The ‘insourcing’ of investment management by superannuation funds is a topic closely followed by many in the industry. Much of the discussion has focused on the merits of this strategy from an investment performance perspective and the need to drive down investment related costs. However, dealing with the operational and IT issues associated with investment management can present significant challenges to Funds.
Many large superannuation funds are holding hedge funds more accountable on a number of fronts - most notably on costs. When it comes to how incentive fees get paid, more investors want hard hurdles to be reached over longer periods before giving up a taste of the upside. Further, regulatory pressure such as the Stronger Super reform is compelling superannuation funds to gather information on the underlying composition of their investments.
A colleague and I recently co-presented at the Superannuation Fund Back Office Forum on creating a compelling Customer Service Experience in the Superannuation Industry. Here is a summary of our presentation.
The benefits of performance and attribution (P&A) reporting are well documented. What is less understood, are the operational and Information Technology (‘IT’) challenges that arise as P&A reporting becomes more sophisticated.
The global OTC reforms have been well published and there is a high level of industry awareness of the requirements and operational implications. However, the impacts are yet to be fully identified and could have material consequences on the use of these instruments. In the extreme the reforms could spell the end of the OTC market for many managers.
Supporting unprofitable investment products not only costs our industry money but also exposes firms and investors to unnecessary risk. It is time for the industry and regulators to tackle this problem together.
The new Australian Prudential Regulatory Authority (APRA) reporting requirements present some serious challenges but we believe they offer opportunities for Responsible Superannuation Entities (RSE’s) as some of the key components of the requirements align to where the industry has been heading, particularly with respect to improved transparency and oversight over externally managed investments.
As industry superannuation funds gain scale through consolidation, many have or are considering insourcing of investment management activities. Whilst the business case for insourcing may be clear, the operational implications can often be significant and represents both a threat and an opportunity to custodians servicing these funds.
There are real opportunities for Custodians to provide value added services to clients that are both profitable to their bottom line and address significant issues within investment organisations. Trade order management services is one of them.
The use of Financial Information Exchange (FIX) for electronic trading has been regarded as a necessary investment in most overseas markets but historically has had a low take-up by Australian investment managers.