Focus on Australia: Superannuation
Australia’s Superannuation Funds are amongst the fastest growing in the world following more than a decade of compulsory contributions. Dennis Baillon, Sales Executive for Charles River Development in Asia-Pacific talks about the trends and challenges super funds in Australia faces and the technology tools available to help them.
There are certainly many trends that we see that are affecting the superannuation industry in Australia, there was the super system review of 2010 by Jeremy Cooper, and financial market changes both locally and regionally. As well as the global economic climate that they’ve all impacted the industry and have continued to do so. Although the Cooper review itself, it was probably geared more around members and their interaction with the superfunds. The themes of the report certainly have some relevance on how the superfunds are managing their investments. Themes such as regulation efficiency, Governance, systematic transparency and ultimately savings or dollar savings for the members. The GFC itself really had an impact on the industry, we are seeing conservative asset classes back in vogue. We are also seeing a resurgence of asset classes such as the higher income type of investments, inflation linked investments and in general a higher asset allocation to fixed income where funds have a greater exposure to international equities, we’ve also seen a trend to move from exposure to more of the Alpha side of those funds as opposed to index tracking and international equity funds whilst exposure to alternatives and derivatives has probably declined or at least more cautiously used. Generally these are for hedging or diversification rather than for absolute return or aggressive growth.
There is also a trend to bring some of the management in-house rather than outsourcing everything to a third party investment manager. I don’t see this happening across the entire industry nor across all asset classes but certainly some of the more sophisticated super fund’s have begun to build up their internal funds management team and have brought AUM in house. This trend seems to be mainly due to a couple of things, like the cost of entering and exiting external funds as well as those external funds MER but also gives them the ability to tailor a funds mandate to their own unique requirements while still keeping the IP in house and proprietary. I do see this trend growing. When you look at the in-house teams that some of these fund houses have built up and the experience behind the personnel within them it’s very clear to see there is an appetite to bring more of this management in house in the future.
With an increased focus on reducing costs for members and also the challenges of gaining positive returns in a diversified portfolio in the current climate, superfund’s are increasingly looking for different ways to reduce their management costs, without reducing the investment options that are available to the members so bringing funds in-house is certainly one way that many superfund’s are achieving this, however, it comes with its own challenges in itself. Infrastructure is certainly a challenge for many of the super fund’s. When super fund’s start managing more fund’s in-house, they need to ensure they have the appropriate infrastructure in place to support their change of business and infrastructure can be in the shape of technology, integration, integration with the trustees, custodians, fund administrators, third parties, compliance and regulatory reporting as well as the more obvious internal IP that is required to manage those direct investments.
Transparency is also a big challenge and is one of the themes within the Cooper report. With diverse portfolio investments across multiple outsourced mangers, the in-house funds that they are managing, reporting and exposure management becomes increasingly difficult and this becomes even more so with complex counterparty exposures taking into account when you are look at derivatives and unstructured products. The GFC reminded the global financial markets how important counterparty exposure monitoring is and I believe that many superfund’s and in actual fact many managers of managers struggle to really appreciate what their true exposure is to a particular counterparty or an issuer when they consider all their deposits, their equities, their ETFs, OTC instruments, their debt instruments and anything that they have managed externally. The other challenge is access to timely accurate information, and this is a challenge for a lot of people, but as super fund’s bring more money in-house, they require a lot more information regarding their portfolios and they need it in a more timely fashion, and this places more pressure on the custodians and fund administrators, generally the services providers that are being used by the super fund’s.
What tools does Charles River provide that support the Australian Super Industry?
Charles River is actually really well suited to the super fund’s industry in Australia. We’ve been headquartered in Melbourne for the past 8 years so, and we have built up a large team of industry professionals who really understand and have very relevant experience. Functionality wise, we’ve built a lot of super functionality into our investment system to support the industry. Functionality such as funds of funds structures, counterparty exposure monitoring as well as derivative and currency overlay modeling. All which really complement the full front- and middle-office functionality that we have in the application. We’ve also built a lot of interfaces to the relevant back-office systems, data providers and custodians that are typically used in the local market. But I suppose if you look at one area in particular, our compliance tool, we’ve given superfund’s the ability to monitor their exposure to direct investments as well as their fund of funds or externally managed funds, so it gives them complete transparency over all their exposures that they have within their portfolios. We added performance measurement, attribution and risk into our product suite a few years back now that has been extremely popular. It provides the superfund managers and asset managers the ability to identify you know where they’ve outperformed, where they’ve underperformed but also to identify the true risk of their portfolio.
Our solution has been designed to bring all the different data points that a superfund manager would have together into one place, so it gives them a holistic view of all of their investments and gives them the ability to manage with best-of-breed functionality across the portfolio management side, modeling, order management, execution management, performance, attribution, risk, as well as compliance across the entire spectrum of their investments.
Probably most importantly though is Charles River’s managed service offering. Charles River offers the Charles River IMS as a completely outsourced managed service. Where by Charles River takes care of the infrastructure and the management of the application so that the investment managers at the super fund can focus on managing their investments rather than managing systems or technology.