulting, while Migara Alles joined the company as an investment consulting analyst.

Lander previously served as the head of international equities and diversified assets at Credit Suisse Asset Management while Alles has moved from the wholesale banking division of National Australia Bank and will be based in Melbourne.

Head of consulting and advisory services in Australia for Russell Investments, Greg Liddell, said the new hires came amid increased institutional demand for advice, as

experience with him, most recently performing the role of general manager, product and marketing at Challenger. There he was responsible for maintaining, developing and marketing Challenger’s annuity and managed fund products.

Prior to Challenger, Greenhalgh carried out a number of senior product development roles at MLC. SR

the investment environment grows more complex.

FORMER head of Colonial First State (CFS) Investments and Challenger Financial Services Group, Chris Cuffe, has become chair of UniSuper after more than four years as an independent director on the board.

Chris Cuffe

Cuffe succeeds Elizabeth Bryan, who announced her intention to retire from the board earlier this year after more than eight years as a director and four as chair. He is currently a director of a number of organisations including Centric Wealth, Third Link Investment Managers, Social Ventures Australia and Arkx Investment Management.

In other changes to the board, Bruce Bonyhady AM will fill the independent director position left vacant by Cuffe’s appointment.

Meanwhile, former head of CFS Credit Tony Fitzgerald has been appointed to UniSuper’s Investment Committee. SR JULY 2011 * SUPERREVIEW

ROLLOVER

THE OTHER SIDE OF SUPERANNUATION

A return to form?

I walk the line NOTWITHSTANDING the number of retailers offering bargains based on ‘EOFYS’, Rollover despises the end of financial year.

The reason is simple, really.

The end of the financial year brings with it the realisation of how little Rollover has earned and how much he will nonetheless have to pay to the Australian Taxation Office.

However he notes that over the past few years the end of financial year has created significant activity within the superannuation funds, with some of the major players reminding their members of its impending

arrival and what they must do as early as May. The most frequent reminder issued to members is the opportunity to take advantage of the Government’s co-contribution regime, but Rollover also noted at least one fund reminding its obviously wellheeled members not to exceed the contribution cap.

Alas for Rollover, neither of these reminders is relevant. He earns too much to take advantage of the co-contribution regime and he earns too little to worry about contribution caps.

C’est la vie. SR

A chilly junket ROLLOVER has noted just how busy August is going to be for those working on the institutional side of the financial services industry.

They will have to contend with the Financial Services Council (FSC) national conference on the Gold Coast, followed by the Australian Institute of Superannuation Trustees Superannuation Investment Forum in Hobart.

Rollover expects no shortage of refugees from the southern capitals at the FSC event, but he

is not so sure about the Tasmanian expedition.

Hobart can be both grim and cold in August, but Rollover accepts that there are many in the superannuation industry who enjoy an open fire, good food and fine wine – something Hobart can offer in abundance.

Those needing to thaw out from the cold of Hobart can then sign up for the Association of Superannuation Funds of Australia event in Hong Kong in September. SR

From humble beginnings

SUPERREVIEW

*

JULY 2011

ONE of the bigger news items to be reported last month was that specialist superannuation ratings house SuperRatings would be operating out of the same ownership stable as leading retail funds rating house, Lonsec.

Big Swiss-based insurer Zurich has been having something of a garage sale of non-core assets, and in the process decided to sell Lonsec to Financial Research Holdings – a vehicle formed by Mark Carnegie, the chief executive of Lazard Australia’s private equity business, LCW Private Equity.

At the same time, it was announced that SuperRatings would consolidate its business into Financial Research Holdings.

Rollover vividly remembers the formation of SuperRatings by the ever-ebullient Jeff Bresnahan and its entrepreneurial rise and rise in the superannuation industry thereafter, not least on the back of the competitive dynamic created by choice of fund.

Rollover assumes that Jeff and the other SuperRatings founders are feeling pretty comfortable. SR

AND if it is end of financial year, it must certainly be that time when the ratings houses deliver their final assessment of whether superannuation returns ended up in the black or slid, ignominiously, into the red.

First out of the blocks with an official call was the principal of Chant West, Warren Chant, who concluded the median growth fund would post a return of 9 per cent for 2010-11 – which is probably disappointing, given the manner in which funds ended the calendar year.

As good as returns have been since 2009, Chant pointed out they needed to achieve a further 6 per cent before they could be deemed to have returned to the levels that existed before the global financial crisis.

Rollover reckons the chances of that extra 6 per cent being found before the end of the current calendar year are remote, with all indicators pointing south for at least the next three months. SR

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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.