investment magazine

investment April 2011

I N V E S T M E N T & T E C H N O L O G Y F O R I N S T I T U T I O N A L I N V E S T O R S

CALL TO ACTIONadapting to super’s next evolution

Catastrophe bondcrossroads

Cambridge Associates’ Asia play

Cyber crims strike super

Amy Diab, Head of Sales, T: 03 8641 1468, E: [email protected] Hele, Managing Director Client Relationships, T: 03 8641 1668, E: [email protected]

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contents Investment MagazineApril 2011 03

investment magazine

cover story20_ Call to action: adapting to super’s next evolutionThe drive for superannuation reform has shifted gears: new policies have been committed to, and the gritty work of implementation has begun. What do these far-reaching changes, in addition to the forces of consolidation at play, mean for the future of the peak bodies representing the industry? SIMON MUMME and PHILIPPA YELLAND report.

features30_On the ground in Asia Sandy Urie’s four-month relocation to the Asia-Pacific region marks the next phase of development for Cambridge Associates, reports SIMON MUMME.

40_ Australia’s catastrophe crossroadsMIRANDA WARD reports.

51_ Managed account providers get organisedMICHAEL BAILEY reports.

54_ Be careful what you wish for, industry fundsKRYSTYNE LUMANTA and MICHAEL BAILEY report.

56_ Storms gather in the CloudPHILIPPA YELLAND reports.

01 0203regulars14_Fiduciary Investing

16_Public Knowledge

18_Editorial

19_Reflections

61_Absolute Returns Survey

65_Long-Only Survey

67_FSC Viewpoint

69_AIST Viewpoint

70_Unbalanced

04

news05_BGI, McKinsey veterans driven to profit06_Activism’s gentle face comes to Australia08_The science behind Winton Capital 10_Shock and ore: commodities’ strong run12_In emerging markets, new betas are still better13_Private equity adrift in consultant limbo

investment & technology Feb 2010 � Full Page

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For more information on RCM's global equity strategies, please contact Michael Negline at RCM Capital Management Pty Limited (AFSL 244322) on (02) 9238 2071 or by email [email protected] Capital Management Pty Limited (AFSL 244322) only provides financial services to wholesale clients in accordance with its Australian financial services license

Investment involves risks. Past performance is not indicative of future performance.This is not an offer to buy or sell or a solicitation or incitement to buy or sell any particular security or strategy referred to herein.

It will be the distinct hybrid of fundamental company analysis and quantitative execution that enables BCS Capital, the funds manager launched by former Barclays Global Investors (BGI) and McKinsey & Co. executives, to move ahead of the market as stock-specific information is released, according to John Bowers, a co-founder of the firm.

Bowers, the former CEO at BGI Australia and global head of fixed income, has teamed up with Justin Herlihy, BGI’s ex-head of European fixed-income alternatives and John Stuckey, the former Australian managing partner at McKinsey & Co., to launch the new Australian equities boutique

BCS Capital is the culmination of four years’ research, in which the team’s knowledge of industrial economics and quantitative techniques enabled it to discern the distinct “profit drivers” of listed Australian companies and measure how they respond to information flows, Bowers said.

By anticipating how the fundamental profit drivers of companies will respond to new information, and implementing these views through a systematic

process, BCS Capital aimed to capitalise on the slow and often imprecise responses of the market to new information, he said.

Stuckey’s experiences with corporate management and deep knowledge of industrial economics helped BCS Capital determine the profit drivers of each company, and how they are impacted in different macroeconomic environments.

“We hypothesised, through economic theory and research and what I learned in the best part of 30 years at McKinsey, about what really impacts companies and revenues,” Stuckey said.

“What affects their top-line is what also affects their share price.”

Even companies within the same industry sector were found to have distinct profit drivers, he said. Boral and James Hardie, both squarely in the building supplies industry, sourced revenues from different activities: while new infrastructure spending would be a boon for Boral, James Hardie would be more receptive to news about a boost in housing starts.

Most businesses had between eight and 12 significant profit drivers. But some, such as BHP Billiton, which mines a wide array of resources, could generate upwards of 15 drivers.

This has resulted in more than quantitative 400 signals for BCS Capital, Herlihy said, all of which have been back-tested to 2004 against publicly sourced data, such as the Australian Bureau of Statistics.

Interestingly, the fundamental input into the manager’s process involves no interviews with corporate chiefs.

“We don’t say management doesn’t matter. It does,” Bowers said. “But at the end of the day it doesn’t matter to our process whether the CEO and team are great or poor.

“The characteristics of the economic environment in which they reside actually determines the fate [of the company] more than management does.”

Unlike value managers, BCS Capital does not aim to determine the true worth of a company.

“We don’t care about the true value of a company or its current share price. The information that is really important [to us] is what drives share prices, and most of this is the information that affects profit drivers.

“Value managers have to wait, whereas we’re modelling the one-day change, not the fair value.”

He said the market usually responds to new information

within five to eight days, but that BCS’ process is designed to react as this information comes to light.

“In days one, two, three, you get the most out of it.”

The profit drivers are reviewed at least every six months so that meaningful changes in the corporate management or strategy of businesses, or in economic conditions, are factored in.

This provides the opportunity to refine models so that other managers catching on to this type of strategy do not crowd upon the opportunity set.

The strategy, which incurs a high turnover rate, invests actively in about 100 stocks in long-only and market neutral strategies which undergo a daily optimisation process to maximise expected returns for a given level of risk, and mitigate sector concentrations.

BCS Capital generated favourable results in the back-tests, and in its five months of live operation the market neutral strategy delivered an excess return in line with the target of 7.5 per cent net of fees.

In the back-tests, it was run against the 109 core Australian equity managers in the Mercer database, and its highest correlation with these competitors was

BGI, McKinsey veterans driven to profit

By Simon Mumme

news Investment MagazineApril 2011 05

Steven Hall, John Bowers, John Stuckey and Justin Herlihy ... their models were four years in the making

newsApril 2011Investment Magazine06

Australia has a few fund managers – just a handful – that some company boards may consider as being ‘activist’, but this select group tends to be vocal only rarely and then never request board representation or long-term involvement in the company.

But in the US, activism is almost an asset sub-class. Jeffrey Ubben and George Hamel Jr, founders of the 10-year-old US-based activist manager ValueAct Capital, which has been scoping out Australia to offer its services, don’t see themselves as activist investors in the way we may perceive corporate raiders who use the press, proxy battles, threats and worse to affect change at a company.

They are proud of the fact that in only about 50 per cent of their investments over the last decade have they exercised their rights to a board seat. They are value investors, sure, but they prefer to see the value of their stock selections unlocked more organically.

The poster child of US activism is probably Carl Icahn who, Ubben said, has a vastly different style. Icahn tends to be transaction-driven rather than showing the normal patience of an institutional investor. These days, Icahn only needs to announce his stake in a company and the share price will spike. It’s not greenmail, which is illegal in the US as it is in Australia, but it’s not a million miles removed.

Ubben says that the governance

of US public companies is “broken”. There is a principal/agent problem in many boardrooms.

He is CIO and Hamel is COO at ValueAct. They worked together at Blum Capital Partners before starting ValueAct. About 10 per cent of the US$5 billion they manage is their own money, invested in 64 “core” investments in 10 years, of which 20 have been sold. They hold their core investments for between three and five years.

They also invest in “farm team” stocks, named after the feeder clubs that service American A-league sports. These are investments where ValueAct has taken less than 5 per cent, and therefore hasn’t yet gone public with the news, while assessing whether to go further with the company. The aim is to hold between 5-25 per cent of a core stock longer-term.

“We’re not looking for opportunities which are just activist opportunities,” Ubben said. “We’re

looking for great business models that, for some reason, are going through a periods which means they’re at good valuations.”

“What we do is a lot like private equity,” Hamel said. “We’re primarily invested in public companies but we have a performance component … We go into a boardroom to get all the information we can and decide what’s best for all shareholders.”

Like private equity managers, ValueAct looks for unleveraged companies because the manager wants to be a part of the capitalisation process. Lazy cash is usually a good find.

“About half of our portfolio looks like a traditional value-investment and the other half looks like private equity,” Ubben says.

The company was backed by a family office which sold its minority stake to Affiliated Managers Group (AMG) in 2007. It is one of only three of AMG’s affiliates in which it has less than 50 per cent. The others are AQR and Blue Mountain.

With AMG, ValueAct gets an Australian marketing presence, of which it has not started to avail itself. The local AMG office is run by Gregor Rennie.

One of ValueAct’s more celebrated investments was in Martha Stewart Living Omnimedia, which, believe it or not, turned out to be a profitable decision, although not necessarily one Ubben and Hamel would like to repeat.

Ubben invested in Martha Stewart’s celebrity company two days before she was indicted for insider trading. He doesn’t normally like retail but the Martha Stewart model was more about brand and marketing than inventory management.

When she went to jail for two years, Ubben became chairman of the company, replaced the board and rode out the stock’s slide. On her release, with the stock price on the rise again, he sold the stake for a total gain of about two-and-a-half times the average investment.

“We want to be driving the bus, but we look for what we think are low-risk investments,” Ubben said. “When you have a CEO you can trust and you know the strategy, you can get a compound rate of return of 20 per cent a year.”

The investment style – looking for recurring revenue streams – tends to skew the portfolio towards intellectual-property-based industries, such as software and technology, healthcare (including devices and pharmaceuticals), and applied technologies.

“We like free cashflow, so we don’t own any banks or resources,” Ubben said.

A recent punt is interesting. Ubben has put his toe in the water at the New York Times, where the CFO is Ubben’s former colleague at Martha Stewart Omnimedia, with a $70 million investment at $8 each share. The beleaguered stock is still in recovery but touched $10.80 on February 18. Watch that space.

Activism’s gentle face comes to AustraliaBy Greg Bright

Jeffrey Ubben ... governance of US public companies is ‘broken’

0.3 and the lowest -0.3.It was found to not have large

exposures to the four dominant risk premiums in investment: size, momentum, book-to-market and the market itself.

Brookvine, a marketing and

fundraising partner to funds managers, has taken an equity interest in the firm, has invested capital in the BCS strategy, and will oversee its distribution through institutional and wholesale channels.

Bowers remarked that the origins of BCS Capital began a little more than 30 years ago, when he and Stuckey were schooled in industrial economics at Harvard before taking their respective career paths.

“But we always wondered if we could apply some of the ideas of industrial economics to investment management,” Bowers said.

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It doesn’t matter how small you are it’s how big you think

investment in the Fund may only proceed on an application form attached to the relevant Product Disclosure Statement (PDS). A copy of the PDS can be obtained from the Issuer of the AUI-Vianova Strategic Fixed Interest Trust – Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No 234454. You should consider the PDS in deciding whether to acquire, or to continue to hold the product. AUI1002

*The performance information included in this advertisement is for Vianova the manager, not the AUI-Vianova Strategic Fixed Interest Trust. Importantly, past performance is no indication of future performance. Neither Vianova Asset Management nor any of its representatives makes any representation as to the future performance or success of the Trust. Applications for an

Proud joint venture partner with:

Mahatma Gandhi wasn’t much to look at. He was a small, skinny, bent figure, swathed in a hand-woven dhoti. But he thought BIG. He, more than anyone, understood that unity is strength.

Following this principle, Australian Unity Investments (AUI) teamed up with industry visionaries Vianova Asset Management (Vianova). Under the mantra “think big”, the free-thinkers behind Vianova combine their investment talent with our resources to come up with a range of innovative fixed interest investments that are unconstrained by benchmarks.

For the three years to 31 January 2011, Vianova outperformed the UBSA Composite Bond Index by 0.6%*.

Vianova also proves that by doing things completely differently, you can actually decrease risk and increase returns.

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Australian Unity Investments – Smaller and Smarter

Risk & Return for three years to 31 January 2011

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Risk (Standard Deviation)Source: Mercer Australian Core Fixed Income

Survey Report, 31 January 2011

2.0 2.5 3.0 3.55

6

7

8

9

10

Vianova Asset Management

Gandhi IT 314x202mm Jan11.indd 1 10/03/11 4:29 PM

David Harding dismisses investment jargon like ‘market inefficiencies’. The models developed by a 100-person strong research team, which includes 80 PhDs, aim to simply “make inferences about the future”.

Winton is a London-based commodity trading advisor (CTA) hedge fund with $20 billion in funds under management. But Harding described it as a scientific research firm. Its algorithms are developed through statistical analysis that peers far back into the history of financial markets, because this provides some idea, within a range, of what will happen next.

“We look for data going back to the 1950s. Most stock-pickers look back a month or two.”

The manager will not attempt to predict the exact value of, say, the Australian dollar in six months’ time, but forecast the range in which it will be and place these bets through futures contracts, Harding said. This process is repeated systematically for stocks worldwide and, more often than not, the manager is right.

“When you hedge like that, year-in, year-out, you end up making money.”

It’s an intensive and long-term process: it involves gathering data, making inferences from the data, and writing software to put the data to use.

“You’re doing research so these inferences are based on substantial analysis rather than human feelings, which is a major influence in investment management.”

This sounds like a frenetic, taxing process, but Harding said 90 per cent of Winton’s trades were executed in a room not dissimilar to

any corporate office, where “people sit in front of computer screens” as models automatically interact with markets.

He said it is difficult to know how many algorithms are at work at any one time, or how many algorithms Winton had deployed

into markets. “An algorithm is like a house with many rooms. There is effectively one algorithm.”

These methods were not breakthrough ideas, but designed to capitalise on market trends and biases. They work because the majority of investors bestow much

legitimacy in the status quo. People trained in orthodoxy

find it difficult to perceive new and better ways of doing things, Harding said, but the nature of scientific discovery is to usurp previously believed truths.

Harding’s passion for science

The science of Winton Capital By Simon Mumme


It doesn’t matter how small you are it’s how big you think

investment in the Fund may only proceed on an application form attached to the relevant Product Disclosure Statement (PDS). A copy of the PDS can be obtained from the Issuer of the AUI-Vianova Strategic Fixed Interest Trust – Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No 234454. You should consider the PDS in deciding whether to acquire, or to continue to hold the product. AUI1002

*The performance information included in this advertisement is for Vianova the manager, not the AUI-Vianova Strategic Fixed Interest Trust. Importantly, past performance is no indication of future performance. Neither Vianova Asset Management nor any of its representatives makes any representation as to the future performance or success of the Trust. Applications for an

Proud joint venture partner with:

Mahatma Gandhi wasn’t much to look at. He was a small, skinny, bent figure, swathed in a hand-woven dhoti. But he thought BIG. He, more than anyone, understood that unity is strength.

Following this principle, Australian Unity Investments (AUI) teamed up with industry visionaries Vianova Asset Management (Vianova). Under the mantra “think big”, the free-thinkers behind Vianova combine their investment talent with our resources to come up with a range of innovative fixed interest investments that are unconstrained by benchmarks.

For the three years to 31 January 2011, Vianova outperformed the UBSA Composite Bond Index by 0.6%*.

Vianova also proves that by doing things completely differently, you can actually decrease risk and increase returns.

Admittedly we haven’t changed the world. But we have changed investing.

To find out more about the AUI-Vianova Strategic Fixed Interest Trust*, call our Adviser Services on 1800 649 033 or visit australianunityinvestments.com.au

Australian Unity Investments – Smaller and Smarter

Risk & Return for three years to 31 January 2011

Ret

urn

(%p

a)

Risk (Standard Deviation)Source: Mercer Australian Core Fixed Income

Survey Report, 31 January 2011

2.0 2.5 3.0 3.55

6

7

8

9

10

Vianova Asset Management

Gandhi IT 314x202mm Jan11.indd 1 10/03/11 4:29 PM

and philanthropy manifested in his gift of £20 million to the Cavendish Laboratory in the physics department of Cambridge University, a donation large enough to fund 10 start-up research programmes.

Harding first undertook algorithmic trading in 1987, when London emerged as a hive of CTA activity. After stints at stockbrokers

and Sabre Fund Management, he co-founded CTA shop Adam, Harding and Lueck, which was later acquired by Man Group and today distributed as AHL.

As traders developed skills, these firms became launchpads for many successful CTA managers, such as Altis, BlueCrest and Beach Capital. And there is no guarantee that Winton can retain its staff and

their clever ideas.“About 16 CTAs have spun out

of this work over the years, so the answer is: you don’t keep people.”

Despite big salaries, generous bonuses and share options, people leave to start their own enterprises. “There’s no intellectual property [IP] law in what we do. There is no patent, trademark or copyright. But we seem to do perfectly well

without IP protection.”The acquisition of AHL by

Man Investments is perhaps one reason why the London CTAs did not diversify their strategies, like Tudor Investment Corporation has done, Harding says. This was fortunate, because managed futures shot ahead of all other hedge fund strategies when the market crashed in 2008.

news Investment MagazineMarch 2011 09

David Harding ... an algorithm is like a house with many rooms


Commodity markets may provide the clearest insights into the short-term risks that global investors now face.

Civil uprisings across the Middle East, sparking the type of geopolitical “event risk” that can benefit commodity prices, have driven up the price of oil and incited fears among investors that it could undermine the global recovery, said Colin O’Shea, head of commodities at Hermes Fund Managers.

Throughout February and into mid-March, when Investment Magazine went to press, the price of oil surged by more than US$20 a barrel to beyond US$100 as investors feared the people of Saudi Arabia would, like those of Egypt and Libya, openly protest against their authoritarian rulers. Investors’ uncertainty was obvious as equity markets sold off and gold was bought for more than US$1,400 an ounce.

This “supply shock” raised questions about how much spare capacity the world’s oil producers have, O’Shea said. And for good reason: some producers have had to slow or “shutter-down” production, while companies further down the supply chain face higher operational costs.

This price improvement is beneficial for Hermes, which sources close to $2 billion of its $38 billion under management from commodities mandates. But the manager does not want to see the barrel price of oil go beyond US$130, “because if it goes to this level it could de-rail the recovery,” O’Shea said.

The potential for another oil shock is ever-present because large producers, such as Saudi Arabia,

Nigeria and Venezuela, lay on geopolitical fault lines. Investors are now watching Saudi Arabia closely, given its proximity to the so-called Arab Spring. O’Shea said there is no clear evidence that protestors will soon take to the streets of Riyadh, “but it’s difficult to forecast what will happen”.

In 2010, Hermes forecasted that existing oil supplies will last until 2014 before they are severely depleted. But now that Libya’s production has slowed, the world is drawing up to 4.5 billion barrels each day from its reserve supplies, “we might be looking at a 2012 or 2013 limit”, O’Shea said.

Fears of an oil shock have compelled investors to sell equities.

But in a break from past behaviour, they have not looked for safety in the US dollar, said Matthew Kaleel, CIO at H3 Global Advisors.

During equity sell-offs, the US dollar usually rallies alongside bond markets and the prices of gold and oil. But not this time, as investors express wariness towards the US economy’s debt problems, Kaleel said. Excessive money-printing doesn’t boost the dollar’s strength, either.

FEEDING THE MASSES

A MAJOR THEME

Jacked-up oil and gold prices are key contributors to the strong run commodities are making, Kaleel said. But the long-running industrialisation within emerging markets countries is as an ongoing theme.

“In every country where this has happened – Western countries, Singapore, Korea and Japan – people eat more meat, they buy air conditioners, cars and refrigerators.”

In its revised World Population Prospects for 2005, the United Nations predicted that by 2015, half of the global population will live in cities, and these urban dwellers will outnumber the entire world population of 1965.

This will exacerbate an already

apparent scarcity of harvested land and will put pressure on food prices. Drawing on data from the US Department of Agriculture and Bank of America Merrill Lynch, O’Shea said the world’s supply of farmland has increased by 26 per cent since 1970, while the number of people to be fed has risen by 80 per cent. Barring great advances in food productivity, through genetic engineering or other scientific methods, this trend is “unsustainable”, O’Shea said.

However, in the short-term, H3 will reduce its exposure to food commodities because it expects a “supply response” in which primary producers will endeavour to rapidly increase crop yields to meet rising demand for food.

He says this summer’s disastrous flooding in Queensland, northern NSW and Victoria would bring some benefits to Australia – and commodities investors.

“There is so much water in the soil now, it has created the best growing conditions in 30 years,” Kaleel said, adding that commodity markets were expecting bumper crops from next year’s harvests.

Producers aim to secure agreeable prices on the commodities market in case valuations fluctuate dramatically by the time their goods reach the market. Investors provide this price guarantee, and receive payments for doing so.

“It’s really seen as an insurance premium. That’s where a lot of the excess return in commodities comes from,” O’Shea said.

COUNTING ON

COMMODITIES

Driven by the dynamics of global supply and demand, and unaffected by the corporate management or any position in the capital structure of companies,

Shock and ore: commodities’ strong runBy Simon Mumme

The disastrous flooding

in Queensland and

Victoria would bring

some benefits to

commodities investors,

because the volume of

water in the soil now has

created the best growing

conditions in 30 years

Colin O’Shea ... watching the oil ‘supply shock’

Matthew Kaleel ... US dollar is not so safe anymore

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commodities tread a different “return path” to equities, said O’Shea.

But in doing so, they are more volatile. In the 30 years to December 2010, the S&P Goldman Sachs Commodities Index (S&P GSCI) returned 10 per cent at a volatility level of 20 per cent. In contrast, the MSCI World delivered 9.6 per cent with 15.1 per cent volatility. But O’Shea reckoned the diversification benefit compensates for this higher volatility.

This is primarily because commodities outperform equities in periods of high inflation. Hermes pointed to the track record of the S&P GSCI in the 30 years to December 2010, in which it greatly outperformed the MSCI World Equity Index, and also global bonds and cash, in periods of high inflation. But the asset class underperformed when inflation ran low, irrespective of GDP growth.

LOWLY CORRELATED

WITH EQUITIES

This contributes to the low correlation between commodities and equities returns. For example,

the oil price has a correlation between 0.26 and 0.33 with major producers Shell, Chevron and Exxon Mobil, according to Hermes.

But in 2008, when investors would have treasured anything uncorrelated with global equity markets, commodities simply “didn’t work”, O’Shea said, because inflation fell dramatically. Also, since commodities are a direct

input cost for businesses, they were bought in smaller volumes as “demand destruction” set in among consumers.

The trend, however, is that commodities usually perform well when equities don’t, and vice versa.

In the 10 negative years of equity returns since 1970, in which the MSCI World underperformed by an average return of -16.2 per

cent, the S&P GSCI posted an average return of 7.7 per cent.

And in the 20 positive years, when the MSCI World posted an average 19.8 per cent return annualised, commodities underperformed, bringing in 10.8 per cent.

In the 30 years to

December 2010, the

S&P Goldman Sachs

Commodities Index

(S&P GSCI) returned

10 per cent at a volatility

level of 20 per cent.

In contrast, the MSCI

World delivered 9.6 per

cent with 15.1 per cent

volatility

Until now, emerging markets have been bought on the growth of their underlying economies and the relative outperformance of their share markets over the past two decades. But investors can still do better than this.

Traditional investment approaches are facing challenges in emerging markets, according to Dr Henry Zhao, CEO of Beijing-based Harvest Fund Management.

With most emerging markets, such as China, having beaten Western economies for 20 years, some investors are looking to lighten up their exposures. However work by Dr Zhao and Harvest shows that there are better ways to construct a beta portfolio in China and other emerging markets than the traditional market capitalisation-weighted benchmarks. And because the emerging markets are still less efficient than developed markets, there is a lot of alpha to be had on top as well.

Using the main MSCI cap-weighted indexes, emerging markets have returned 622 per cent over 20 years through to 2010, compared with 277 per cent for developed markets in the same timeframe.

Various fundamental indexes, such as that built by Research Affiliates (RAFI) or State Street, which do not follow market capitalisation weightings as slavishly, can be shown to outperform in both developed and emerging markets.

For instance, a simple GDP Size Global Index, as reported last year by the International Monetary Fund (IMF), would have returned 3.36 per cent in the 10 years to 2009, compared with -0.34 per cent for the standard MSCI World.

Other indexes using projected GDP growth from the IMF would have outperformed by more.

Dr Zhao said that, for Greater China (including Hong Kong and Taiwan), an index constructed of equally weighted stocks would have outperformed the MSCI China Index in three of the past four years, with a cumulative outperformance of more than 70 per cent in those years.

In the China A-Shares market, the excess returns from an equal-weighted index over the cap-weighted index was 11.62 per cent in 2010, 20.57 per cent in 2009, 3.99 per cent in 2008 and 33.32 per cent in 2007.

“When investing in the China stock market, a beta linked to a large market cap-weighted index is not a good indicator to follow… A fundamental index should not be built on a pool of large-cap stocks only,” he said.

“By taking the same amount of risk, equal-weighted indexes are better choices for beta measurements. Choosing the right benchmarks to follow is key for good returns and as a result an optimal beta structure is constructed.”

He added, though, that Harvest, one of the largest fund

managers of the 80 or so with domestic Chinese licenses, is an active manager which looks to provide alpha for its investors. It has 50 analysts on the ground in China and offers a range of active strategies.

Harvest, which is 30 per cent owned by Deutsche Asset Management, recently picked up its first Australian institutional mandate, for $100 million.

Stephen O’Brien, chief executive of Deutsche Asset Management in Australia, said that while he cannot name the Harvest client, there is increasing interest from super funds in looking at more sophisticated strategies in their China exposures and paying more attention to alpha-producing capabilities.

“There’s a feeling that the outperformance of China going forward may not be as great as it has been, at least in the medium-term,” he said. “The government has announced a reduction in its growth targets and there are well known social infrastructure programs in place which won’t deliver immediate returns.

“On the other hand, super funds realise they cannot ignore China or rely on their global and Australian equities portfolios for

the exposure. So, they are looking more closely at active management. Another issue is access, which is not so easy with China, as well as more fundamental questions regarding which asset classes and styles of manager.”

Dr Zhao, who spoke at the Mercer Investments conferences in Melbourne and Singapore last month, said emerging markets, such as China, were dominated by retail investors who had different methodologies to institutional investors.

Market disclosures in emerging markets often did not reflect all the information available about a company. The result is that information takes a lot longer to be disseminated and digested in emerging markets.

Deutsche acquired its initial stake in Harvest in 2005 and subsequently lifted it to its current level. Harvest, which now manages about US$38 billion, formed an international arm, Harvest Global Investments, in Hong Kong in 2009.

Last year it set up Harvest Alternatives and formed its first boutique, JT Capital, a Hong Kong-based hedge fund. The aim is to roll out a full range of boutiques offering alternative investment strategies, including private equity and infrastructure, in which Harvest has minority stakes.

In emerging markets, new betas are still betterBy Greg Bright


Dr Henry Zhao ... choosing the right benchmarks key for better returns

Stephen O’Brien ... super funds realise they can’t ignore China

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The private equity industry has done a poor job of convincing asset consultants and superannuation fund trustees of its capabilities, conceded Les Fallick, founder of placement agent Principle Advisory Services.

Speaking at the AVCJ Private Equity and Venture Forum, held last month in Sydney, Fallick said most of the support the industry had won since the mid-1990s was mainly from private equity specialists within super funds.

This meant private equity vendors aiming to raise funds often met strong resistance from investment committees because relationships with trustees were poor.

He urged general partners to concentrate on building relationships with consultants and trustees to “improve understanding and access” to these “two tiers of the industry”.

Robert Talevski, head of global private markets at the $10 billion Telstra Super and a former consultant at JANA Investment Advisers, gave some advice to the private equity players in the audience.

Talevski’s message was direct: know what consultants want and deliver it.

“You’re in a very competitive situation. You’re competing against listed equity markets [and] other asset classes that are slightly more liquid, so it’s a tough thing to sell to a consultant.”

Ultimately, impressive returns achieved through a proven and transparent investment process would always be an effective door-opener.

“At the end of the day, it’s about numbers. I think that’s what you

need to focus on,” Talevski said. “Also, transparency: as a

consultant I found it, in the early days, really difficult to understand where the true value was added.”

He emphasised that it was important for managers to be able to comprehensively explain how

they generated investment returns.Turning to the global

fundraising environment, Sally Collier, partner at Pantheon Venturers in Hong Kong, said private equity managers were finding it challenging to garner new capital. However, investors in the

US and Asian markets were more open to allocating fresh capital.

“Things are freeing up. I think we’re in a position now where pension funds in general are seeing recovery... not just in private equity but in other asset classes,” Collier said.

PE managers adrift in consultant limboBy Miranda Ward

fiduciary investing

The longevity risk being

shouldered by Australia’s

burgeoning retiree population

can be neutralised by a deferred

annuities market, write

PHILIPPA YELLAND and SIMON

MUMME.

The superannuation industry has five years to meet the longevity chal-

lenge before the volume of money in the decumulation zone becomes too great to risk, says John Evans, a guardian of the NZ Superannua-tion Fund and head of actuarial studies at the Australian School of Business.

The financial crisis alerted everybody in the field to the problem: copping a market collapse like that in the early years of retirement can be debilitating.

But as more accumulation money progresses into the decumulation phase, the industry can almost be certain that the fallout from the next left-tail shellacking will be more severe. Not only economically, but socially and politically: “You can’t have retirees out there eating cat food. They’re 25 per cent of the population. They’re powerful,” Evans says.

In 10 years, the problem will be too big. So a solution must be implemented within five years to meet the need, Evans says. And his preferred solution is a mandatory deferred annuities market.

Jeremy Cooper agrees. The head of retirement income at Challenger and author of the influential Super System Review likens deferred annuities to fluoride in the water.

Speaking at the Post-Retirement Conference in Melbourne last month, which was convened by Conexus Financial, publisher of Investment Magazine,

Cooper said Australia was a paternalistic, ‘fluoride in the water’ country and so the Federal Government could – and should – legislate for a deferred annuity product to ensure that people did not exhaust their superannuation savings.

“Yes, Australia is a paternalistic, ‘fluoride in the water’ country, so the Government should mandate a deferred base-level annuity product and then just ram it in there,” he said.

“Yes, it’s paternalistic, but get over that and move on.”

Evans says this is the most logical and least risky option – particularly if it is Government-run. Even though investment banks, insurance companies and retirement income vendors would no doubt willingly accept the challenge, the risk is too great. If thousands of newly retired fund members buy 30-year annuities from a commercial operator, they are going long a very sizeable credit risk.

“The cost of capital inside insurers would be high, so therefore we need government intervention in this market to hedge the risk. And the Australian Government is not much of a credit risk,” he says.

“I think the risk of deferred annuities is too big for any

insurance company. It could blow them up. And if it blows up, the taxpayer pays the bill.”

Under a Government-run scheme, the Future Fund can manage the assets and Centrelink administer the payments. “The infrastructure exists, and that’s why the super industry should watch its step,” Evans says.

Just as the Government makes it compulsory for people to save for their retirements, it should be compulsory to buy a deferred annuity of a certain size upon retirement. If members have money left over, they can spend it as they please.

He says that in 10 years, the average couple will have up to $800,000 in savings at retirement. Forcing them to buy a deferred annuity will prevent much of this “going up against the wall”.

Also speaking at the conference, Martin Stevenson, global partner at Mercer, made a similar call to Cooper’s – albeit in a more subtle manner – by saying that Australia scored zero out of 10 for not requiring that retirees transfer at least some of their super lump sum into a deferred income stream.

“The Government will have to bite the bullet and mandate an income stream” in post-retirement, said Stevenson, referring to the Melbourne Mercer Global Pension Index on which Australia’s superannuation system scored fourth place worldwide – but with

“serious weaknesses”.Input from the Treasury

was crucial, said David Heine, Cuscal’s general manager product and operations. He said the superannuation industry must work with the Federal Treasury, but the industry could not wait for politicians and so it had to explore some kind of convergence between insurance and superannuation.

Developing this idea, Towers Watson principal Nick Callil floated the idea that “if the Government issued annuities, [then] it should set up a proper life office”. But, he added quickly that “the arguments against this outweighed the arguments for it”.

Callil warned – in a theme that became common during the conference – that the industry must not wait for the Government to set the standards.

“We buy life insurance against dying too soon,” he said. “There must be a mindset change so people insure against living too long” and exhausting their savings.

Milliman’s practice leader, Wade Matterson, echoed Callil’s concerns with a call for the industry to consider some kind of superannuation-insurance hybrid to address the burgeoning problems of longevity and outliving savings. The counterparty risks would need new thinking about risk-management in the asset allocations and some form of very long Government securities.

He related Milliman’s experience in the US where the company had worked with a state pension fund.

“Target-date funds did not manage the risk, so we had to build a glide path which focused on volatility and which had a tail-risk strategy within 10 years of retirement”.

The industry was moving

Put annuities in the waterApril 2011Investment Magazine14

Jeremy Cooper ... the challenging trio: longevity, inflation and market-linking of assets

The risk of deferred

annuities is too big for

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It could blow them up

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the ideas and techniques driving institutional funds

too slowly on developing post-retirement products, said AIST’s CEO, Fiona Reynolds, pointing to evidence of the flight to self-managed super funds, which were later described as the “new garden shed for men when they retire”, by First State Super’s CEO Michael Dwyer.

The huge task ahead of funds was in developing income streams

with allowed for three risks – longevity, inflation, and the market-linking of assets – said Challenger’s Cooper.

“The Government’s position is a fund which offers a post-retirement solution must address the three risks, but [funds] are not being forced to do this in MySuper.

“There’s no excuse to put this in the too-hard basket,” he said. “The first baby-boomers are retiring this year.”

The current rise in oil prices could be a harbinger of inflation, which – even at 3 per cent a year – would “seriously erode purchasing power over 30 years”.

He dismissed the commonly espoused idea that equities were a hedge against inflation, like “boats on a rising tide”, and that “retirement is not a time for winners and losers”.

“In four of the past 10 years,” he said, “the super system has lost money – in 2002-03 and 2008-09, so members had less money, regardless of the asset allocation – other than conservative allocations in early 2002.”

Deferred lifetime annuities were “trapped in a morass of inconsistent and conflicting issues and rules”, Cooper said, “and we’re not allowed to issue them” due to matters involving tax, the prudential regulator and Centrelink.

Cooper argued that annuities were “the new asset class” with returns and terms certain and, as such, they were a “zero-volatility asset class”.

When it was pointed out that the UK, the world’s most developed annuity market, had just abandoned compulsory annuities at 75, Cooper responded that the UK Budget

could not afford the £2-3 billion in tax breaks and that 75 was “a little too young for compulsory annuities”.

Milliman’s Matterson agreed with Cooper’s assertion that annuities could be a new asset class, but said the industry’s approach to post-retirement had to be broader than an annuity or an allocated pension. “It must move to asset allocation that’s more dynamic”, with more awareness of tail-risk.

The industry must move beyond static thinking about accumulation and lump sums. “Retirement is a journey, not a destination,” he said, and funds had to decide if they were providing members with a chauffeur, a map, or merely the keys to the car.

Evans says members suffer from a dearth of education services as they approach retirement.

Investment MagazineApril 2011 15

John Evans ... deferred annuities should be the rule, and the Government should provide them

Making news in March 2011Everything that happened in the

worlds of superannuation, funds

management and investment

administration last month…

John Langoulant was appointed

as chairman of GESB, the $11.5

billion Western Australia public

sector fund, for a five-year term.

Langoulant is the CEO of Oakajee

Port & Rail and is a former chief of

the Chamber of Commerce and

Industry of WA.

General Electric expects to be re-

quired to contribute about US$1.4

billion to its GE Pension Plan in

2012 — the first employer contri-

bution to the plan since 1987, the

company announced last month.

The plan’s funding status fell from

87.5 per cent to 86.2 per cent over

the year to December 31, 2010.

Implemented Portfolios, a

consultant to dealer groups on

portfolio construction, affirmed

defensive strategies for its model

portfolios, as developed mar-

kets continued to show subdued

growth outlooks in its invest-

ment committee’s 10 year growth

forecast. The consultant decided

to maintain a neutral stance on

Australian equities, hold an

overweight to income securi-

ties and maintain listed property

allocations at zero across all of

Implemented Portfolios’ individu-

ally managed accounts.

Raising money from US institu-

tional investors will get tougher

under the Dodd-Frank Act. A

briefing note from funds manage-

ment consultant SEI last month

said that for many years, non-US

asset managers had been able to

claim an exemption from registra-

tion with the Securities Exchange

Commission, which applied to

advisers with fewer than 15 clients

in the preceding 12 months who

did not publicly hold themselves

out in the US as an investment

adviser. However, Dodd-Frank will

see that exemption apply only to

‘foreign private advisers’ whose

15-or-fewer US clients speak

for less than US$25 million, or

‘private fund advisers’ of solely

private funds totalling not more

than US$150 million. SEI warned

that registration with the SEC was

“not just an exercise in completing

paperwork”, with the compulsory

appointment of a chief compli-

ance officer one of many require-

ments. On the upside, SEI said

managers with SEC registration

tended to be more appealing to

institutional investors, with many

of them screening for it.

The new global

CEO of BNP Pa-

ribas Securities

Services, Patrick

Colle, said the

Australian busi-

ness would have

a sub-custody offering for foreign

investors here available by the

end of the year.

Private equity managers tend to

ask existing investors for a ‘re-up’

when their previous fund is about

four years into its seven-to-10

year lifecycle. Managers will often

downplay the importance of their

previous fund’s performance

to that point, but research from

UK consultant Preqin has found

it to be an excellent predictor

for future relative performance.

Preqin analysed its database of

over 5,300 PE funds, identifying

2,500 buyout and venture capital

funds with enough maturity to

form part of the analysis. It then

analysed the quartile position of

funds during their fourth year, and

then viewed the quartile rankings

of these same funds at maturity. It

found that 50 per cent of buyout

funds ranked in the top quartile in

year four go on to be top quartile

at maturity, with 75 per cent beat-

ing the median, while 60 per cent

of VC funds in top quartile at year

four maintain top quartile position

at maturity with 76 per cent beat-

ing the median. Similarly, poor

relative performance early on in a

fund’s life proved to be extremely

difficult to turn around. Just over

half (51 per cent) of buyout funds

in the bottom quartile in year four

remain there at maturity, while 60

per cent of VC funds in the bottom

quartile at year four maintain this

position at maturity.

Vanguard Investments an-

nounced the expense ratio for the

Vanguard All-World Ex-US Shares

Index exchange-trade fund (VEU)

had declined from 0.25 per cent a

year to 0.22 per cent a year. The

VEU is a cross-listed ETF which

debuted in the US in 2007, and on

the ASX in 2009.

SyncSoft, the software supplier

to member administrators, said

the March upgrade of its flagship

system Capital 10 would include

integrated defined-benefit servic-

ing capability for the first time.

Quadrant Super announced it

had reached $500 million under

management, and took the oppor-

tunity to thumb its nose at Jeremy

Cooper’s call for bigger, fewer

super funds. The entire Hobart-

based fund might be half the size

of the typical mandate awarded

by AustralianSuper, but CEO

Wayne Davy said its personalised

service depended on staying

small. Quadrant has outsourced

heavily, adopting Vision Super’s

investment platform and fore-

shadowing a financial planning

joint venture with another fund.

Access Capital Advisers ap-

pointed Don Conway as manag-

ing director-infrastructure, based

in the firm’s Sydney office. Prior

to joining Access, Conway was

global head of direct investments

at CP2 (formerly Capital Partners)

where he was involved in key

infrastructure investments includ-

ing Transurban, ConnectEast and

Sydney’s Airport Rail Link.

Conway’s experience also

includes a five-year period as ex-

ecutive director for Allco Equity

Partners (now called Oceania

Capital Partners) and over 17

years at Brierley Investments,

working directly with famed cor-

porate raider Sir Ron Brierley.

After the loss of many of its

minor-shareholder partners over

the previous two years, Access

CA’s CEO, Alex Austin, said the

consultancy and dealmaker was

back to “growing bench-strength

and experience”: Geoffrey Di Fe-

lice, Luke Grabda (both formerly

of CP2), Nirav Shah (formerly from

Rothschild) and David Elizondo

(from Highstar Capital) have

joined the Access team in the past

four months.

The $6 billion MTAA Super

secured the services of former

Victorian premier, John Brumby,

to chair its trustee board. His

predecessor Labor premier, Steve

Bracks, became the chair of fellow

industry fund Cbus in 2009, for

which he makes between $80,000

and $89,999 per year. MTAA

Super does not publicly disclose

its director fees.

South Australia’s Statewide

Super said members would

receive cheaper income protec-

tion insurance and higher default

levels of death and total perma-

nent disability insurance cover

from March 1. The introduction of

occupationally based insurance

categories will deliver the savings

to some members, while tighter

pricing from incumbent insurer

MetLife will do the rest.

AUSCOAL Super appointed two

new investment managers to its

$5.7 billion portfolio.

AUSCOAL Super’s international

shares portfolio was diversified

with a $100 million plus mandate

to US-based global small-cap

manager Copper Rock Capital

Partners, which runs a 6 per

cent tracking error against the

MSCI World with a discretion

to go up to 15 per cent in

public knowledgeApril 2011Investment Magazine16

Patrick Colle

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While traditional bond portfolios were still attracting a lot of institutional money – more than any other asset class in 2010 – concerns about prices, volatility and duration were prompting more interest in alternatives such as loans.

Paul Hatfield, CEO of loans and mezzanine debt specialist Alcentra, said there had been high levels of inquiry in the loans market since last December.

“Loans solve the duration issue,” he said, because investors make money whether interest rates rise or fall. The consensus is that interest rates, in most of Europe and the US at least, can go only one way – up. But, no-one knows when this will happen.

Investors were also sick of volatility, he said, and with the sovereign crisis in Europe they were worried about whether bonds were being accurately priced.

They were also, however, “yield hungry”, looking for a more constant rate of return. So where did they go?

Loans paid a floating rate of interest plus a margin to compensate for credit risk. Bonds, by contrast, were fixed-rate instruments with a maturity of seven-to-10 years and were therefore sensitive to changes in interest rates.

The expectation of a higher yield curve was driving investors to seek shorter duration assets.

Loans were primarily used to finance leveraged buyouts. They were typically of low duration, secured and had additional

covenants for controls over the borrower. Since the financial crisis, the average equity contribution to buyouts had increased, further reducing the risk of the loan component of the deal.

In Europe the loan market overtook the high-yield bond market for size in 2005 and is currently about twice its size.

Alcentra, an affiliate of BNY Mellon Asset Management, is based in London but has a 25-person US office. Its main European loan fund aimed to generate returns of between 7.5 per cent and 10 per cent with minimal volatility.

Most of the loans were in senior secured debt, with a maximum of 15 per cent in second lien, mezzanine and unsecured bonds and notes.

Hatfield said that people often thought that loans were more risky than they actually were.

“The recovery rates on loans are higher than they are on corporate bonds because they are closer to the action. Right now, there is almost no leverage in the system.”

Bruce Murphy, the head of BNY Mellon in Australia, said that super funds could see the relative attractiveness in Europe and because loans did not have the same volatility as equities they looked like a good way to take advantage of the opportunities.

Hatfield said that most investors put loans in with other absolute-return strategies in terms of their asset allocation, although they did not have many of the disadvantages of other strategies such as high fees and illiquidity.

Loans market heats up on duration fears

By Greg Bright

news

emerging markets. In its

fixed-interest portfolio,

AUSCOAL appointed The

Putnam Advisory Com-

pany, a large global bonds

manager with expertise in

investing across a broad

range of global fixed-inter-

est securities.

Aviva Investors was

awarded a $51.5m bond

mandate by the Labour

Union Co-operative Re-

tirement Fund (LUCRF).

The money will be invested

in Aviva’s T250 Bond Fund,

a macro fixed-income

strategy focused on global

sovereign bond markets

and interest rate dispari-

ties. Managed by Shahid

Ikram, deputy CIO - Fixed

Income at Aviva Inves-

tors, the fund targets an

absolute return before fees

of 3 month EURIBOR plus

2.5 per cent and invests

on both a long and short

basis.

National Australia

Bank’s direct asset

management business,

nabInvest, announced it

had acquired a 35 per cent

interest in AREA Property

Partners (AREA), a global

real estate fund manager

based in New York.

The aggregate assets

under management of

sovereign wealth funds

(SWFs) currently stands

at almost US$4 trillion,

making 2010 the second

year running in which SWF

AUM have increased by

11 per cent, according to

the 2011 Preqin Sovereign

Wealth Fund Review.

FuturePlus Financial

Services, the service

provider owned by NSW’s

Energy Industries Super

Scheme, replaced Pil-

lar Administration as

administrator to the Super

Money Eligible Rollover

Fund (SMERF), whose

trustee is CCSL Limited.

The SMERF contains

about 90,000 accounts,

although like all ERFs

its long-term future is in

doubt owing to the Super-

Stream reforms that aim to

reduce the number of lost

accounts in Australia.

State Super Financial

Services announced that

Michael Monaghan would

become its new managing

director, replacing Peter

McKillop who retired.

Monaghan, an actu-

ary, has previously been

CEO of Deutsche Asset

Management and Intech

Investment Consultants

in Australia.

Catch up with these I&T

News exclusives, using the

tab at

investmentmagazine.com.au:

The 13-year veteran of

BlackRock, Ken Liow,

who rose to become head

of Scientific Australian

Equities and then head

of investment strategy,

resigned following the pay-

ment of annual bonuses.

Senior institutional sales-

man at Russell Invest-

ments, Chris Briant, left to

become the chief execu-

tive of Tibra Investment

Management, a subsid-

iary of global trading firm

Tibra Capital.

The man responsible

for Mercer’s $17 billion

multi-manager business

in Australia, Gary Burke,

was restructured out of the

firm. His responsibilities

were absorbed into the

Asia-Pacific role of Ste-

phen Roberts.

Public Knowledge - making news in March 2011

editorialApril 2011Investment Magazine18

Life under the macroscopeThe major investment

themes for this year, according to a report

from MLC Investment Manage-ment, were meant to be the ongoing “muddle-through” global recovery, sovereign debt blues and China’s slowdown. The risk of asset bubbles in Asian equity and property mar-kets, and in commodity markets and economies, were also highlight-ed. But this was before March.

MLC’s note was current enough to forecast the impacts of the summer floods on the Australian economy, but not the civil strife in the Middle East. Nor the 9.0 Richter Scale earthquake and tsunami that devastated parts of northern Japan.

When we went to press, the full

impact of the tragedy was unclear: the death toll was nearing 3,700 and expected to rise, fears of nuclear meltdown were rife and millions were displaced and without power, food and water.

This immediately rattled equity markets, but funds managers BlackRock and Franklin Templeton were quick to issue commentaries that held out hopes

for Japanese equities and bond yields in the long-run. PIMCO’s CEO, Mohamed El-Erian, said reconstruction efforts would, in time, help the nation’s economy recover, and that its Government’s ability to borrow money at low interest rates was a plus.

The president of global equity manager Causeway Capital Management, Harry Hartford, said many Japanese businesses would be hurt because they typically rely on domestic suppliers, many of which will be out of business for some time. The nation’s large network of regional banks would also be impacted, but this should leave the three majors – Mitsubishi UFJ, Sumitomo and Mizuho – relatively safe.

Outside Japan, the nuclear scares will likely boost oil and gas prices while doing the opposite for uranium, and global reinsurance businesses will be hit by the big claims to come.

These shocks from the latest macro blindsider came after investors grappled with rising oil prices, caused by unrest in the Middle East, and watched the muddling US, UK and European economies for signs of rising inflation. Ever since the 2008 financial crisis and the strong policy response, investors have been dealt a series of macroeconomic shocks, from Dubai and Europe’s debt woes to this year’s set of social and natural crises. The volatility has come thick and fast.

Simon Mumme

Editor: Simon Mumme [email protected]

Journalists: Michael [email protected] Yelland [email protected] Ward [email protected]

Business Development Managers: Sean Scallan (Advertising) [email protected] Jarvis (Events)[email protected]

Head of Design: Saurav Aneja Publisher: Greg Bright

Printing: Sydney Allen Printers

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Subscriptions: Jessica [email protected] Subscriptions are $99 inc GST per year (11 issues)

ISSN 1838-8949

Investment Magazine is published by: Conexus Financial Pty Ltd Level 1, 1 Castlereagh St, SydneyGPO Box 539Sydney NSW 2001Ph: 61 2 9221 1114 Fax: 61 2 9232 0547

April 2011 - Issue 71

Exclusive Media Partner of

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The small-cap effect in PE – different but worthwhile

reflections - Greg Bright Investment MagazineApril 2011 19

When Kevin Kester was running a US$4 billion private equity

and real estate portfolio for the big Colorado Public Employees Retirement Fund a few years ago, he became aware of how difficult it was to invest in smaller companies.

This was a bit frustrating because he was also aware that the small end of the private equity market seemed to be less efficient than the large end, and exhibited different characteristics.

For instance, unlike the public markets, smaller private companies tend to trade at lower price:earnings ratios than their larger counterparts. This allows potential purchasers the ability to buy cashflows for less money. With less money at stake, there is also less pressure to leverage the businesses in order to get target returns of 20 per cent or more.

The problem for Kester and the US$30 billion Colorado fund was that he was investing tranches of US$200-odd million into the bigger funds and the managers who worked the smaller end of the market would have entire funds of less than this – typically US$150-200 million.

So, he set up his own program which attracted the attention of

one of the biggest private equity managers in the US, Siguler Guff. Principles George Siguler and Drew Guff recruited Kester from the Colorado fund in 2004 and helped him create a similar small-cap private equity fund for the general institutional investment community.

From a fund-of-funds manager perspective, Kester says, underlying PE managers operating at the small end tend not to generate the same excess profits on management and transaction fees as they do at the large end. The primary share of wealth for the small-cap managers is their carried interest in the investments and their own direct investments.

From the manager’s own business perspective, the small end of the market also presents

different challenges. For instance – and this gets back to Kester’s original problem at Colorado – the average manager handles about 10 investments in any single fund, no matter how big. So, at the small end, the manager may do 10 deals at $10-15 million each. Raising a total of $100-150 million for a fund would usually require bypassing the institutional market, at least in the US, and going straight to family offices and high-net-worth individuals. That market is much more difficult to access than the pension fund market.

An interesting aspect of the market is that a lot of private equity managers, if not all, have tended to begin their careers at the small end. Many firms which launched in the 1980s, either in the US or Australia, necessarily did very small deals to cut their teeth. At the time, mega-buyouts were unheard of. Those firms have grown in time and, because of the economics of the industry, have moved way up the food chain in terms of deal size.

But according to George Siguler, an old hand in the US market, some of those managers get sick of the bureaucracies that their old firms become and hanker for the days when they were able to do deal themselves. It is these types

of managers which Siguler Guff seeks out, as well as those willing to specialise in the less-glamorous small end of the market.

The universe of small-cap managers, even in the US, is not very large. Siguler Guff tracks about 600 such managers but believes that there are probably only about 200 which are of institutional investment grade. People tend to come and go at the small end, which makes tracking them difficult too.

Like Australia, the US economy is dominated by small-to-medium-sized businesses. Companies with annual sales of between $5 million and $100 million make up about 95 per cent of all US companies. And they are big employers. Interestingly, they are also good employers when times are tough.

George Siguler says that the 170 companies in his firm’s $6 billion portfolio employed an aggregate of 45,000 people at the start of the recession. They employed 54,000 people a year later.

Australian super funds, for their part, have liked the small-cap strategy. Australian-sourced funds made up about 20 per cent of the Siguler Guff small-cap’s first raising in 2006-2007.

Greg Bright

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cover storyApril 2011Investment Magazine20

CALL TO ACTIONADAPTING TO SUPER’S

NEXT EVOLUTION

THE DRIVE FOR SUPERANNUATION REFORM HAS SHIFTED GEARS: NEW

POLICIES HAVE BEEN COMMITTED TO, AND THE GRITTY WORK OF

IMPLEMENTATION IS UNDER WAY. It’s essential that the Stronger Super panel,

set up to advise the Government on making MySuper, SuperStream and better trustee

governance a reality, achieves consensus in this crucial stage. Can this be done? And what

do these far-reaching changes, in addition to the forces of consolidation at play, mean for

the future of the peak bodies representing the industry? SIMON MUMME and PHILIPPA

YELLAND report.

cover story Investment MagazineApril 2011 21


Not since the onset of compulsory superan-nuation has so much

been at stake for the industry.This year, the Government and

industry campaign for mandatory 12 per cent super contributions will succeed or break down amid bipartisan disputes, and Jeremy Cooper’s vision for default super and a modernised administration of the industry will be inked into black-letter law. Meanwhile, as funds grow, the trustee governance structures overseeing this $1.3 trillion pool of members’ money will tested. There is clearly much to be fought for, and much to be defended.

The centre of gravity in the reform agenda is the Stronger Super panel, led by the former chief of the $71 billion Future Fund, Paul Costello, and featuring the heads of key industry organisations: the Australian Institute of Superannuation Trustees (AIST), the Financial Services Council (FSC), the Association of Superannuation Funds of Australia (ASFA) and the Industry Super Network (ISN), among others.

This group has been tasked with reaching consensus on a plan to implement the key reforms of MySuper -- which is, essentially, shorthand for the default super structure – and SuperStream. It will be representing the interests of their constituents, be they trustees or superannuation executives, and by extension, the members of their funds.

But it’s not just the structure of the industry that is in the grip of change: the peak bodies representing its interests are also adapting to this new world. A current case in point is AIST. The association, which has until now concentrated exclusively on trustees in not-for-profit super, is responding to the evolution of the

industry by adopting a broader focus.

In 2010, the association undertook some introspection, and questioned how it would survive as the population of its traditional member, the not-for-profit super trustee, declined as funds continued to consolidate. AIST faced some tough questions. Foremost among them was: How could it maintain its mission as its member base shrunk? Should it seek scale through a merger?

In the end, the industry itself provided the answer. AIST hired an independent consultant, Invisible Hand Consulting, to interview 30 people the association believed to wield considerable influence in the industry. They were asked for their opinions about AIST’s work, its strengths and weaknesses, and what its future should be. Their answers were kept anonymous.

AIST was told that it should continue to fly solo and remain committed to the not-for-profit space. Fiona Reynolds, CEO of the association, says this response was vindicating.

“This is the reason why AIST came into being, and why it won’t change,” she says.

“People wanted to see better collaboration, not a merger with ASFA, because they wanted advocacy for the not-for-profit sector.”

However, respondents made it clear that the number of organisations representing not-for profit super left some members flummoxed. They confused AIST’s initiatives with those run by ISN, Industry Funds Forum and the corporate governance-focused Australian Council of Superannuation Investors. Amid this activity, it wasn’t always clear what each association stood for. It wasn’t enough for AIST to

be committed to not-for-profit super, and its focus on trustees was unsustainable. The association needed to redefine its mission.

“Unless associations continue to grow and change with their memberships, they aren’t going to survive. Most associations are looking at what the industry will look like in 10 years, and where they will fit in,” Reynolds says.

What this new mission should be, exactly, emerged when respondents opined that levels of professionalism and governance in industry super could improve and be vetted. This spurred AIST to “morph” into an association committed to developing these qualities in the sector, in addition to its advocacy role, Reynolds says.

Now, AIST is endeavouring to provide accreditation for industry super trustees. In this, it will perform a role like the Financial Planning Association, which certifies financial planners. Its four-day trusteeship courses, which are in the 12-month process of achieving registered training organisation status, will be the platform for this accreditation, and will be supplemented by additional courses. These refreshers aim to align trustees, whose roles in super are typically part-time, with best

practice. This should not alarm industry

fund trustees that their governance standards are sub-par, Reynolds says. “One thing that is attacked in every review is the trustee system in the not-for profit sector. I find that hard to understand, because it is the system that outperforms.” Rather, the new accreditation platform is a means of enhancing this model. And such a focus on stewardship will be appreciated by the regulator and the general public, given that industry funds manage more than $219 billion in superannuation money.

But AIST’s vocational scope is broader. It will also continue to offer training to the growing ranks of executives and specialist workers in superannuation. This would build on its one-day conferences on subjects such as administration, group insurance and member services.

Membership demographics dictate that a major new focus for the association will be financial planning for industry super members. In the next decade, as the baby boomer generation begins retiring, funds need to provide adequate financial advice alongside pension-phase investment products. In response, AIST plans to deliver accreditation programs for three tiers of advice: general advice,

Pauline Vamos ... join resources in spite of ideological differences

People wanted to see

better collaboration, not

a merger with ASFA,

because they wanted

advocacy for the not-for-

profit sector. This is the

reason why AIST came

into being, and why it

won’t change”

cover story Investment MagazineApril 2011 23

limited advice and full financial advice.

By looking further down the chain of superannuation fund staff, AIST has the opportunity to boost its membership as funds decline in number but grow in size. In addition to offering vocational training for the various tasks in super, it has established focus groups with which these new segments of its memberships can engage. These ‘communities of interest’ cater to business development managers, young people in super, and staff of regional and state-based funds.

“We need to focus on the new roles in the industry,” Reynolds says.

This includes the next generation of trustees. The last member survey that AIST conducted was answered mainly by men in their 50s, and some in their 60s. Many of these trustees are, or will soon be, on the cusp of retiring from their roles, and over the years they have built a deep knowledge about their membership and what it takes to run their funds. “They’ve got a lot of experience and know the history,” Reynolds says. “We need to make sure these skills and histories are passed on.”

She says AIST will step up its efforts to engage unions and sponsoring organisations over their succession plans. Some are more

proactive than others: they have nominated incoming trustees and are preparing them for their future roles. Other funds haven’t taken these steps. AIST’s focus in trustee succession will be educational, “so that people aren’t coming in cold to $20 billion, $30 billion, $40 billion funds”.

Reynolds expects succession plans, among other pressing matters in industry super, to be part of the discussion in the members-only session at CMSF 2011, in which attendees will be encouraged to air their plans for the next 12 months.

In two years, AIST will carry out another survey aiming to capture the thoughts of the industry’s influential people. By then, the impact of these new initiatives on the industry, and the association’s strength and survival, will be evident.

CONSENSUS MEANS

COMPROMISE

Paul Costello has set a deadline three months from now for the industry to decide on how to best implement the Stronger Super reforms. There are campaigns, such as the push for 12 per cent SG, where agreement from the retail and not-for-profit sides of the industry is unanimous. But fierce disagreement exists elsewhere.

The heads of the major associations representing super – Reynolds of AIST, John Brogden at the FSC, Pauline Vamos of ASFA and David Whiteley at the ISN – are on the official panel advising the Government on the implementation of these reforms.

As precious days pass by, Vamos is keen to send a wake-up call to the industry because she says it is deluding itself on two fronts. First, its belief that there are no alternatives to the current structure of the super system is naive. Second, its belief that it is

being consulted about the policies is dead wrong.

An absolute threat to the industry is the Government’s ability to withdraw its endorsement of the industry’s current structure. “The Government could say: everyone will pay the superannuation guarantee through the tax office or Medicare, and the money will go to the Future Fund to invest.”

She does not smile as she paints this wipeout scenario, and warns: “If we do not become a transparent and accountable industry that delivers retirement outcomes, the Government will look for alternatives.”

She also shatters the industry’s perception that it is being consulted about reforms following the Henry, Ripoll and Cooper reviews. The Government has chosen which recommendations it supports, and is consulting the industry only on how these should be implemented.

“This is where people [in the industry] have it wrong. They think

the consultation process is about whether it’s good policy or not. That’s not what it’s about. It’s about implementation.”

“If you look at the Treasury papers that go to the working group, there was never a question ‘is this good policy or not?’ It’s ‘this is the Government’s policy, these are the issues around implementing this policy, what do you think?’

Vamos is passionate about the industry, but is pessimistic about its ability to pull together and self-regulate. It now has stewardship over $1.3 trillion in assets, a sum projected to grow to $5 trillion by 2035. Super is a serious business, and the Government wants confidence that the industry, as a whole, will act in the best interests of members when it proposes how the reforms should be implemented.

“When you are responsible for that much money, you must have a structure and legislation,” she says. “It’s not about the industry being bad: it’s about getting the right regulatory structure going forward.”

To achieve this, now and in the future, industry associations must set egos aside and pool resources on some matters, she says. “We need to get better at joining on initiatives in which we can share our resources. I’m the first one to say that egos get in the way, and finding time to get together is difficult.

“There will always be differences, but let’s join our resources. There is an appetite to do this, but it’s difficult: people are frightfully busy and we are suspicious of each other.

“The relationships are not at a stage, at the moment, where there’ll be a frank discussion between all the bodies. Individually, this happens, but not at an association level. It’s time to do this now.”

She rejects claims that a turf war being waged by industry

David Whiteley ... pushing for real consensus

If we do not become

a transparent and

accountable industry

that delivers retirement

outcomes, the

Government will look

for alternatives. It could

say: everyone will pay

the superannuation

guarantee through the

tax office or Medicare,

and the money will go

to the Future Fund to

invest”


associations has prevented such cooperation.

“It’s not a turf war. We charge fees, and funds pay a lot of fees, so we all have the KPI [key-performance indicator] of keeping the members happy. Part of that is being visible, driving outcomes.

“It’s ego.” To gauge the associations’

true willingness to collaborate, Vamos advocates that some kind of performance review is made to assess “how we as an industry come together”.

But she adds, quickly, that some members would be appalled if the bodies came together on many issues, even though achieving self-regulation as an industry should be paramount.

“Yes, there are philosophical differences in approaches to super, and they can still exist, but there are areas where we can come together.”

Such as the operational structure of the industry, which is in a general state of disarray. Vamos uses a number of analogies to describe this:

“The super industry has different pipes, different taps, different plumbing. We can’t consider [ourselves] as a whole industry. You can’t go around Australia on the one railway because we have different rail gauges in the states. In super, there are different forms, different ID requirements to change funds. If we made it easy for people to deal with us, the industry would be better off.”

SuperStream can improve this. So can MySuper, she says. Each fund’s version of the new default vehicle will be different, but the common name can provide some basis for comparison. To date, this kind of comparison across the market has been too difficult, and arguably oversimplified by the prudential regulator’s reporting of

investment returns at the whole-of-fund level.

“I’m not saying all funds are the same, but consumers have hit the wall. They’re asking: ‘Where do I start?’ MySuper is about being the first step to be able to compare, but funds are not transparent.”

If the industry was able to cooperate without the force of imminent regulation, some quick wins can be claimed, she says. The proposal to implement swimEC (superannuation, wealth and investment management electronic commerce) data standards is a case in point. After joining ASFA in August 2007, Vamos soon became chair of the swimEC committee. “There’s no competitive advantage in complying with swimEC, and so mandatory legislative backing is essential” to get it over the line. “Just get it up and running,” she says, and override the vested interests in the way.

In the second half of 2010, a six-month study on swimEC was undertaken with Jeremy Cooper to see how an industry body could be created to implement the standard, and has been sent to industry associations. “I’ve asked that the recommendations be supported, and the industry go to [the] Government,” Vamos says, but adds ruefully that there’s push-back on it, along the lines of ‘but if we

support this, then it looks as if we are supporting ASFA’.

“There are different views on what type of body it should be,” she acknowledges, but then repeats: “Just get it up and running”.

“We all want to win, but we have to start compromising on some issues.”

Another sitting duck is risk management. Last year, the Australian Prudential and Regulatory Authority (APRA) issued a letter about investment timing in super fund portfolios. A joint working group involving ASFA, the FSC, APRA and the market regulator was formed to determine guidelines on the matter, and the progress has been encouraging. “Everybody is in the tent,” Vamos says.

“Will it be perfect? No, but we’re nearly there – we’ll draw a line in the sand. It’s 90 per cent there.”

But if the talks stall, APRA itself will move on and enforce new standards without serious input from the FSC and AFSA.

“I’ve had 10 years in this game, and I’ve seen this so many times. Because there hasn’t been an ability to compromise, the Government says ‘we will draw the line’. [They] draw the line, not in the middle, but anywhere, and that’s where you get unintended consequences.”

It will be a long-term win for

the industry if the big reform pieces of 2011 were implemented well. “If reform goes through in the way it should, then it will transform the industry,” she says. But it would be a pity if the Stronger Super reforms suffered a fate similar to the superannuation clearing house legislation of a few years ago.

Here, the aim was to decide on the structure for a clearing house to process super payments made by small- and medium-sized businesses. After a huge amount of time and money spent on studies and submissions, the Government decided that Medicare should handle these payments. “It’s a classic example. It’s in our industry and it’s in the past two years,” Vamos says.

But there can be two types of consensus around far-reaching reforms, says David Whiteley, CEO of the Industry Super Network (ISN). One is rhetorical consensus. The other is real.

He says the Wallis Inquiry into financial services in Australia, concluded in 1997, found that transparency and disclosure were all that consumers needed to make rational investment decisions for their retirement. But in Whiteley’s view, the billions pouring into retail super funds each year is evidence that this isn’t so.

He says that in a sector-by-sector comparison, industry funds have outperformed retail funds by 3 per cent throughout the past 15 years. But in the last financial year, employers channelled about $16 billion into the retail sector.

“We should be asking: Why are these employers, on behalf of workers, going into quite clearly underperforming funds. Hopefully, that’s what MySuper and Stronger Super will fix.”

These hopes are pinned on the consensus reached by the Cooper Review that disengaged members would benefit from a

This is where people

in the industry have it

wrong. They think the

consultation process is

about whether it’s good

policy or not. That’s

not what it’s about. It’s

about implementation”Michael Baldwin ... leadership a key part of superconsensus

Sarah DobellClient Development Manager

AIA Australia Limited (ABN 79 004 837 861 AFSL 230043)

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paternalistic approach to default superannuation. This is the rationale behind MySuper, and it is pretty much the polar opposite of the Wallace view.

“Consumers don’t work in that way,” Whiteley says. “They don’t think reasonably about the future. They are disengaged. We need a regulatory framework to help them in that.

“We’re not talking about a revolution in consumer protection here, but about the recognition of some basic economic principles.” By this Whiteley means the outperformance of industry funds, and what he describes as a “market

The Mavis Robertson legend will live on...By Miranda Ward

Mavis Robertson’s legacy to the superannuation industry will remain in perpetuity as the industry celebrates her outstanding contribution as she steps down from all her official roles.Robertson’s vision, her passion and her drive for the industry were celebrated at a recent party, with HESTA CEO Anne-Marie Corboy honouring her achievements in a heartfelt speech.It was in the early 1990s when Robertson made one of her greatest contributions to the superannuation industry – the creation of the Conference of Major Super Funds (CMSF). The government was preparing to legislate to make super mandatory through the Super Guarantee. The only industry body at the time was ASFA, and its CEO came out in opposition to the SG despite that being in conflict with the position of public sector funds and major company funds that were represented by ASFA. “Mavis – as the driving force – decided that changes needed to be made at ASFA and industry funds needed a voice,” explained Corboy. “Mavis’s vision for what might be became evident, as, whilst working on those changes she proposed a new and different conference, where trustees and their staff would outnumber the service providers and so the Conference of Major Super Funds – CMSF – was born in 1991.”Robertson’s passion for equal rights, peace and change showed itself not only in her professional life but also in her personal life: she was involved in the Australian Communist Party, the Women’s Liberation Movement, Vietnam War Protests, the Nuclear Disarmament Co-ordinating Committee and the People for Nuclear Disarmament (PND).A prominent activist in the Vietnam War protests, at the end of the war, Robertson travelled to Hanoi, along with other filmmakers and made the film “Changing the Needle” to mark the end of the Vietnam War.Corboy paid homage to Robertson’s persuasive skills and

the legacy she has left behind in her pursuit of peace, explaining how in 1982 Mavis convinced NSW Urban Transport to sell PND an old double-decker green bus.“It was outfitted and painted by PND volunteers. It was known as the Peace Bus and between 1982 and 1987 travelled extensively throughout NSW into Victoria, South Australia, Queensland and the ACT,” Corboy said.“It was used as a mobile education centre, promoting the cause of nuclear disarmament and world peace. It is now housed in the National Museum.”Robertson’s passion for women’s rights drove the development of the Women’s Breakfast at CMSF. Out of this, and as a result of her leadership, came Women in Super and the Mother’s Day Classic. Robertson has been the CMSF chair and spokesperson for the better part of 20 years, “and is always a force to be reckoned with”, said Corboy.“This is where I first met Mavis. I attended my first women’s breakfast at CMSF in 1994 and listened to Mavis speaking about the need for more women to be represented on industry boards,” remembered Corboy.“I had not met her before and after the breakfast tentatively approached her and said I would be happy to do something. I was a rarity – a woman public-sector trustee – there were less than five of us at the time.“In the following 12 months I found myself representing the public sector on the steering committee of CMSF, a board member of AIST and on the WIS committee. Such were her powers of persuasion!”The Mother’s Day Classic has raised, since its inception, $7.8 million for the National Breast Cancer Foundation. Corboy named the Mother’s Day Classic as one of Robertson’s greatest achievements.The first successful merger in the industry fund movement is also credited to Mavis Robertson. She was responsible for the merger of BUSS and AUST in 1994 when they formed Cbus. She was the newly merged fund’s first fund secretary.Robertson has been chair of

Industry Funds Credit Control, a foundation director of Industry Services, chair of the Australian Preservation Fund (now AusFund), the IRIS Pension Plan (Industry Funds Investments), and an inaugural director of Superpartners.She was also the brains behind Industry Administration Services, which she formed with Ann Byrne. The pair also formed the Industry Funds Forum.“So you see there weren’t many – if any – representative organisations where Mavis’s influence wasn’t felt,” said Corboy. Robertson was the convener of CMSF until the merger which created AIST and has been a patron of the cadet program run by AIST. She was the force behind the development of the CMSF study tours which morphed into the Global Dialogue. “Mavis’s leadership in all these ventures has been clearly evident,” said Corboy.The study tours contributed to the establishment of the Australian Council of Superannuation Investors where Robertson was a foundation committee member.Robertson’s services to industry superannuation and her services to peace and disarmament were celebrated in 1994 when she was made a Member of the Order of Australia. She was one of the first 250 women entered on the Victorian Women’s Honour Roll in the centenary year of Federation and on the 50th anniversary of the Declaration of Human Rights. She was also named as one of 100 Australian “defenders” of Human Rights.“Mavis has had an extraordinary impact on the development of superannuation in this country and the promotion of equality for women both in their retirement savings and their rightful place in the decision making forums,” said Corboy. “Mavis has been and continues to be an outstanding role model for women and men of all ages in her fight for equality and peace. We thank her for that fantastic contribution and give her our very best wishes in the next stage of her wonderful life.”

Mavis Robertson ... pillar of industry super

I’ve seen this so many

times: because there

hasn’t been an ability

to compromise, the

Government says ‘we

will draw the line’. They

draw the line, not in the

middle, but anywhere,

and that’s where

you get unintended

consequences”

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failure”: the massive inflows into their retail rivals.

The retail sector seems to have accepted MySuper, but Whiteley is suspicious as to whether its consent to the reform is rhetorical or real. “It has a business model which isn’t necessarily conducive to much of what the Cooper Review is trying to achieve.”

The phasing out of commissions under the Future of Financial Advice (FoFA) reforms has not stopped some financial planning businesses “seeking to hang on to the system of incentivising planners to sell product,” he says. By maintaining that volume rebates and asset-based fees are legitimate ways of charging clients, the industry is still seeking to incentivise its sales forces “while rhetorically supporting the reform agenda”.

“I don’t think anyone should underestimate the resources major banks and the financial planning community has, and the effort they will go to in prosecuting their case.”

The core purpose of MySuper – a robust default system that safeguards disengaged members – will be affected by how much the FoFA reforms can separate advice from product. Whiteley says that because eight out of 10 people do not choose their own super fund, setting up a default system with integrity is important.

“It’s about having a workable and transparent system for determining the default fund in the workplace. We’re talking about 8 million people here.”

He does not believe that industry funds should be “too fazed” about the arrival of retail products that carry price tags previously seen only in the not-for-profit sector. “One of the wash-outs of Stronger Super will be industry funds offering high-performing products net of tax and fees. Retail funds will

offer low-cost indexed products, which will deliver inferior returns.”

FUTURE LEADERS

Besides compulsory inflows, many of the industry’s dynamics will remain constant throughout this time of fundamental change, such as the need for high-calibre leaders.

It’s this requirement for leadership within super funds, rather than the reform debate, that continues to drive the evolution of the educational program designed by the Fund Executives Association Ltd (FEAL). However, since the forces of change in the industry have influenced the needs of FEAL members, the association, in turn, is responding.

As funds grow and consolidate, not only do CEOs need to develop their leadership skills, but departmental heads, such as the people running investment,

distribution and operations teams also need to consider their competencies as leaders. They may have specialised knowledge in their professional fields, but they must also know how to manage people and think strategically about how their team can deliver better outcomes within the organisation.

“They need to develop a breadth of skill which would equip them for leadership within the larger organisations their funds will become,” says Michael Baldwin, CEO at FEAL.

“In addition to being a very competent CIO or governance manager, they need broader skills, [and] a lot of this involves teaching people to become a leader.”

“Our specialisation isn’t in super. It’s in leadership.”

FEAL’s programs seem to be striking a chord within funds. Its masters in organisational leadership program – which is run through the Melbourne Business School and covers topics such as managing human capital, ethics and governance, and mergers and acquisitions – has steadily attracted an increasing number of students over the years. In 2008, 18 members enrolled; this year, FEAL is processing 30 applications, from CEOs, CIOs, COOs, finance and compliance specialists, relationships and products specialists, and marketing specialists, among others.

The association’s rate of membership growth has also steadily increased in recent years, from 5 to 7 per cent. “We realise we have a finite membership pool. Our goal is to reach all of the potential leaders in each fund,” Baldwin says.

“We’ve probably covered every type of direct report from CEO down. And that’s ideal, because it means we’ve got a broad diversity of experience of views coming to the table.”

This diversifies FEAL’s

membership pool, delivering more well-rounded feedback on its programs and suggestions for future educational courses. It also means that executives rising through the super industry ranks, say, from an administration team to the executive ranks, are better equipped to lead funds with complex operations.

Fund mergers have caused some attrition among its membership, but bigger funds require leaders at different levels of the organisation, Baldwin observes. He points out that Westscheme executives will probably continue to participate in the programs after their offices become a WA subsidiary of AustralianSuper in July.

FEAL’s exclusive focus on leadership, rather than the work of managing superannuation, means it does not lead industry action on matters such as SuperStream. Baldwin recognises that larger associations, such as AIST, the FSC and ASFA, have the resources to react to big changes in policy.

“I see them as collaborative organisations, rather than as competitors.”

He acknowledges that AIST’s new governance focus edges into FEAL’s leadership terrain, but says the newcomer’s focus is primarily vocational: hands-on skills can be best developed by participating in AIST programs, but “if it’s about leadership and aspiring to other roles in the industry, they should be doing my program”.

I’m the first one to say

that egos get in the way,

and finding time to get

together is difficult.

There will always be

differences, but let’s

join our resources. The

relationships are not at

a stage where there’ll

be a frank discussion

between all the bodies.

Individually, this

happens, but not at an

association level. It’s

time to do this now”

Joe Di BellaNational Manager, Business Development, Group Risk

07 3835 5709, [email protected]

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Pho

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ON THE GROUND IN ASIA

For Cambridge Associates to become a “truly global firm, not just in footprint, but in

mindset”, its personnel must have on-the-ground experience in major markets worldwide to gain the requisite insights, says Sandy Urie, CEO at the asset consultant. “This should start at the top.”

The consultant, headquartered in the US, is no newcomer to the global investment landscape. Out of its 900 clients, 200 are based outside its home market. But to be truly global means more than servicing business interests abroad: it means cultivating an awareness of the investment challenges and opportunities that exist worldwide, and developing insights into how global investors can approach them. “If we want to bring the best ideas, this idea of a global mindset is very important,” Urie says.

“How can our clients take advantage of the opportunities that exist here, and start to dispel some

of their home-country biases?” Urie asks.

The answer should begin to emerge from her experiences as “something of a roving CEO” in Asia, as she witnesses first-hand the growth and dynamics of the region’s investment markets and meets key institutional figures. And it will involve creating deeper linkages between Cambridge’s offices across the world.

Speaking to Investment Magazine one month into her time in Asia, Urie says each of Cambridge’s offices – which are stationed throughout the US and in London, Singapore, Sydney and, from September, Beijing – is interconnected but focused mainly on its immediate market. Trying to “break down this fragmentation”, build more awareness of the work undertaken by each office and contributing to a collective, global outlook is another goal to be undertaken during the temporary

relocation. Cambridge establishes new

offices in advance of, but also in response to, client demands. Naturally, each outpost is assigned research, client service and prospecting objectives. But it’s the research ambitions that most often compel the consultant to set up in a new market, Urie says.

The consultant’s knowledge and understanding of managers in Asia accelerated when it first established a physical presence in the region. Eugene Snyman, who opened the firm’s Singapore office in 2001 before relocating to Sydney in 2007 to do likewise, says the consultant keeps track of managers in the region as they emerge and progress.

“Groups that started up in 2002 with a maiden fund, with family and friends as investors – we’ve stayed in contact with them,” Snyman says.

It’s common for Cambridge staff to relocate among the firm’s

offices. In May, hedge fund specialist Paul Liu will arrive in Australia from Cambridge’s office in Menlo Park, California. Such movements also enable the firm to offer a broader worldview to clients in each region, and overcome the geographical boundaries between offices.

It will be the managing director of Cambridge’s London office, Christopher Hunter, who will undertake the big job of opening the Beijing office. There he will lead an initial team of three in research programs designed to understand investment opportunities in China, and will provide on-the-ground support to clients in that market and seek out prospects.

When Urie returns to the Boston headquarters of Cambridge, she does not want to merely relay what she has learnt and reacquaint herself with a familiar US-centric view. She plans to continue to regularly visit the region, for up to

manufacturing Investment MagazineApril 2011 31

SANDY URIE’S FOUR-MONTH RELOCATION TO THE

ASIA-PACIFIC region marks the next phase of development

for Cambridge Associates, reports SIMON MUMME.


three weeks at a time, rather than a few days, and continue to work as a roving CEO.

“It’s about maintaining the momentum.”

ON CAMPUS

Perhaps the clearest distinction Cambridge makes from its competitors is its competencies around the style of investing that has become known as the endowment model.

This style gained notoriety throughout the professional investment industry as the Yale and Harvard university endowments posted impressive returns that were attributable to large investments in hedge funds, venture capital, timberland and other alternatives. Observing this, some pension funds began eyeing these strategies – particularly as they sought to diversify away from equity beta after the collapse of the dotcom bubble. Talk of ‘endowment envy’ percolated through industry commentaries.

But the financial crisis brought an end to the long stretch of outperformance enjoyed by many endowment-style investors as liquidity pressures and the market rout of 2008 unceremoniously grounded their consistent double-digit returns.

Like all asset allocation strategies, endowment-style investing was challenged by the systemic breakdown of the financial crisis and the ensuing volatility and liquidity scarcity. “Those weekend events” – Urie says, employing a euphemism to describe the 2008 Wall Street banks crises – “just kept coming.”

But not all endowment investors fared terribly. About 80 per cent of Cambridge’s clients did not experience liquidity problems during this period, Urie says. Like other investors, they learned some

lessons: absolute portfolios can decline – they don’t have a “floor” – and investment risk should be viewed in dimensions other than volatility. It also takes the form of leverage, liquidity, equity beta, currency, inflation, interest rates, credit spreads and exposure to active management.

“We’ve been doing modelling in trying to get at how you can deconstruct that overall volatility in a portfolio and assign it accordingly,” Urie says, adding that investors have taken these lessons on board rather than becoming shy of risk.

“I don’t think the stomach for risk has been hurt. It’s more about understanding the risks you’re taking and why.”

Too often, the endowment model is incorrectly viewed as merely an alternatives-heavy approach to asset allocation, Urie says, when it is purely a framework for thinking about institutional investment.

“It is a form of investing with a long-term horizon,” she clarifies. “Each investor steps back and asks: ‘What is the role of this portfolio, and what is the financial structure of our organisation? How dependent are we on [the portfolio]?’

“That can lead to an asset allocation with alternatives, because it’s consistent with what they’re trying to achieve.”

These questions ensure that endowment-style investors do not employ a ‘set and forget’ approach to asset allocation. These investment policies must be revisited, tested and again prove themselves. Also, over time, new asset classes have emerged, such as real estate and non-US investments in the mid-1980s, which have better met the needs of investors.

More recently, institutions have shifted to an asset allocation which

classifies assets according to the roles they perform in portfolios, rather than the asset class they belong to.

“What’s more recent is investors are taking these traditional asset buckets and acknowledging more explicitly the role they play in the portfolio.”

This progression, from asset class silos to roles, has resulted in Cambridge clients segmenting their portfolios into four categories: growth, macro hedging, diversifiers and cash as “dry powder” to make opportunistic investments, Urie says.

These days, endowment investors are keeping more cash available to meet funding needs as well as capitalise on opportunities. Distressed credit was a big opportunity in the past two years, but “there is no table-pounding buy out there now”, Urie notes, adding that leading US endowments have only changed their policies “at the margins”.

But as investors eye more innovative ways to allocate capital, Urie offers a reminder: “The more you put into these asset classes, the more you take out of the long-term growth engine of equities.” In other words, long-term liabilities should not be forgotten.

Neither should the inevitability of asset bubbles. There are some expressions, which resurface from time to time, that should stop investors in their tracks: new paradigm, new era, new age. Urie interpets them as a reminder to check market fundamentals.

“When things start to get two-to-three standard deviations away from the long-term, and you begin to hear talk of a new paradigm, you have to step back and ask yourself if you believe it, and if you do, then why.”

Asset bubbles are strange phenomena, and have few parallels

outside investment markets. In supermarkets, for example, if popular goods increase in price, demand naturally pulls back as consumers tire of paying higher prices. “But in markets, when prices go up, people buy more.”

Conversely, when goods are cheap, shoppers rush in to buy up stock. “But when markets are falling and risk has been beaten out of the system, people are fearful.”

ALL FOR ONE

During the crisis, Cambridge committed to a policy of making no lay-offs for cost considerations. People were let go for poor performance, but to prevent retrenchments throughout the business, executives chose to take pay cuts.

As financial companies shed staff across the US, Cambridge held a firm-wide conference call to deliver the message.

“We had a salary and a hiring freeze, but the fact that we weren’t laying people off allowed people to breathe and to focus on their work,” Urie says.

“Senior executives at the firm agreed to take a hit so we didn’t have to sacrifice the talent pool,” she says. “And during that period of time, clients needed us more, and to slice our talent pool was counter-intuitive.”

Also, the firm anticipated that when the recovery began, demand for services would increase.

“It takes time to train people. We wanted people available as we were working our way out of it.”

There were cultural and business reasons why this policy was enforced. “We did the same in the early 1990s recession.”

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State Street celebrated its

25th anniversary in Australia

last month with the opening

of a new office in the heart of

Sydney which enables, for the

first time, the company’s 700

local staff to come together in

the one building. Jay Hooley, the

company’s chairman, president

and chief executive, elaborated

on the milestone. GREG BRIGHT

reports.

When Jay Hooley took over the helm of State Street in Feb-

ruary last year, he set himself the task of doubling the firm’s non-US revenue within five years.

“That’s an achievable goal,” he said prior to the official opening of his new Australian headquarters. “We currently have about 40 per cent of revenue from non-US sources and a little over 40 per cent of our staff are outside the US. So it implies compound growth in the mid-teens. That’s pretty heady, but I’m confident of getting there partly because of the markets we’re in.”

In Australia, for instance, an increase in the superannuation guarantee would benefit the industry as a whole. And elsewhere in the Asia-Pacific region, asset pools are developing.

“We feel that post-crisis, as an organisation, we are very well positioned. We are also well positioned in a financial footing sense. We are one of the best capitalised financial institutions in the world.”

In Australia, in particular, the stars seem to be in alignment for State Street for several reasons.

Last month also marked the 10th anniversary of the exchange-

traded fund (ETF) market in Australia, which State Street pioneered, and has taken off in the past couple of years as competitors have joined the scene.

With structural change affecting the financial planning industry in Australia – mainly the move away from trail commissions to a fee-for-service remuneration model – the non-commission-paying ETFs are suddenly even more attractive.

Hooley says: “We view the increased competition as validating our strategy. ETFs represent one of the great innovations of our time. The competition is the result of an advanced market.

“One of the next evolutions will be in using ETFs to create target-based funds.”

In the institutional investment market, the prevailing trends also favour State Street, and not only because of the rising tide of

superannuation contributions.Hooley points out that

pension funds around the world are adapting their asset allocation strategies towards one which involves cheap beta, including a range of new betas such as fundamental and tilted index funds, and diversifying alpha, such as alternatives and hedge funds.

This suits State Street Global Advisors, the firm’s asset management arm, to a tee.

It is one of the largest index managers in the world and has in recent years had considerable success in developing alternative betas, such as low-volatility funds. At the same time, and with the Australian office playing a key role in product development, it has also developed a range of long-short equity and other alpha-seeking strategies.

A new development, consummated this year, is the provision of a traditional active global equities strategy, through the acquisition of Bank of Ireland’s funds management arm.

Hooley says the firm is committed to its quantitative roots as a manager, but will “selectively introduce different styles to address client needs”.

Quantitative managers had a difficult time in the early part of the financial crisis, partly because of the weight of money in their strategies and the fact that many managers, particularly in the US, were using similar strategies.

Hooley says: “We had a 100-year storm. We went through a difficult cycle and we will be smarter for it. We’re comfortable in our space.”

He is also confident the firm can achieve strong growth in its asset servicing and Global Markets lines of business.

“State Street is the largest administrator of alternatives in the world,” he points out. “The priorities from a buyer’s point of view are capabilities and a strong balance sheet behind them. Through the cycle, we’ve never stopped spending 20-25 per cent [of revenue] on information technology.” He believes there will be more consolidation in asset servicing around the world.

Growth areas, apart from a general expected rise in cross-border investments, include collateral management, derivatives processing and middle office services.

He believes the fact that State Street does not do proprietary trading, and therefore is not conflicted in its Global Markets business, is a plus with clients.

He sees a continued trend to more transparency and more electronic crossing.

State Street plans next 25 years in Australia

Exchange-traded funds

(ETFs) represent one

of the great innovations

of our time. One of the

next evolutions will be

in using ETFs to create

target-based funds”

Jay Hooley opens new office ... ‘we went through a 100-year storm and will be smarter for it’

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Martin Currie has unveiled

its new emerging markets

strategy ahead of the launch of

an Australia-domiciled fund.

The new team, recruited from

Scottish Widows Investment

Partnership (SWIP) last year,

has a strong sustainability bent.

GREG BRIGHT spoke with two of

the team leaders, Kim Catechis

and Andrew Ness.

A lot of the big themes facing international in-vestment managers have a

sustainability flavour to them. Here are some examples of particular relevance to emerging markets:

• urbanisationandindustrialisation;

• pressuresonsocialinfrastructure, such as education and healthcare;

• rawmaterialsconstraintsorshortages;

• aregulatorybacklashfromclimate change;

• awaveoframificationsstillto come from the global financial crisis;

• thepost-Madoffworldoftransparency; and

• ashiftinsocialrequirementsfollowing a generational change where companies must now be seen to be doing the right thing, such as retailers managing their supply chains to avoid exploitation of workers.

According to Andrew Ness, investment manager in the Martin Currie emerging markets team, the world is changing and a lot of the changes are secular in nature and require qualitative analysis.

“Qualitative analysis is harder than the quant work, but just because it’s harder to quantify some of these [sustainability] issues it doesn’t mean they shouldn’t be analysed,” he says.

Ness was in Australia from the manager’s Edinburgh head office in February with Kim Catechis, the firm’s director of emerging markets equities. Both are part of the six-person team hired from SWIP last year to add gravitas to Martin Currie’s offerings in emerging markets. They can demonstrate a 10-year track record of working together at the other Scottish firm.

Kimon Kouryialas, Asia Pacific head, says the firm let the new team settle in and it is only in the past few weeks that the managers have been discussing their strategy with clients and consultants. He is confident that an Australian-domiciled core emerging markets equities fund will be seeded shortly.

The eight-person Martin Currie team conducts its research on a sector basis, which Catechis says makes it easier to compare apples with apples. It also invests on a three-year time horizon, with the average portfolio stock being held for two-and-a-half years.

“We do a lot of in-depth due diligence and find that when we assess sustainability issues it really enhances the fundamental analysis. It produces a high-conviction portfolio between 40 and 60 names.”

In the UK, in particular, there is increasing pressure on funds

managers by the public sector funds to demonstrate the inclusion of sustainability factors in their stock selection processes.

Different parts of this environment, social and governance analysis are relevant for different companies and different industries. The environment, for instance, is of special concern for mining and energy companies. Social concerns, such as sourcing goods from countries with suspect labour laws, have the potential to damage retailer reputations. Good governance tends to be good all round.

Catechis says: “A big chunk of the investment process is avoiding accidents, so when we do our due diligence we always look to see what can de-rail it… We’re not hard-edged activists.”

The firm subscribes to a political research service and also assesses how a country treats its foreign investors.

But Catechis says that political dynamics are not unique to emerging markets: “every country has a series of power brokers; how they interact determines how the country is managed”.

An amateur historian who speaks eight languages, Catechis says that he likes to study the last 100-or-so years of a country’s

history before he invests in its market.

“I like to look at cultural trends mixed with history… There are some common themes. There is a resurgent nationalism in many countries and we’re seeing a growth in domestic brands as their middle classes expand.”

One of the team’s success stories at their previous shop makes an interesting case study. After about nine months of research in 2003 they bought 5 per cent of African Bank, a financier which specialised in loans for low-income earners in South Africa.

The bank rode the big rise in the number of middle-class Africans over the subsequent few years while also demonstrating great discipline in its lending practices. It would make sure, for instance, that its interest payments stood first in line when a customer was paid each week or month. African Bank’s market capitalisation has risen from US$600 million in 2003 to about US$2 billion today.

The main emerging markets strategy covers large-, mid- and small-cap stocks. The firm also has a Latin American fund and a separately managed China joint venture based in Shanghai that has been managing China A-share capabilities since 1998.

ESG matters in emerging marketsThere is a resurgent

nationalism in many

countries and we’re

seeing a growth in

domestic brands as their

middle classes expand”

Kim Catechis and Andrew Ness ... ‘in-depth due diligence is the key’

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After determining to employ a

new way of evaluating portfolio

risk which overlays risk across

asset classes, rather than

replacing asset classes with

risk categories, CalSTRS now

just has to work out how to do it.

AMANDA WHITE reports.

Unfortunately life doesn’t fit into neat buckets, and neither does risk, the

investment team at the $146 billion California State Teachers Retire-ment System (CalSTRS) have discovered.

According to CIO Chris Ailman, the fund had intended to conclude its evaluation of risk management by allocating according to risk budgets.

“We came up with the risk overlay approach after a meeting in early January with Martin Leibowitz from Morgan Stanley, our staff and Allan Emkin and his staff. We fully intended to come up with risk buckets, but found that the number of risk buckets depended on your time period, and over the really long-term they blend in to one or two,” Ailman says.

“Everyone wants to keep the world in a spreadsheet but the world is messy, you can’t put into neat buckets. It would be nice if risk was neat, if for example you could say a particular risk was exactly 83.6 per cent and we could hedge to that decimal, but life is complicated.”

From a graphical viewpoint, tather than allocating risk according to a neat colour wheel, CalSTRS decided it was more like the mess of an artist’s palette, which Ailman describes as a “clever nuance”.

“We decided that you can’t say for example 65 per cent of the portfolio is exposed to global GDP – because it affects real estate, fixed

income, cash, as well as equities.”The fund has come up with

six core risk factors, but instead of using them to divide the portfolio by exposure, they will be overlaid across the entire $146 billion portfolio, as well as used to dissect each new investment to understand its risks.

The six core risk factors are:• globaleconomicgrowth–

uniquely, CalSTRS is considering dividing the world by the average age of a country’s population rather than the traditional division of emerging and developed, to determine a measure of expected global economic activity and corporate profits;

• interestraterisk;• inflationrisk;• liquidity–fluidmarkets;• leverage/financing;and• investmentgovernancerisk.But, to some extent, deciding on

what the risk exposures are is the easy part. The next step, according to Ailman, is to spend four to five months bedding them down, working out how to measure them and determine what their cycles

might be.“We need to figure out how to

measure these risks. And we need to determine, for example what is the strategy if we think interest rate is a high risk or global GDP is a risk. What do we do about it, and do we need more tools?”

What is clear, is that CalSTRS is prepared to think of risks differently.

Together with Allan Emkin from PCA, it has come up with the idea of measuring global economic growth risk, according to the age of the population of the country, rather than the traditional

developed and emerging country classifications.

The idea is that countries with an older and ageing population typically have low immigration and slower economic output so would include countries such as Japan or Italy); middle age would pick up more mature economies such as the US which allow more immigration; and younger countries often exhibit more growth potential.

The other more administrative decision is to decide whether to reorganise staff, which depends a bit on how the portfolio is managed.

CalSTRS overlays ‘fuzzy’ asset bucketsThe fund has come

up with six core risk

factors, but instead of

using them to divide the

portfolio by exposure,

they will be overlaid

across the entire $146

billion portfolio, as

well as used to dissect

each new investment to

understand its risks

CalPERS in manager fee rethinkBy Amanda White

CalPERS will set an external fee reduction target for the financial year, in light of the fact it spent more than $1 billion on external asset management fees in 2009-2010 and only a relatively modest $29.5 million on investment office personnel services including salaries. About 62 per cent of CalPERS’ assets are managed inhouse, compared to about 33 per cent for its global peers according to a database put together by CEM. It also manages more assets passively than its global peers (31 versus 22 per cent), which when combined with the internal management, brings the costs down for the fund.External asset management fees at CalPERS accounted for 90 per cent of the $1.2 billion in total investment office costs in 2009-2010. The other costs were personnel (3 per cent), portfolio management tools (2 per cent), consultants (2 per cent), legal and audit fees (1 per cent), appraisal fees (1 per cent), enterprise overhead (1 per cent)Of the external management fees CalPERS dished out in 2009-10, the alternative investment management program accounted for 49 per cent of those costs, followed by global equity (31 per

cent), real estate (17 per cent), inflation linked (2 per cent) and fixed income (1 per cent).The Carlyle Group was the biggest beneficiary of the external fees paid to managers, receiving $52.45 million in fees in 2009-10.In addition to developing an external fee reduction target, the fund will also enhance its financial reporting automation and data integrity, and determine an appropriate benchmark to set expense ratio targets for the fund.Cost effectiveness initiatives for 2011-12 include continuing the external fee reduction initiatives and identifying a relevant peer group and process to benchmark the total expenditures, and work with CEM to refine the benchmark data collection and make it actionable.CalPERS claims to be about 8 basis points more cost-effective than a CEM Custom Peer Group of 10 sponsors, with a median size of $64.5 billion, with that benchmark cost calculated as an estimate of peers costs if they had the same asset mix.The fund claims that its cost-advantage is driven by its “public markets implementation style”, or in other words the combination of more inhouse and passively managed assets.

ING Investment Management Limited ABN 23 003 731 959 AFSL 233793 (INGIM) is the responsible entity of the ING Wholesale Global Property Securities Fund (Fund) ARSN 115 202 358. This document has been prepared without taking into account any person’s objectives, financial situation or needs. Investors should refer to the latest offer document for the Fund before making any investment decision. Standard & Poor’s Rating: Standard & Poor’s Information Services (Australia) Pty Ltd (ABN: 17 096 167 556, Australian Financial Services Licence Number: 258896) (“Standard & Poor’s) Fund Awards are determined using proprietary methodologies. Fund Awards and ratings are solely statements of opinion and do not represent recommendations to purchase, hold, or sell any securities or make any other investment decisions. Ratings are subject to change. For the latest ratings information please visit www.standardandpoors.com.au. Lonsec Rating: The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned January 2010) for the ING Wholesale Global Property Securities Fund) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial products. They are not a recommendation to purchase, sell or hold the relevant products, and you should seek independent financial advice before investing in these products. The ratings are subject to change without notice and Lonsec assumes no obligation to update these documents following publication. Lonsec receives a fee from the fund manager for rating the products using comprehensive and objective criteria. Zenith Rating: The Zenith Investment Partners (“Zenith”) ABN 60 322 047 314 rating (Recommended February 2010) for the ING Wholesale Global Property Securities Fund referred to in this document is limited to “General Advice” (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of these financial products on this basis. It is not a specific recommendation to purchase, sell or hold the relevant products, and Zenith advises that individual investors should seek their own independent financial advice before investing in these products. The rating is subject to change without notice and Zenith has no obligation to update these documents following publication. Zenith usually receives a fee for rating the fund manager and products against accepted criteria considered comprehensive and objective.

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Everyone wants to

keep the world in a

spreadsheet but the

world is messy, you

can’t put into neat

buckets. It would be

nice if risk was neat, but

life is complicated”

“We looked at whether to separate two portfolios, and reorganise staff that way, but the jury is still out. We are heading down the structural path that the asset people continue to do what they do, then there is an overlay strategy with a team that includes me, the directors and some traders,” Ailman says.

“We can do the overlay in a couple of ways. We need to develop the signals (the risks) then the next step is to determine how to implement those tools.”

What is important, Ailman says, is to recognise that insuring risk comes at a premium. You have to pay for it.

“We all do it as human beings – buy insurance to reduce the level of risk, and pay for it. In an overlay idea it’s the same thing: we have to realise there is a premium.”

The fund will consider the various options of how to implement the overlay, including the cash market and derviatives, which it uses already, as well as global macro managers.

It will also make subtle changes to its asset allocation, which typically has had tighter ranges than its peers, with movements of between 3 and 6 per cent allowed.

But one of the more exciting aspects of the overlay from the internal investment management point of view is it will enable the

fund to be more nimble.“It will let us be a little bit

more nimble. I know with our government structure we won’t be entirely nimble, but we will be more nimble.”

The portfolio risk review is one of two studies the investment committee is looking at as part of its annual study plan.

The other study will be

looking at internal versus external investment management, which began with an investigation at the last board meeting, and is a full and exhaustive review, concluding in June.

Ultimately investment staff will recommend strategies and asset classes that can be brought in house.

“CEM Benchmarking has

some good work on demonstrating that internal management can be one-tenth to one-twentieth of the cost of external. There are some things we still should have external managers for, but about one-third is in house now and we could run more,” Ailman says.


Australia’s catastrophe crossroads

NATURAL DISASTERS BELTED PARTS OF AUSTRALIA AND NEW ZEALAND THIS SUMMER. As affected

people of Queensland and Christchurch begin to rebuild their lives, and governments and insurers tally up the

costs, there has been speculation about whether this episode of nature’s fury warrants a domestic catastrophe

bond market. MIRANDA WARD reports.



It will be some time until reinsurers determine whether the earthquake that hit

Christchurch on February 22 was a standalone seismic event, or an aftershock from the quake that rocked the city in September 2010.

In other words, it will take weeks to determine who, be it reinsurance companies or the New Zealand Government, has to foot the multi-billion dollar damages bill.

Similarly, the Australian Government is embroiled in controversy over its one-off levy to fund the restoration of towns and cities damaged by summer flooding in Queensland.

This has spurred major reinsurers to call on the Australian government to think long-term and issue catastrophe bonds instead of slugging taxpayers each time Australia is hit hard by a natural disaster. But is Australia suited to this form of insurance securitisation?

As the nation’s population increases and becomes concentrated in major cities and the eastern seaboard, the potential human and economic impact of a natural disaster hitting these highly populated areas – which are areas of productivity and wealth – is rising every decade, says John Seo, managing principal at the Connecticut-based catastrophe bond specialist, Fermat Capital Management.

Seo says a natural disaster becomes a human catastrophe when people “clump up” in an area, and with more than half of Australia’s population living in major cities – 68 per cent of the population, according to 2006 census data – we are running out of time before the “big one” hits.

Likening the need for a consistent governmental approach to insurance and reinsurance with

national defence, Seo says it would be a real shame for Australia to dismiss catastrophe bonds as unnecessary once the shock and impact of the current crises blow over.

“It takes a crisis to reveal underlying structural issues, and you hope that those issues get addressed and fixed long after the crisis has passed,” he says. “That’s the crossroad Australia is at.”

If this problem doesn’t get solved this time around, Australia will have to wait until the next, potentially worse, crisis. And it’s too late to seek the coverage after the crisis has struck.

This is why Mark Senkevics, the head of Swiss Re in Australia and New Zealand, is calling on the

Australian government to adopt a more “pre-emptive approach to financing disaster relief ”. He has suggested the government cover the rising damages bill through the use of insurance instruments like catastrophe bonds as opposed to one-off disaster levies.

“We would like to see some form of insurance from government rather than a levy after the event,” he says.

Swiss Re has estimated that the Christchurch earthquake in February will cost the insurance

industry upwards of US$6 billion. The re-insurer has also estimated its own claims for the earthquake, net of the benefits of retrocession, to be around US$800 million before tax. Turning to the Queensland floods, Swiss Re has estimated claims, net of the benefits of retrocession and before tax, to be US$325 million. For claims relating to Cyclone Yasi, Swiss Re has estimated it will be liable for US$100 million.

The Insurance Council of Australia says that at the beginning

NZ quake fund skates on very thin reserves By David Chaplin

New Zealand’s earthquake disaster relief fund could be completely drained following the fatal quake, measuring 6.3 on the Richter Scale, that flattened large swathes of central Christchurch on February 22. The Earthquake Commission (EQC) was already releasing about NZ$1.5 billion ($1.1 billion) of the $4.4 billion disaster fund to pay for claims generated by the 7.1 quake that caused widespread destruction in Christchurch last September.The latest New Zealand government accounts to the end of January this year show the EQC had budgeted for insurance claims amounting to just over $1.78 billion from the September event.While the fund itself must meet the first $1.1 billion in claims it had reinsurance in place up to a further $1.85 billion.The EQC covers residential homeowners up to a value of $74,000 per claim. Owners who had been paid out after the September quake would be able to claim again if their homes sustained fresh damage following the latest catastrophe.According to latest government estimates, about 10,000 Christchurch homes would have to be demolished while a further 100,000 required some level of repair as a result of the February earthquake.If the latest round of claims exceeded $2.95 billion ($1.1

billion from the fund plus $1.85 billion from reinsurers), the EQC would have to dip into its remaining capital, which would amount to about $2.22 billion of New Zealand fixed-interest investments.Last year Phil Jacques, EQC chief financial officer, told Investment Magazine’s sister publication, I&T News, the fund would first sell-down its $1.26 billion global equities portfolio to meet claims.While EQC would not comment, it is understood the global equities sell-down had almost been completed. AXA’s annual accounts to the end of December last year, for example, reveal the EQC redeemed its $237.3 million global equities mandate with AllianceBernstein to cover costs incurred by the September earthquake.The EQC also had global equity mandates with State Street Global Advisors, Tweedy Browne, T. Rowe Price and Capital International.The remaining 70 per cent of the EQC portfolio was chiefly invested in a range of New Zealand government securities, including about 20 per cent in inflation-linked bonds.Russell acts as investment adviser to the EQC fund.EQC collects about $66.6 million in levies each year but New Zealand Prime Minister, John Key, said that figure could triple next year to replenish the disaster fund.

John Seo ... on the lookout for the ‘big one’

It takes a crisis to reveal

underlying structural

issues, and you hope

that those issues get

addressed and fixed

long after the crisis

has passed. That’s the

crossroad Australia is

at”


of February, 43,255 flood claims had been received, and $201 million had been paid to policy holders after assessing 77 per cent of the initial claims.

But not everyone in the industry is so positive that there is a viable market in Australia for catastrophe bonds. Ryan Bisch, a senior associate with Mercer Investment Consulting, questions the need for a catastrophe bond market in Australia.

So far, reinsurers in Australia have not needed to issue ‘cat’ bonds to reduce their exposure to natural disasters. But this could change if more people buy insurance against the type of high-intensity, low-probability events, such as earthquakes.

“If the need for insurance increases significantly, and the number of insurance companies buying reinsurances increases, then there is definitely a market for catastrophe bonds in Australia.”

Bisch says losses incurred by reinsurers could cause this, as recent events in Australia and New Zealand could drive the price of reinsurance and therefore insurance to increase significantly. Limited capacity from some reinsurers to absorb more risk could add to demands for a catastrophe bond market in Australia.

This is the general pattern in

most of the global insurance and reinsurance markets, says Chi Hum, managing director of Guy Carpenter Securities, a reinsurance broker.

“When something happens, the reality of the event sinks into the market; more people want to buy, pricing goes up, capacity can’t meet the demand,” Hum says.

“That happened in the US, post-Katrina.”

However, Seo says the recent natural catastrophes alone will not cause any future the price increases. Rather, he says, the events will have accelerated the inevitable rise of insurance costs.

To date, Australia and New Zealand have been accessing reinsurance at cost price – making it a bargain buy.

“The general consensus is that the markets down in Australia and New Zealand was getting its reinsurance very cheap, close to cost and some would say even below cost,” Seo says.

However, this lack of rent on insurance monies will be something of the past as, inevitably, more capital must be held against incremental increases in risk.

“So all these things are kind of changing. The era of cheap reinsurance is probably over and recent, unfortunate events down in Australia and New Zealand only helped to precipitate that.

“But it was ending anyway: it accelerated and punctuates the break with the old regime.”

Seo says everybody will have to learn to deal with higher charges on capital, saying goodbye to bargains – and this will make companies look into the realm of catastrophe bonds.

A catastrophe bond market would open up more capital to the insurance market by allowing reinsurers to offload some of their exposure to ‘perils’ to cat bond managers. Nephila Capital, a specialist manager in this space, views catastrophe bonds as a useful function in areas prone to natural disasters.

“Catastrophe bonds or other similar ways of taking that risk and spreading it over the reinsurance market, rather than just the insurance market, can be a very useful solution to places that have more catastrophe risk then they can comfortably digest,” says Nephila’s Barney Schauble.

“And then, obviously, on the other side of it, there’s investors in Australia who are investing in this type of risk as something that’s a non-correlating diversifying risk in their investment portfolio. I think there are two sides of that market and it offers something to both sides.”

Catastrophe bonds have always been more viable in areas where the capacity for insurance and re-insurance was limited; therefore the demand for catastrophe bonds was there.

Hannover Re’s senior

Ryan Bisch ... So far, reinsurers in Australia have been able to absorb the risk

Even though there are

some ongoing projects

to develop flood, hail

and bushfire models

for Australia and

New Zealand, when

those will be finalised

and accepted by cat

bond investors is not

foreseeable for the time

being”


underwriter, Axel Wichmann, says the peak areas of the US and Europe, such as Florida’s hurricane-prone coast, have always had a viable catastrophe bond market as their traditional insurance and re-insurance markets were not very efficient. In Australia, insurance pricing has been a deterrent for catastrophe bonds.

“It has always been a function of price as to why cat bonds haven’t been as popular or widespread in Australia as in other regions,” Wichmann says.

Traditional reinsurance has been preferred in Australia, according to Munich Re’s head of risk trading, Rupert Flatscher, because of the more “attractive” costs and broader coverage of natural disasters

“In the past, the gap between traditional reinsurance and cat bond prices was the main reason why we have not seen any cat bonds in Australia issued by Australian sponsors.

“The traditional insurance capacities for Australian natural catastrophe perils were not scarce in the last years.”

Whether or not there is currently enough reinsurance capacity is quite unclear for Nephila’s Barney Schauble, who says a catastrophe bond market is definitely viable but it comes down to the question of capacity.

“I’m sure that if Australia – either on a governmental level or at the level of individual companies – if it decided to go and buy protection in the catastrophe risk market, I’m sure it’s something that could be executed. It’s more of a question of whether they need the additional capacity available from that marketplace.”

Catastrophe bonds have also been less attractive in Australia due to the types of perils Australia faces: cyclones and storms, earthquakes,

floods, hail storms and bushfires. Even though external catastrophe models used by cat bond managers are available for Australia and New Zealand cyclones, storms and earthquake, the bonds don’t traditionally cover flood, hail storms and bushfires. This is left to the traditional insurance market.

“Even though there are some ongoing projects to develop flood, hail and bushfire models for Australia and New Zealand, when those will be finalised and accepted by cat bond investors is not foreseeable for the time being,” says Flatscher.

Flatscher sees catastrophe bonds becoming more attractive for Australian insurers, especially the three leading Australian insurers – IAG, QBE and Suncorp – as the domestic insurance market seems to have hardened as a result of the Queensland floods, Cyclone Yasi and the Christchurch earthquakes.

“The Australian and New Zealand cat bond market can definitely develop to an attractive niche market for sponsors and investors,” he says.

But the CEO of Suncorp, Patrick Snowball, is confident reinsurance capacity won’t be an issue for the Australian insurance market, although he echoes the pricing concerns aired by Bisch at Mercer.

“The reinsurance market is a global market, and actually until quite recently Australia really hasn’t registered on the Richter scale of reinsurance demand,” Snowball says.

“I don’t believe there is an issue with capacity, I’m certain there will be some more horse trading over price.”

Suncorp is handling over 100,000 natural catastrophe claims – arising from floods,

Cyclone Yasi and the September 2010 Christchurc h earthquake – totalling $2 billion dollars in natural catastrophe claims since September last year. It remains to be seen whether the insurer will be subject to further claims from the February earthquake, or tremor.

Barney Schauble ... there is scope for an Australian catastrophe bond market

Not the ‘big one’, but Japan’s one-in-20-year quake is bad enough

By Miranda Ward

Although it is still too soon to tell with any certainty, the Japanese earthquake in March is likely to trigger “one-in-20-year” losses on the Japanese portion of the catastrophe bond market, according to managing principle at catastrophe bond specialist Fermat Capital Management, John Seo.As the death toll from the 9.0 magnitude quake, the resulting tsunami and aftershocks continued to climb, and as Japan faced one of its bleakest moments, the catastrophe bond market was focused on several minor issues, among them the two Japanese earthquake bonds potentially affected by the event – the Vega Re 2010 bond series and the Valais Re issue.Speaking three days after the big quake, and shortly before Investment Magazine went to press, Seo explained the Vega Re 2010 bond had a “parametric index trigger”, meaning that it was activated by the level of ground movement recorded at more than 4,200 distinct coordinates of land across Japan.“Initial assessment indicates that the location of the quake, some 450km north-east of Tokyo, occurred in a remote enough area to pose a minor threat to this bond,” Seo said. “What this means is that while we expect it is highly unlikely this bond will experience a principal loss from this event, it is likely to

experience a relatively modest mark-to-market loss.”Valais Re, the second bond possibly affected by the natural disaster, had an “indemnity trigger”, which Seo explained is directly related to the actual insurance losses experienced by the issuer from this event.“While this is a relatively small bond issue and not widely held by investors, it will be some time before the actual losses of the issuing reinsurer are calculated to determine whether the bond was triggered,” Seo said.These most recent events in Japan will likely result in higher insurance premiums in the region as insurers seek coverage over the coming year, he said. The extent to which they rise will be determined by the final damage costs, as well as the public-private dynamics in the Japanese insurance system, which has a “complex, tripartite public-private-cooperative structure”.The cat bond market shouldn’t rest easy: based on early estimates of the damage, the total insurance losses look set to be a one-in-20-year event, which may mean new cat bond supply from the Japanese market in the near future. “So it’s not the ‘big one’, or a one-in-100-year event for Japanese cat bonds, but this is potentially something closer to the big one for the local insurance industry and certainly a significant human tragedy,” Seo said.

Matthew Cobon

For Australian investors looking

to invest in global markets, one

of the most important decisions

over the last decade has actually

been a call on something far

closer to home, the Australian

dollar, writes MATTHEW COBON,

fixed income specialist at

Threadneedle.

The decision to sell the Australian dollar (AUD) and buy foreign currency

to purchase overseas assets, or to defend against Australian dollar strength by hedging currency risk, is an important one which has had a significant impact on returns – and will probably continue to.

Looking at returns in the 12 months to the end of February, the S&P500 index returned just shy of 23 per cent in US dollar (USD) terms. The decision to sell Australian dollars and not to hedge against AUD strength would have shrunk those gains to just under 5 per cent.

Similarly, an unhedged exposure to the FTSE 100 index in the UK would have generated 5 per cent returns, versus a local currency return of just shy of 20 per cent.

Now, as the AUD currently sitting within a hair’s breadth of all-time highs against the USD, is it the time to re-enter the international markets on an un-hedged basis?

Since March 2001, the total return of holding a long AUD versus USD forward position, including carry, has been an average of 9.81 per cent each year. Holding a passive long AUD/USD exposure as a standalone investment strategy would have generated a Sharpe ratio of 0.69, a number that would compare well with many active funds managers’ returns and risk

profiles. Within this period of positive

long-term returns, there have been times of extreme volatility. During the financial crisis of 2008, the AUD dropped spectacularly in a

37 per cent peak-to-trough decline against the USD (see chart 1).

STRUCTURAL SUPPORTS

The primary reason for the trend of AUD outperformance in

the last decade is attributable to the huge improvement in the terms of trade and the generally higher level of domestic interest rates in Australia.

The terms of trade mirrors the movement in the real effective exchange rate (see charts 2 and 3). The Reserve Bank of Australia (RBA) frequently uses these two factors as justification for a sustainably higher AUD. It’s true that trend appreciation of the AUD can’t be attributed to relative productivity differentials: with regard to AUD/USD, Australian productivity has generally been weaker than the US at least for the last decade or so.

In order for the AUD to continue posting positive returns (and therefore require hedging

Make the most of our dazzling dollar

Source: Bloomberg

Chart 1

Source: JPMorgan and Bloomberg

Chart 3

Source: Australian Bureau of Statistics

Chart 2


Since March 2001, the

total return of holding

a long AUD versus

USD forward position,

including carry, has

been an average of 9.81

per cent each year

by Australian investors), several conditions need to continue to be satisfied.

Firstly, global demand for Australia’s commodity exports will need to continue, sustaining these record-high terms of trade. While global growth is likely to remain supportive in general, inflationary pressures, especially in emerging markets, will probably compromise the sustainability of easy global monetary conditions.

For this reason, the market will be watching the path that policy makers in Asia, and especially China, take during 2011. China has already begun tightening monetary conditions and we are likely to see additional policy measures to try and reign in the increasing inflationary conditions.

Chinese consumer-price inflation printed 4.9 per cent in January 2010, and further gains are expected. Despite its moves to tighten monetary policy, its current

central bank deposit rate is only 3 per cent, which implies real interest rates are still -2 per cent.

Predictions about China’s economic growth are an integral part of forecasting the strength of the AUD. China is now Australia’s largest merchandise export partner, receiving 23.1 per cent of our total exports. Iron ore and coal make up two-thirds of the total value of exports. China is also an important source of foreign direct investment into Australia, investing $9.1 billion in 2009. Leading indicators do show at least some sign of moderation and have tended to correlate with the AUD/USD relationship broadly over time (see chart 4).

The RBA is more advanced in its domestic tightening cycle than most of the central banks in developed economies. Since rates

troughed at 3 per cent in 2009, the RBA has cumulatively hiked by 1.75 per cent, and the market currently expects approximately 0.5 per cent in additional tightening.

In our view, the impetus from widening interest rate differentials and the AUD are probably close to their peak levels in our view (see chart 5). The AUD/USD has been closely aligned to movements in short-term interest rates over the last year, with a weekly correlation of 0.57. Should global yields normalise further, this would reinforce the case for a correction in the AUD/USD rate.

The path of the AUD is unlikely to be straightforward in 2011. Given this uncertainty, it is difficult to advocate an Australian investor buying foreign assets fully unhedged.

There are obvious headwinds

and risks to the AUD strength and the global outlook, but there are still many important supportive factors for the AUD. Barring a sudden shock to global growth, Australia’s terms of trade will continue to hold firm for the foreseeable future as the impact of the Australian floods come through.

Given the risks and uncertainties in global markets, and a more balanced outlook for the AUD/USD than in previous years, a more dynamic view on currency is likely to reap rewards this year.

The AUD is unlikely to offer the type of risk/return characteristics it exhibited in the past 10 years, but importantly it does offer the highest yields available in the developed world to foreign investors. In their dynamic allocations to the AUD, investors should monitor short-term interest rate differentials, movement in commodity prices and general terms of trade, and global and regional growth trends together with market-related factors such as the size of positions held by the market in the AUD.

The long-term picture for the Australian dollar is much more mixed. The fantastic gains of a once-in-a-generation terms of trade shock have been largely redistributed to the population through lower tax rates, while Australia has reported lower productivity gains than many other developed countries. A ‘buffer’ fund to invest some of these windfall gains in future generations, similar to the Norway sovereign wealth fund, seems a very sensible option and one that would likely smooth out the extreme gains and losses of the AUD over the recent commodities super-cycle.

Source: Bloomberg, Goldman Sachs, National Bureau of Statistics China

Chart 4

Source: Bloomberg

Chart 5


There are obvious

headwinds and risks

to the AUD strength

and the global outlook,

but there are still many

important supportive

factors for the AUD.

Barring a sudden

shock to global growth,

Australia’s terms of

trade will continue

to hold firm for the

foreseeable future as the

impact of the Australian

floods come through

Research is in our DNA.And in our alpha.Fundamental, bottom-up research has been at the core of the Janus investment process for over 40 years. Our intensive, first-hand approach to evaluating companies enables us to invest with conviction in our best ideas and to seek consistent results for our clients. Janus’ research team managed Global Research Growth strategy has delivered positive alpha relative to our benchmarks over every sector since inception.

6.8%

3.2%

5.2%

11.3%

8.7%

18.3%

7.9%8.6%

3.2%

-0.8%-0.3%

5.8%

4.0%4.4%

15.1%

9.0% 9.0%9.8%

5.0%5.8%

6.8%

20%

15%

10%

5%

0%

-5%

Since Inception Annualised Total Returns (01/04/05 - 31/12/10)

Issued in Australia by Janus Capital Asia Limited (ARBN 122 997 317), which is incorporated in Hong Kong, is exempt from the requirement to hold an Australian financial services licence and is regulated by the Securities and Futures Commission of Hong Kong under Hong Kong laws which differ from Australian laws. This document does not constitute investment advice or an offer to sell, buy or a recommendation for securities, other than pursuant to an agreement in compliance with applicable laws, rules and regulations. Janus Capital Group and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this presentation and do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regards to the results obtained from its use. As with all investments, there are inherent risks that each individual should address. Past performance is not a guarantee of future results. There is no assurance that the investment process will consistently lead to successful investing. For wholesale client use only.

DL0111(1A)0511.Aust.Ad

Performance of Janus Global Research Growth Equity sector teams, as of 31 December, 2010. There is no assurance that the investment process will consistently lead to successful investing. Base returns do not include fees. They reflect the underlying securities’ close-of-day share price and may differ from actual returns due to equity only analysis and end of day valuation. Base return measures the impact on the relative performance from selecting stocks within a particular group. Source: Janus, Wilshire Atlas

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The National Pension Service (NPS) of Korea will outsource 26 trillion Korean won – the equivalent of $23 billion – to external funds managers this year as it moves towards its 2015 strategic asset allocation (SAA), which will see a dramatic increase in equities and alternatives.

The fund’s long-term SAA sees domestic equities shifting to more than 20 per cent, from its current 15.9 per cent allocation, and by 2011 the fund aims to have that allocation sitting at around 18 per cent of the fund, the head of institutional networks and communications at the NPS, Ha-Young Kim, said.

The other major shift will be in the alternatives allocation, shifting from the 2010 allocation of 5.5 per cent to 7.8 per cent at the end of this year, and ultimately to more than 10 per cent by 2014.

International equities will move from 6 per cent to more than 10 per cent. “The essence of our strategy is diversification, moving from domestic fixed-income to overseas investments and alternatives,” Kim said.

The fund currently employs about 19 equity funds managers, and has 28 alternatives relationships, and ultimately will outsource about 100 trillion Korean won, or about one-third of all assets.

Kim said it is expected the total size of the fund will be 336 trillion won by the end of 2011.

Internally, the NPS has eight departments of direct investment management, and last year was on a recruitment drive.

The external funds management team, which manages all relationships with external managers and is responsible for manager selection, sits within the investment strategy department.

Boon for managers: Korea fund outsources billions

Asset class 2010 2011 2015Domestic fixed income 68.1% 63.5% <60%Overseas fixed income 4.2% 4.1% <10%Domestic equities 15.9% 18% >20%Overseas equities 6% 6.6% >10%Alternatives 5.5% 7.8% >10%

By Amanda White


Emerging markets offer

compelling long-term return

potential, but continue to present

risks that every investor should

understand. NORIKO KUROKI,

of the emerging markets equity

team at J.P. Morgan Asset

Management, discusses the risks

inherent in emerging markets

and looks at the effect they have

had on economic and investment

performance.

There are two macroeco-nomic trends – globalisa-tion and urbanisation

– which mean that, for long-term investors who are aware of the risks, there is considerable reason for optimism about emerging markets.

THE FUNDAMENTALS

DRIVING EMERGING

MARKET EQUITIES

First, it is worth restating the two fundamentals driving the development of the emerging markets asset class.

The first is the rebalancing of the world economy from the extreme concentration of economic power typified by the creation of the G7 (the group of seven industrialised nations) in 1976, which meant that by the end of the Cold War in the early 1990s the developed world of North America, western Europe, Japan and Australasia, about 12 per cent of the world’s population, represented 77 per cent of global GDP. It is this extreme degree of economic imbalance that is unusual, not the more balanced world we are moving back towards (see Exhibit 1).

The second key driver is urbanisation – the continuing move of population from the countryside to cities–which drives both productivity and consumption. About 50 per cent of the world’s

6.8 billion people currently live in urban areas. However, more than 95 per cent of the population of developed countries is already in urban areas. In consequence, close to 100 per cent of the productivity and consumption growth derived from urbanisation lies in the emerging world, sustaining faster economic growth.

STRATEGIC RISKS

TO MONITOR

Having described the key positive drivers, the risks should be examined, and specifically at why many of the emerging nations of 100 years ago are still emerging today. There are two key reasons: revolution (or political upheaval) and inflation. Exhibit 2 lists the 10 largest emerging markets and highlights their experience with these two destructive phenomena.

The economic consequences of political revolution are clear, with the Russian and Chinese examples of the 20th century not requiring further elaboration. Many countries in the emerging world have witnessed less well-known but equally damaging political upheavals, which make political and legal institutions less reliable and predictable than in the developed world.

The impact of inflation is

less obvious but more pernicious in preventing development and especially in perpetuating poverty. Over the last 100 years, Brazil has grown on average at 4.9 per cent in real terms. This is considerably better than the US, which grew at 3.5 per cent over the same period.

However, Brazil remains an emerging market, while the US is the world’s leading economy. Unlike most of the top 10 emerging market countries, Brazil, despite periods

of military rule, has not suffered from political revolutions, partition or war. Consequently, it should be a candidate for graduation from emerging to developed status.

The reason that Brazil has not emerged is inflation. From 1958 to 1968 and again from 1975 to 1994, Brazil suffered from high and even hyper-inflation. In only 12 of the last 65 years has inflation been below 10 per cent, and seven of those years have come in the last eight years. It is this change from high to low inflation that has allowed the Brazilian market to return 16 per cent a year since 1995: twice the return from each year of US equities over the same period.

Inflation increases inequality, impoverishing the majority of the population. It also undermines

Emerging markets: understanding the risks


1

Exhibit 1 – The really big picture

Source: J.P. Morgan Asset Management, Angus Maddeson 2001, IMF as at end 2009, GDP in PPP terms

1820 1913 Today

North America Developed Asia Europe Emerging markets

Emerging markets’ rising share of global GDP

The impact of inflation

is less obvious [than

revolution], but

more pernicious in

preventing development

and especially in

perpetuating poverty

Noriko Kuroki

currency values, explaining why for most of the last 100 years emerging market currencies have been weak against G7 currencies.

In consequence, the biggest financial risk that investors face in emerging markets is a return to an environment of fixed exchange rates and high and rising inflation. J.P.Morgan expects average inflation in the emerging world to be 5.5 per cent over the next five years, based on internal macro-economic work.

If that assumption is correct then, except for individual countries such as Venezuela, the inflation risk in emerging markets is low and on a completely different scale to that experienced in the period from 1970 to 2000.

Therefore the two strategic risks that need to be understood and monitored are political upheaval (which leads to the appropriation of assets via revolution as in Russia, China, Turkey, Egypt, Chile, Cuba, Iran, Algeria and Vietnam, among others), and inflation (which destroys the real value of assets, as seen in Argentina, Brazil, Zimbabwe, Russia and Indonesia). Political risk need not be as dramatic as some of the revolutionary examples given, but may involve an undermining of the rule of law and a pervasive culture of bureaucratic and corporate corruption that siphons wealth from shareholder to domestic powerbrokers. As such, monitoring of political risk should be broadened to governance in general rather than just revolution.

TACTICAL ISSUES

Alongside the two strategic risks are the two tactical issues that should inform any equity investment, emerging or developed:

earnings and valuation.Over the last 10 years, emerging

market debt has re-rated, reflecting a dramatic improvement in credit quality as the asset class approaches investment grade. Equities, in contrast, trade at levels similar to those of a decade ago, meaning emerging market equities currently appear cheap against emerging market debt.

On an earnings and asset basis, emerging market equities also appear to be trading close to long-term averages.

The great difference between bonds and equities is that the former trade on perceptions of solvency, the latter on perceptions of future profitability. Valuation is therefore not a concern on a tactical basis as long as market expectations for earnings and dividend growth are not unrealistic.

Following the cyclical collapse of 2008, earnings have grown very strongly, with the market returning over 20 per cent in 2010. More important for future returns is the long-term outlook for earnings per share, which is the return enjoyed by shareholders rather than the GDP growth that most commentators focus upon.

The emerging markets equity team at J.P. Morgan Asset

Management currently expects average earnings per share growth for the companies covered to be over 15 per cent a year for the next five years. If this expectation is right then the combination of earnings per share growth at twice the global level, modest currency appreciation and a current dividend yield of 2.5 per cent (likely to grow at 12 per cent per annum) should give investors an attractive return from these levels over the next five years.

The emerging markets story is by no means without risk, including the strategic risks of governance and inflation and tactical risks around earnings growth and valuation. J.P.Morgan’s current view on these risks is summarised in the table above.

However, for investors who are comfortable with these risks, there is considerable reason for optimism around emerging markets, driven by global rebalancing and by the long-term urbanisation trend, which is spurring dramatic improvements in productivity and consumption.


Exhibit 2 - Ten largest emerging markets: Revolution and inflation


2

Proportion of the MSCI All-Countries

World Index (%) Revolution Inflation China 2.47 1911, 1937-1949 1990-1995

Brazil 2.14 1979-1993

Korea 1.80 1910, 1945, 1950-53 1998

Taiwan 1.45 1911, 1949

India 1.08 1947

Russia 0.84 1917-1922, 1991

Mexico 0.57 1910 1980-1988

Malaysia 0.41 1963-1965

Indonesia 0.31 1945-1949 1998

Chile 0.24 1973 1970-1975

Turkey 0.24 1918-1923 1973-2004

Thailand 0.22 1998

11.76

Exhibit 3 – Ten largest emerging markets: Revolution and inflation

Source: MSCI, World Bank, IMF, CIA World Factbook


4

Governance risk

Low at the national level among the larger countries.

Ever present at the stock level, although rising average ROE suggests

a positive trend.

Inflation

Low by historical standards but cyclical pressure is upwards.

Currency flexibility and economic orthodoxy are key to continued

success.

Valuation

In line with historic averages, although high relative to developed markets.

Wide company and sector variance makes stock selection crucial.

Earnings

A strong cyclical recovery is being followed by robust secular growth.

Reduced dependence on G7 trade gives greater confidence in the sustainability of

EPS and DPS growth rates.

STRATEGIC

TACTICAL

Exhibit 3 - Brazil inflation 1949 – 1979


3

Exhibit 4 – Brazil inflation 1949 – 1979



Source: J.P. Morgan Asset Management



SINCE 1886

MASTER CHANGE

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By 2015, the $53 billion OMERS

expects to be managing all its

investments in-house, with each

business unit doubling in size

in the process. AMANDA WHITE

reports.

An ambitious investment plan to move to a strategic mix of 53 per cent public

equities and 47 per cent private investments, coupled with a move towards 100 per cent in-house management and attracting third-party investors to the organisation, means OMERS will need to create a business of choice for employees.

Not only will it need more investment professionals, but also it will need the best. The fund already employs a hoard of people. Its real

estate business is an operating company so there are more than 1,000 people employed, and its infrastructure business has about 60, private equity about 40, and capital markets about 150. It has offices in Toronto, Calgary, London and New York, and an Asian office is expected soon.

CIO Michael Latimer says as part of the fund’s 2015 strategic plan, all businesses will double in the next couple of years.

The fund’s long-term asset mix is set by the board against an asset liability study, with the next strategy session set for April, and within these parameters management can determine where investments can be allocated.

While other funds are clearly

favouring particular asset classes, Latimer says that OMERS is focused on “building all our books”.

“Anything we are building is scaleable. We want to attract more capital, because the quality of the assets we are interested in requires more significant dollars. To diversify our risk we want to get the opportunity to get world-class assets,” he says.

A few years ago OMERS revamped its investment operations and applications group, which involved building its own systems. Latimer puts a lot of credence on this platform in building the fund as a third-party provider.

The strategy to attract capital and become a third-party provider of investment services for other

pension funds has a number of elements:

•Thereisthedomesticcapital raising – through OMERS Investment Management – which attracts domestic pension funds to OMERS. This was initiated about seven months ago, and Latimer says he expects success in the back half of this year;

• Additionalvoluntarycontributions, whereby the fund is tapping current membership to bring external mandates to the fund; and

• OMERSStrategicInvestments, which is in the process of forming an alliance of like-minded co-investors committing up to $20 billion to be invested over five years in large-scale assets.

OMERS aims for total in-house

Exchange-traded funds might

have stolen some of their airtime

of late, but the managed account

industry is reasserting itself with

the resurrection of its industry

association. MICHAEL BAILEY

reports.

It’s generally agreed that the amount of money in managed accounts is growing in Austral-

ia, although nobody is sure exactly how much is in these alternatives to managed funds.

Nevertheless, managed account consultant Toby Potter is confident enough in their prospects to have helped revive the Institute of Managed Account Providers (IMAP).

Unlike the well-intentioned voluntary organisation of old, IMAP version two will have a permanent executive officer, and serious sponsorship from the likes of prominent managed account administrator, OneVue. Its chair, former BNP Paribas Securities Services boss Gail Pemberton, will also sit at the head of the IMAP board table.

However in today’s financial services industry, a prerequisite for real lobbying clout is an accurate picture of how big your patch is. Just ask the self-managed super lobby – is there a politician in Canberra that doesn’t know there are 429,000 SMSFs in existence, commanding more funds under management than any other super industry sector? Hence, the do-it-yourself crowd got pretty much everything it wanted out of the Cooper Review implementation, including a big watering down of initial proposals to ban art and collectible investments.

IMAP recognises that data equals power. The first job of the

relaunched association will be a questionnaire of all the major providers, to try and provide some gauge of the volume of assets in the sector, and the way they are being managed.

We do know that managed accounts come in one of two major forms - a managed investment scheme (MIS) structure requiring a product disclosure statement, or through a managed discretionary account (MDA) structure including a contractual relationship.

“While it’s a generalisation, MIS are generally offered by funds managers like BlackRock and Aviva, and MDA by dealer groups,” Potter says.

For instance both OneVue and the new kid on the block, HUB24, have a single cash account to receive inflows, but OneVue is bound by a product disclosure statement while HUB24 works via a contract with each of its dealer group users.

The providers can offer individually managed accounts, where investors retain beneficial ownership of their shares but are grouped with others.

Potter has identified a number of primary drivers in the development of managed accounts, both to date and into the near

future:•Independentplatforms

focused on portfolio management;•Developmentbythe

mainstream platforms and specialist technology companies of portfolio management tools;

•Frozenfundsasaresultoftheglobal financial crisis and, generally, disappointment with funds’ results;

•ContinuedgrowthoftheSMSF sector – the chief executive of OneVue, Connie McKeage, estimates 70 per cent of flows through its managed account administration platform are from self-managed superannuation funds;

•FutureofFinancialAdvice(FoFA) changes the government has announced which will substantially erode traditional revenue models for advisers; and

•Increasedfocusonafter-taxreturns.

PLANNERS AND THE

MANAGED ACCOUNT

The part of the industry with the most to gain from the rise of the managed account is unequivocally the financial adviser, according to Potter.

“It gets them out of being the

distribution arm of the platform business, and into the investment advice business,” he says.

“With the FoFA reforms rolling through, the advisers that are going to survive and prosper are those that can have a different type of conversation with their clients. Using managed accounts allows the adviser to position themselves as the active manager looking after the portfolio.”

Potter said dealer groups were developing investment committees of ever greater sophistication. He cited Snowball, to whom he consults, as an example – its investment committee includes outsiders such as former Counterpoint asset consultant, John Parrish, and Select Asset Management executive Dominic McCormick.

“The days of advisers saying ‘take five managed funds and see me in the morning’ are over,” Potter says, and predicts big ramifications for the asset management industry as we’ve come to know it.

“There will be no more manager number 137 of Australian equities. There will be no more dealer group approved product lists with 15 Australian equity large cap managers, where number 15 gets 3 per cent of the money. It will be number one manager getting 100 per cent of the money,” he says.

“Managed accounts will help facilitate dealer groups having fewer, deeper relationships with managers.”

Sitting at the helm of a platform which last month added nine investment options to take its total to 119, it’s not surprising that Brian Bissaker, CEO at Colonial First State (CFS) disagrees.

“I’ve heard managed accounts talked about as the ‘next big thing’

Managed account providers get organised

Toby Potter ... MAs allow dealer groups fewer, deeper manager relationships

Connie McKeage ... 70 per cent of OneVue MA inflows are from SMSFs

distribution Investment MagazineApril 2011 51

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distributionApril 2011Investment Magazine52

for the last 15 years,” Bissaker said last month at an event for the FirstChoice Wholesale platform, announcing a drop in its minimum investment from $100,000 to $1500, and entrenching the unit trust as Colonial’s weapon of choice in breaking through to the mass ‘Mum and Dad’ superannuation market.

“There will always be a small proportion of advisers for whom managed accounts are the right way to go, but I just think it’s too big a leap for many. They’ve got so many other balls in the air – asset allocation, tax, estate planning – do they really want direct shares to worry about as well?” he asked.

“Because you can bet the clients who take up [managed accounts] are going to have a view on the shares. You can just see them saying, ‘hey I notice there’s Gunns in there,

what’s Gunns doing in there?’ that kind of thing. Then you’ve got the [individually managed accounts] with the screens where you can knock out stocks – it just becomes a big compliance risk for the adviser and the dealer group.”

CFS’ head of distribution, Marianne Perkovic, observed

that exchange-traded funds had become a much hotter topic among financial planners than managed funds.

CFS does allow advisers to plug third-party managed account functionality into its FirstWrap wrap offering (the minimum of which was also slashed last month, from $250,000 to $20,000),

FUNDS MANAGERS AND

THE MANAGED ACCOUNT

Melbourne-based boutique SG Hiscock is one of the few funds managers whose name is recognised for both institutional mandates and managed accounts.

After all, ‘IMAs’ and ‘SMAs’ are acronyms greeted with disdain by some managers, especially those less familiar with retail distribution trends. Some managers are loath to have their name attached to a

portfolio for which they are not physically dealing. Most fundies worth their salt would still consider their dealing desk as a value-add.

There is also a belief that providing a portfolio update ‘feed’ to a managed account administrator is a less profitable business than managing the money oneself.

However both these concerns are countered by Tim Wood, the assistant portfolio manager for SG Hiscock’s survey-topping concentrated Australian equity fund, SGH 20.

SG Hiscock provides three model portfolios to OneVue’s SMA engine, including the SGH 20, and says the service is just as profitable as the boutique’s retail unit trusts, which outsource administration and responsible entity chores to Equity Trustees.

Today, these feeds into managed

Darren Pettiona ... don’t view managed accounts in isolation

accounts speak for a tiny fraction of the boutique’s $2 billion-plus under management, but Wood is confident his firm has “gotten in early with three providers who will be strong in the market for a long time”.

Wood’s feeling is that a OneVue or a HUB24 will never have “hundreds” of different model portfolios – at least not in Australian equities, anyway – so it will pay off to have established a relationship early.

Handing over the trading responsibility is not a concern for SG Hiscock, either. While Wood is proud of the SG Hiscock dealing desk and its addition to performance, he says it would not be practical for the boutique to trade on small SMA-sized parcels of shares in any case.

Because the shares in an SMA

are held directly in the client’s name, getting an individual portfolio ‘set’ might also involve trading against what the firm’s larger portfolios are doing on any given day, creating a conflict of interest, Wood says.

The fund manager observes that managed account technology has finally “caught up to where it needs to be”, and says the three SMA providers to which SG Hiscock provides portfolios now implement the trades the next day.

Wood does not necessarily agree with the bold prediction from HUB24 founder and director, Darren Pettiona, that managed accounts will render broad market Australian equity unit trusts obsolete within a couple of years.

“I think both have their pros and cons – there are certainly still asset classes and [Australian equity] sectors which you cannot access

through an IMA or an SMA. We just think it’s good business to be able to service several channels.”

THE LOWDOWN ON IMAP

Apart from OneVue, the other principal sponsors of the Institute of Managed Account Providers are IRESS (which offers its own managed account administration solution), and two providers of model portfolios – Lonsec, which to date is better known for its fund ratings capabilities but has recently established a portfolio construction division, and Ralton Asset Management, one of those names all but unknown in the institutional space, yet which has a 10-year history of offering its Australian equities stockpicking capabilities through separately managed accounts.

HUB24’s Pettiona says

he will support IMAP and its mission to educate advisers and funds managers on the benefits of managed accounts. However he cautions the institute will struggle for traction if it talks too much about managed accounts in isolation, rather than as a component of a portfolio which will inevitably also include managed funds, exchange-traded funds and direct investments like term deposits.

IMAP will offer different classes of subscription – advisers can join free, dealer groups can pay $275 each year for the right to attend ‘breakfast sessions’ held on alternating months (Perpetual CEO Chris Ryan is an upcoming speaker) while service providers can secure membership for $1100 per year.


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11534 Conexus Conf Advt 142d x 204w.indd 1 16/02/11 5:08 PM

distributionApril 2011Investment Magazine54

For years now, the industry fund

movement has championed its

big differentiator with retail

master trusts: the lack of any

commissions payable to financial

advisers. But now that the

campaign against commissions

has finally succeeded, the

not-for-profit funds have

opened themselves to more

direct comparisons with the

superannuation offerings of the

four pillars, plus AMP-Axa.

Colonial First State threw down

the gauntlet on that front last

month. “We’ve neutralised the

fee debate and put the focus

on to service,” says CEO Brian

Bissaker. KRYSTYNE LUMANTA

and MICHAEL BAILEY report on

how.

The real value of industry funds will come under the spotlight, starting

from this month, when Colonial First State (CFS) slashes the invest-ment minimums for its FirstChoice Wholesale platform.

The minimum will now be minimal – just $1500, as opposed to $100,000 before. The retail giant can now compare what one of its members with a $25,000 balance will pay in comparison to an industry fund – and the result may send a shiver down a few not-for-profit spines.

Citing Chant West figures, CFS says a $25,000 balance invested in its ‘default’ multimanager balanced fund will attract a total annual cost of 0.98 per cent. Any advice fees have now been separated from the product fee, thanks to the imminent Future of Financial Advice legislation, so that 0.98

per cent includes only investment management, administration and any custody fee necessary. The comparable default balanced industry fund costs an average 1.15 per cent.

The CEO of CFS, Brian Bissaker, clearly didn’t call the first media lunch of his four-year tenure for nothing.

“For the first time, we’ve got a major platform, indeed, the largest platform in the industry, offering a fee level for the mass market which actually is as low or lower than many industry funds, and the lowest retail product fee in the industry,” he says.

The fee for an all-indexed balanced option is just 0.40 per cent.

Bissaker says that in providing a new benchmark in fees and a commission-free platform, FirstChoice has “neutralised the fee debate”, leaving administration efficiency and product features the focal competing factors in super.

The CEO admits that CFS will need to increase its market share to cover the cost of lowering the FirstChoice minimums. He is banking on the fact that advisers, now legally obliged to recommend the most appropriate products for their clients, will not have to shop on price if master trusts and industry funds cost about the same.

INVESTMENT OPTIONS

TAP ZEITGEIST

In a veiled dig at its low-cost retail superannuation competitors – think BT Super For Life and AMP’s Flexible Lifetime Super – CFS has actually increased the number of investment options on Firstchoice Wholesale at the same time as cutting its minimum.

Firstchoice Wholesale will now offer 119 options (up from 110) whereas the cheap ‘Core’ stream of AMP Flexible Super has two all-passive choices, while BT Super For Life gives punters the option of a lifecycle fund, or four options familiar to anyone who’s ever looked at an industry fund annual report.

Alan Kenny, general manager of product and investment services, says adviser demand had led to the introduction of ‘FirstRate’ term deposits. He says they were specifically geared for superannuation investors, whose lengthy investment horizon was also characterized by a fear of inflation.

The FirstRate term deposits will have a six-year lock-up, and a coupon pegged to 1 per cent above the official cash rate set by the Reserve Bank.

Kenny also highlighted the

option that addresses emerging markets using a fundamental indexing style.

“We’ve had very successful index business that invests using the fundamental indexing methodology, which constructs portfolios based on a company’s economic footprint, rather than market-cap size,” he says.

“This is really responding to customer’s demand for different ways of accessing the growth prospects of the emerging market region.”

The standout points of competition for the platform, according to Bissaker, surround administration – anti-detriment rules, the capturing of future capital gains tax (CGT) liabilities only when they are required, and a shorter waiting time for tax statements.

“There’s a whole range of

Be careful what you wish for, industry funds: now you’ve got it

Brian Bissaker ... taking FirstChoice to the masses ‘neutralises the fee debate’

Bissaker says that

in providing a new

benchmark in fees and

a commission-free

platform, FirstChoice

has “neutralised the

fee debate”, leaving

administration

efficiency and product

features the focal

competing factors for

super funds

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strategies and government incentives within super funds that some do and don’t do,” Bissaker says.

“For most of the past decade, our fund has been able to do a whole range of strategies because we’ve invested in the administration.”

The approach CFS has taken to save “tens, if not hundreds of thousands of dollars to individual beneficiaries” is to fund back contributions tax.

“An obscure section of the Tax Act allows us to provide a refund of all the contributions tax that was ever paid on behalf of a member when that member dies,” Bissaker says.

“There are a staggering amount of funds that don’t do it. It’s not compulsory, they don’t have to do it [but] it’s a nice little tick to say that

my estate will be this much better off being in this particular fund versus other funds.”

The second strategy involves

capital gains tax when a member moves from the accumulation phase to the pension phase.

“We turn the provisional capital gains tax off,” Bissaker says.

Lastly, CFS’s administration efficiencies turns out what it claims are among the fastest tax statements in the marketplace, able to be completed three weeks after the end of year so that members are looking at a relevant figure at the time they receive it.

Warren Chant, principal of superannuation research house Chant West, says FirstChoice’s efficiency in generating tax statements is possible due to the administration system’s capabilities, although he says the “vast majority” of super funds now have anti-detriment provisions in place to ensure that tax is not passed on to dependents.

That’s not the case with appropriate provisioning for capital gains tax.

“It’s fair to say that CFS affectively allows people to transfer to pension phase and they’ll get credited within any provision of tax through unrealised gains,” Chant says.

“All other wrap products will do it, but no industry funds do it.”

FirstChoice’s platform market share last September was 11.01 per cent, which Bissaker is aiming to grow to 12 per cent off the back of the FirstChoice Wholesale changes.

An obscure section of

the Tax Act allows us

to provide a refund of

all the contributions

tax that was ever paid

on behalf of a member

when that member

dies,” Bissaker says.

“There are a staggering

amount of funds that

don’t do it

technology

Storms gather in the cloud

April 2011Investment Magazine56

IT’S THE CRIME THAT DARE NOT SPEAK ITS NAME – CYBER-THEFT. ESTIMATED TO

COST AUSTRALIA $2 BILLION A YEAR, cyber-fraud and identity theft could be an even larger

problem than the investment and superannuation industry acknowledges, because no-one wants to

admit that members’ accounts can be infiltrated. PHILIPPA YELLAND reports.

technology technology Investment MagazineApril 2011 57

Detective Inspector Bruce van der Graaf, of the NSW Police, is only

half-joking when he says that the best protection against cyber-crime is the ultra-secure Linux operating system. Vastly superior to the ubiq-uitous Microsoft OS, apparently.

Speaking at last month’s ASFA lunch, van der Graaf said “a Linux boot disk is the most secure way to work”, followed by the Macintosh environment in which “it’s relatively safe” to work in Australia, where it was estimated that a mere 8 per cent of security events were reported.

At the same time as he calmly and laconically reels off some truly frightening statistics, van der Graaf demonstrates how easy it is to breach cyber-security – or find someone who will.

And it’s not just police who are concerned. That cyber-crime is of concern to APRA is shown in its letter to all trustees and APRA-regulated superannuation funds last November in which the prudential authority flagged its concern about lax procedures.

APRA’s general manager in the supervisory support division, Puay Sim, says that “to date, assessments of cloud-computing proposals typically lack sufficient consideration” of business processes, the technology’s architecture, and the sensitive information (member or other) “impacted by the outsourcing arrangement”.

Ethical hacker Ty Miller is already alarmed that SuperStream’s mooted use of the Tax File Number “will increase the risk of ID theft. SuperStream will introduce risk and it’s a question of managing that risk”.

Miller, who is chief technology officer at Pure Hacking, says the best defence is a dedicated server on its own network.

“Plus, the hosting company must comply with the standards to which you are compelled to be compliant,” he says, “for example, PCI DSS compliant (Payment Card Industry Data Security Standard).”

INTRUSION TESTS

Some super funds already retain Pure Hacking to do intrusion tests, but Miller says many cases of cyber-fraud are internal. “We’ll find the internal rogue employee – usually within a day – and we’ll be in the system and controlling it. The much bigger risk is internal fraud.”

Investment behemoth State Street has acted on cloud concerns already. State Street’s chairman, president and chief executive, Jay Hooley, says State Street has built its own private “cloud” rather than use a public one such as Google’s.

“It’s a scale business which requires continuous investment in IT and systems,” Hooley says. “We’ve never stopped spending 20-25 per cent (of revenue) each year throughout the cycle.”

That equates to more than US$1 billion a year. Recent spending has had a focus on “cloud” computing, which offers not only security and cost savings, but also much greater speed to market and innovation around data.

In response to the crowd of Jeremiahs warning against cloud computing, some parties are urging optimism. Cloud-computing specialist Glenn Elliott challenges APRA’s assumption about the riskiness of the cloud.

Elliott, who is managing

director of Myriad Minds, says APRA’s letter is “vague, fear-inducing and just not very helpful”.

“APRA emphasises the need for proper risk and governance processes for cloud-computing initiatives, but why specifically for cloud?

“The implicit assumption is that cloud computing is inherently riskier than traditional on-premise solutions. I challenge that assumption.”

Another bullish voice comes from Graham Sammells, CEO of The IQ Business Group. Like it or loathe it, Sammells says, the cloud is here to stay. “The impact of Cooper is a drive to efficiency which will lead to an increase in the momentum of cloud-based solutions,” he says.

“For example,” he says, “Microsoft is investing 70 per cent of its research budget in the cloud.”

APRA’s Sim says that, although the use of cloud computing is not yet widespread in the financial services industry, several trustees and superannuation fund administrators are considering, or already using, selected cloud computing based services.

Examples of such services include mail (and instant messaging), scheduling (calendar), collaboration (including workflow) applications and CRM solutions.

INNOCUOUS USE

APRA’s Sim delivers a blunt warning about such seemingly harmless uses.

“While these applications may seem innocuous, the reality is that they may form an integral part of core business processes, including both approval and decision-making, and can be material and critical to

ongoing operations of the trustee and the superannuation fund”.

Sim goes on to note that “regulated institutions do not always recognise the significance of cloud computing initiatives and fail to acknowledge the outsourcing and/or offshoring elements in them. As a consequence, the initiatives are not being subjected to the usual rigour of existing outsourcing and risk management frameworks, and the board and senior management are not fully informed and engaged”.

The prudential authority then goes on to ask trustees to consult with APRA “before entering into any offshoring agreement, either directly or via a service provider, involving a material business activity”. APRA defines ‘material’ as circumstances where arrangements have the potential, if disrupted, to have a significant impact on the trustee and superannuation fund’s operations or its ability to manage risks effectively.

Sim says “assessments of cloud computing proposals typically lack sufficient consideration of these factors”, and as part of its regular onsite review processes, it will continue to examine outsourcing or offshoring arrangements of trustees and superannuation funds.

So, the industry is officially on notice, but it’s not alone. Detective Inspector van der Graaf estimates that half of all Government sites “are compromised” and he has some strong recommendations for any industry.

“If you don’t need payment data (on the Internet), get rid of it,” he says. “If you can’t secure it, outsource it. Hire the right database administrator. Do an annual penetration test.”

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While he does not know the rate of early-release fraud within super funds, he predicts that, within the next 10 to 15 years, “superannuants will be wearing losses”.

He proposes a radical solution to cyber-fraud: “We should assign more responsibility to the end-user.”

WHERE’S THE DATA?

Graham Sammells, IQ Business Group, also advocates proactivity, but on the part of the fund when it is selecting a cloud provider. “Look at the potential service provider,” he

urges. “Ask questions about security encryption.”

Typically, reliable cloud providers have more robust systems because they are under scrutiny from the large organisations in their client base.

Further questions to ask are

“Where is the data stored?” and “In which country?”, Sammells says.

The IQ Business Group works with clients on three main areas: security, the vendor’s viability, and data loss.

“It’s a different way of thinking,” he says. “Just as Amazon and eBay

changed the way we shop, the cloud is changing the way we do business.”

If a fund’s member info is in the cloud, Sammells says, then there must be rigorous questioning: what is the degree of encryption, who has access to the data?

Similar to many commentators in the industry – whether they are for or against cloud computing – Sammells says the main enemy is within, or through accidental breaches such as leaving a PC on the train with the spreadsheet still open.

Pure Hacking’s Ty Miller has worked on numerous ethical hacking tests – external penetration, cloud, and internal – and says one of his main concerns is that many cloud providers are using virtualised systems that clone the client’s environment and data, which leads to privacy concerns.

This leads him to recommend that the best solution is a dedicated server on its own network. The hosting company must also comply with the standards to which the organisation is compelled to be compliant.

And, even if the cloud computing is on a dedicated server, Miller warns, the potential client must determine if that server is sharing a network with other servers.

While APRA has no specific prudential requirements in the area of cloud computing, its guideline letter says the principles in the following materials are pertinent to cloud computing: 1. Outsourcing: Superannuation Industry (Supervision) Act 1993 Reg 4.16, Superannuation Guidance Note SGN 130.1 and Prudential Practice Guide PPG231; 2. Business Continuity: Prudential Practice Guide PPG233; and 3. Management of security risk in information and information technology: Prudential Practice Guide PPG234. Pertinent areas include risk management, resilience and recovery (including offshore IT assets) and service provider management.

APRA in the cloud The terrible trio of security breachesTy Miller, Pure Hacking’s chief technology officer, details the top three high-level security compromises.

1. Vulnerability exploitationWhen systems aren’t managed properly, their security patches may not be applied in a timely manner. This means vulnerabilities exist in the systems that can be exploited by attackers.Attackers can use Open Source Exploit Frameworks such as Metasploit (www.metasploit.com) and publicly available exploits (www.exploit-db.com) which is currently archiving almost 14,000 exploits.From this point, attackers pilfer information from the servers, including usernames and password hashes (encrypted passwords).

2. Password controlOften an attacker may gain access to hundreds or thousands of password hashes after compromising a system.All these captured password hashes can be cracked using ‘Rainbow Tables’ to reveal the original password.Instead of having to run millions of password guesses that can

take years, Rainbow Tables are pre-calculated hash-to-password mappings.This allows the attacker to simply look up the password, rather than having to crack the hash, which may take as little as one minute.An example of a system becoming compromised and password hashes stolen and cracked was Gawker where 1.3 million passwords were stolen and cracked.

3. Web application vulnerabilitiesExtreme risks to companies are serious web application vulnerabilities, such as SQL Injection and Remote File Inclusion.These allow an attacker anywhere on the Internet to compromise a database, which may include usernames, passwords, credit card details, or take control of a web server that provides the attacker with a foothold on the DMZ or internal network.After compromising a database server or web server, an attacker may use these systems as a ‘pivot’ to perform ‘privilege escalation’ by attacking other internal systems.

technologyApril 2011Investment Magazine58

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Australian superannuation funds

may have costly obligations

under the Foreign Account

Tax Compliance Act (FATCA), a

new chapter of the US Internal

Revenue code aimed at boosting

the tax-take from Americans

living overseas, warns the

financial services division of

Deloitte. MICHAEL BAILEY

reports.

Australia is just not ready for the ‘know your cus-tomer’ challenge that is

FATCA.A partner specialising in

forensics and financial crime at Deloitte, Graham Dillon, says Australian super funds have not even responded adequately to the five year-old anti-money laundering obligations, according to the latest stakeholder survey from the supervising body, Austrac.

“So you would have to doubt how well-prepared super funds and funds managers are going to be for a further test of their know-your-customer procedures,” Dillon said.

He noted that several large global financial institutions had estimated their costs of compliance with FATCA would exceed $100 million apiece.

Noelle Kelleher from Deloitte’s superannuation practice observes many funds wrongly assumed their members would be granted an exemption from FATCA, whereas only single-employer corporate funds had been definitively relieved.

More information on

exemptions will be provided throughout his year and next, before the planned start of FATCA on the first day of 2013.

Kelleher said funds had no basis for believing that FATCA would not apply to them. However,

she did sympathise with the notion that few would-be American tax dodgers are likely to choose Australian super as their medium of choice, particularly given they would not be able to access the ill-gotten gains until they are 65.

FATCA seeks to identify US taxpayers with accounts at foreign financial institutions (FFIs), and attempts to enforce reporting of those accounts by imposing withholding tax. Apart from the extra account verification requirements, which Dillon said required funds to “prove a negative” in terms of their members’ non-American status, the costs of non-compliance with FATCA are real.

Technically, the application of the law to financial institutions licensed outside the US is voluntary, but the US will apply sanctions to institutions it knows to be harbouring US tax-avoiders.

Under those sanctions, a withholding agent will be obliged to withhold 30 per cent on withholdable payments to FFIs whose procedures are found wanting by US Internal Revenue. So much for last month’s Obama-Gillard lovefest.

Deloitte has prepared a checklist of what FFIs – including super funds and funds managers – are required to do under the

FATCA regime.• FFIsandtheir80percent-

owned affiliates are required to enter into an agreement with the US Internal Revenue Service (IRS).

• Reportingofinformationon certain US customer accounts at least annually including deposit accounts, custody accounts and any equity or debt securities (except for listed securities which are regularly traded ). This reporting must include names, addresses, account balances and account movements.

• Obtaininformationsufficient to identify accounts held by US citizens, which requires proving an account is not a US account.

• Complywithverificationand due diligence procedures on such accounts as required by US

Treasury.• Complywithrequests

from US Treasury for additional information.

• FFIsmustwithhold30percent tax on payments to recalcitrant account holders, as well as payments to non-participating FFIs which are attributable to certain US sourced payments received by the FFIs.

• Ifforeignlawwouldpreventreporting accounts, the FFI should obtain a waiver from the customer to allow the reporting. If a waiver cannot be obtained, the account should be closed, even though this may be against the spirit of Australian privacy and consumer laws.

• FATCAhasbeendesignedto override tax treaty and other withholding exemptions.

American FATCAts could cost super funds

Noelle Kelleher ... FATCA is a buzzword in London, but not in Melbourne or Sydney

administration Investment MagazineApril 2011 59technology

FEAL is pleased to invite

nominations for the Fund

Executive of the Year Award.

Now in its 10th year, the Award

recognises outstanding leadership

by a fund executive within the

Australian superannuation industry.

The recipient will receive a

$20,000 business education

grant made possible with the

support of AMP Capital Investors.

NomiNate Now at:

www.feal.asn.au

201110th Anniversary

Presented in partnership with

New York, London, Hong Kong … BrisbaneAustralian hedge funds,

including offshore funds sold

in Australia, returned 0.18 per

cent in January 2011. Long/

short equity and fixed-income

strategies boosted the total

with their respective 1.33 per

cent and 1.06 per cent results.

However, global macro,

commodities, managed futures

strategies and global macro

funds-of-funds hurt posted -0.98

and -1.41 per cent returns.

The top five performers were PM Capital Abso-lute Performance Fund

with 8.6 per cent followed by three Platinum Asset Management funds – Japan, Europe and International Technology, with 5.5 per cent, 5.3 per cent and 5.2 per cent respective-ly, and finally the Mathews Capital Searchlight Asia Pacific Fund with a 4.6 per cent return.

It’s heartening to see that 14 of the top 20 funds for January deployed global or Asia-Pacific in-vestment strategies while operating from Australia. This demonstrates that local managers can compete

with the best managers in New York, London and Hong Kong to produce strong investment returns while enjoying the enviable Austra-lian lifestyle.

The lifestyle advantage was brought home to me last weekend when I competed with a large number of teams in what is known as the 20/twenty Challenge 2011, a sort of mini-endurance event which raises money for cerebral palsy.

Two of our competing teams were from Queensland-based BlueSky Funds Management. Our team, Crawford Two, beat them, but while sharing a beer with Mark Sowerby, BueSky’s CEO, at the

event BBQ, I got thinking about situating an alternatives business in Brisbane.

BlueSky manages about $200 million across a range of products. Sowerby heads up the funds man-agement holding company which houses BlueSky Private Equity, Water Partners, Private Real Estate and Apeiron, a macro hedge fund.

What I found interesting was the diversity of the BlueSky team and their significant international experience. The members of the team have worked in San Francisco, Singapore, Tokyo, Johannesburg and London. The team members have worked for the likes of GLG, Credit Suisse, Morgan Stanley, Bain & Company, Bankers Trust and Investec, yet they have all elected to return to live in Brisbane or Adelaide.

Each of the BlueSky funds are small. The Macro Fund has $10 million in funds under management but has won a significant number of accolades including Best Emerg-ing Hedge Fund in the Australian hedge fund awards. The fund annualises at 12.5 per cent over a

four-and-a-half-year period. David Hobart is the macro fund’s CIO and like the rest of the BlueSky team, he is energetic and passionate about his trading.

Most of the fund raising across the products has been domestic, with sourcing from Australian institutions and financial planning groups. They manage some assets for offshore groups but intend ramping up their offshore distribu-tion.

Although Brisbane is not on the regular alternative asset route for global allocators of hedge fund capi-tal, it is a lovely place to do business. The team is very health-conscious and it is quite obvious that they spend a lot of time outdoors, (and not regretting their moves back from London or Tokyo, considering the winters in these cities).

There is a lifestyle trade-off where you can still manage a lot of money and have the lifestyle as well. ‘Where else but Queensland!’ as the state’s tourism jingle says.

Damien Hatfield is a director of Triple A Partners Australia

Report Compiled in association withAny manager with an open fund, open to investors in Australia, is eligible to submit

performance data. Information to [email protected]

Damien Hatfield

performance Investment MagazineApril 2011 61

*Average Annual Index data begins October 2004. Monthly Standard Deviation annualized. Sharpe Ratio is calculated in the following ways: USD uses rolling 90 day T-bill rate, JPY uses rolling BBA LIBOR JPY 1 Month, CHF uses rolling BBA LIBOR CHF 1 Month, EUR uses rolling Euribor 1 Month.

CurrencyIndex / Sub StrategiesMonthly Performance

Value ValueJan 2011Feb 2011

ROR ROR Std Dev* Sharpe*

YTDReturn

1 year-Return

AvgAnnl*

Dow Jones Credit Suisse AllHedge Index USD 127.55 1.08% 126.19 0.13% 1.21% 9.04% 3.87% 7.64% 0.21

Convertible Arbitrage USD 111.5 0.79% 110.62 1.78% 2.59% 11.78% 1.71% 13.41% -0.04

Dedicated Short Bias USD 61.87 -4.33% 64.67 0.92% -3.46% -20.35% -7.21% 15.93% -0.6

Emerging Markets USD 147.28 -0.61% 148.18 -1.18% -1.79% 9.38% 6.22% 14.52% 0.27

Equity Market Neutral USD 81.23 0.54% 80.79 1.48% 2.03% -3.24% -3.19% 10.43% -0.52

Event Driven USD 161.72 1.04% 160.05 1.03% 2.08% 14.39% 7.78% 7.75% 0.71

Fixed Income Arbitrage USD 78.55 0.44% 78.21 1.11% 1.55% 2.40% -3.69% 11.39% -0.52

Global Macro USD 114.31 1.65% 112.45 -2.71% -1.10% 5.63% 2.11% 9.83% -0.02

Long/Short Equity USD 126.53 1.50% 124.65 0.90% 2.42% 8.22% 3.73% 9.23% 0.16

Managed Futures USD 158.22 2.12% 154.93 -1.27% 0.83% 13.93% 7.41% 10.12% 0.51

Multi-Strategy USD 116.86 0.68% 116.06 1.34% 2.04% 6.61% 2.46% 8.80% 0.02

Fund Name JanuaryPerformance %

2010Return

%

Annualised (M)CompoundReturn %

Annualised (M)Standard

Deviation %

2009Return %

2008Return %

2007Return %

InceptionDate

Cash Based PM Capital Enhanced Yield Fund 0.42 7.55 7.20 2.47 10.96 0.83 6.05 Mar-02Event Driven Macquarie Special Events Fund 0.59 7.60 12.23 5.87 41.32 -5.11 12.70 Oct-03MM&E Capital Trust 1 0.64 3.44 7.33 4.28 7.13 -4.89 3.56 Jul-02MM&E Capital Trust 2 0.52 3.00 6.49 4.75 7.48 -5.98 3.40 Jul-04Pengana Asia Special Events Fund 1.00 6.00 7.72 4.86 14.27 -0.94 Jul-08RAB Cross Europe Fund Ltd Class B (USD) -0.54 0.12 7.25 5.70 1.05 0.29 2.07 Nov-98Fixed Income HCAP Diversified Fund (AUD) 0.66 17.05 15.77 7.75 0.69 Dec-09Kapstream Wholesale Absolute Return Income Fund* 0.62 6.71 6.70 1.02 7.77 7.04 2.41 Jun-07QIC Global Fixed Interest Alpha Fund (AUD - Onshore) 1.41 1.45 9.21 5.19 13.60 7.67 11.21 Jul-05RAB European Credit Opportunities Fund Ltd-Class B (USD) 1.56 8.24 9.29 11.32 46.35 -28.86 9.03 Jul-01Global Macro/Commodities/Futures 36 South - Cullinan Fund SPC -4.10 2.32 -4.55 23.11 -5.69 Jun-0936 South - Dresden Green SPC -5.17 -3.99 3.93 13.28 18.77 13.63 4.25 Sep-0636 South - Regent Fund SPC -22.27 112.83 41.09 78.54 -8.07 34.42 58.57 Sep-07Active Global Commodities Fund (AUD$) 2.94 12.65 10.70 12.71 7.00 1.37 16.89 Dec-99Antipodean Capital Global Currency Strategy -1.20 1.57 3.60 14.71 -8.32 2.02 3.60 Feb-06Apeiron Global Macro Fund - Class A (EurekahedgeHF) -2.32 4.99 10.84 11.08 -1.68 19.52 20.79 Feb-06Argus Dynamic Multi-strategy Program -0.92 4.27 16.44 25.62 -2.19 45.44 4.92 Oct-96Ascalon H3 Commodities Fund 2.13 8.63 4.81 15.41 19.64 -13.25 Feb-08Attunga Agricultural Trading Fund (EurekahedgeHF) 3.61 4.02 13.84 9.86 9.73 22.08 Apr-08Attunga Metals Trading (Offshore) Fund -8.62 5.55 -3.55 11.00 Feb-10Attunga Power & Enviro (Offshore) Fund -5.98 -10.58 -0.75 13.87 27.01 -8.20 Jun-08Attunga Power & Enviro Fund -4.42 -5.77 22.35 20.69 17.99 -6.75 86.79 Aug-06BlackRock Asset Allocation Alpha Fund - Class D -0.71 -5.44 12.38 11.98 -0.12 41.19 34.54 Jun-06BlackRock Global Ascent Fund* 1.11 17.70 20.64 15.13 18.43 -5.33 14.69 Feb-03Blue Sky World Inc. (Class A) 0.73 5.79 18.51 23.31 22.66 -3.95 75.75 Feb-06Commodity Strategies - Long Only 2.38 9.76 13.06 13.09 27.78 10.47 25.08 Dec-99Commodity Strategies Ltd – Global Commodity Fund Long-Short 2.23 8.64 19.27 20.31 21.07 20.82 10.75 Oct-07Excalibur Absolute Return Fund 2.25 10.38 14.95 8.28 0.98 12.23 21.39 Jul-06Global Trading Strategies (Cayman) Fund 1.05 -1.07 15.43 12.80 -3.78 44.85 27.30 Nov-06GMO Systematic Global Macro Trust - Class B -1.22 14.00 11.54 10.56 9.38 12.03 15.77 Feb-06Graham Discretionary-6V Portfolio (USD - Offshore) 1.31 7.12 8.72 5.66 17.09 8.66 -6.93 Sep-03Graham K4D-10V Portfolio (USD - Offshore) -0.38 2.30 10.14 12.68 1.15 21.82 12.72 Feb-95Graham K4D-15V Portfolio (USD - Offshore) -0.49 4.62 14.51 18.23 4.95 35.63 16.90 Feb-95Graham Proprietary Matrix-10V Portfolio (USD - Offshore) 1.03 10.58 10.74 12.21 15.46 25.14 8.48 Jul-99H3 Global Commodities Fund - Class AUD 2.34 7.32 9.28 13.46 13.35 -2.53 14.55 Nov-05H3 Global Strategies Fund 0.75 -4.89 -0.71 7.47 -4.27 6.88 May-08Headland Global Diversified Fund -2.21 11.11 6.90 9.40 3.90 1.61 9.96 Nov-06Kaiser Trading Fund 1X SPC -1.64 4.66 6.24 6.00 -4.32 8.39 11.76 Apr-04Kaiser Trading Fund 2X SPC (EurekahedgeHF) -3.21 9.84 7.55 9.65 -7.78 15.28 19.54 Oct-06Kohinoor Series Two Fund 0.25 0.44 15.78 13.61 -1.85 73.29 7.05 Aug-05Macquarie Commodity Alpha Segregated Portfolio -0.96 -6.41 2.89 5.57 1.83 8.68 7.44 Sep-07Merricks Capital Soft Commodities Fund 2.13 16.09 15.07 7.77 20.35 8.04 Jan-08MGH Investment Fund Ltd 0.61 16.22 13.40 11.35 16.61 -21.67 10.03 Jan-03RAB Energy Fund - Class B-1 1.79 46.58 18.87 24.16 86.90 -60.11 4.96 Jun-04RAB Octane Fund Ltd. Class D (USD) 1.61 30.71 6.27 12.41 11.86 -31.12 16.86 Jul-00RAB Special Situations Fund (USD) -0.50 -8.74 14.51 37.58 4.94 -69.76 9.45 Jul-03The ANZ Macro Fund* -0.20 11.31 10.74 5.19 1.40 Dec-09Long/Short Equity 90 West Global Basic Materials Fund (AUD - Onshore) 1.39 73.07 38.14 23.11 49.03 -11.90 Jul-08Agora Absolute Return Fund 0.49 -2.12 8.21 8.56 23.99 -12.23 9.78 Mar-04Allard Growth Fund -1.37 19.90 13.77 13.27 49.20 -28.83 16.89 Jan-96Allard Investment Fund 1.03 8.97 13.75 9.76 25.45 -13.82 15.56 Jul-03AR Capital Management The Ascot Fund 0.31 -2.69 11.07 5.87 20.01 5.24 26.07 Aug-05BlackRock Equitised Long Short Fund* -0.25 -0.84 16.55 15.86 53.45 -45.91 38.48 Dec-01

This report is produced in association with Triple A Partners Australia. Any manager with an open fund, open to investors in Australia, is eligible to submit

performance data. Information to [email protected]

HEDGE FUND PERFORMANCE SURVEY

performanceApril 2011Investment Magazine62


Blue Sky Japan - Class A USD 1.33 4.68 8.78 24.27 24.39 -17.97 -35.08 Jun-00Cadence Capital Limited (EurekahedgeHF) 2.60 24.88 14.82 17.89 45.37 -34.73 3.89 Oct-05Hayberry Australian Equity Fund (EurekahedgeHF) 3.20 11.82 13.94 13.81 28.86 -24.26 -3.27 Feb-03Herschel Absolute Return Fund (EurekahedgeHF) 4.25 9.34 17.45 9.14 25.47 0.30 16.36 May-06Jaguar Australian Leaders Long Short Unit Trust -0.15 -28.94 2.27 20.79 82.39 -33.97 9.74 Mar-03K2 Asian Absolute Return Fund (EurekahedgeHF) 0.53 3.48 12.81 16.50 40.77 -28.35 22.53 Sep-99K2 Australian Absolute Return Fund (EurekahedgeHF) -0.49 4.12 14.44 13.11 41.03 -18.61 10.36 Oct-99K2 Select International Absolute Return Fund (EurekahedgeHF) 0.43 8.93 12.90 12.68 31.92 -22.44 13.87 Jan-05Lanterne Arran Fund (EurekahedgeHF) 1.01 7.06 9.22 7.02 28.81 -5.44 10.35 Aug-04Lanterne Strategic Asia-Pacific Fund (EurekahedgeHF) 1.08 5.90 12.00 6.47 26.92 -3.70 9.01 Jan-02Mathews Capital Searchlight Asia-Pacific Fund 4.60 30.65 155.25 16.54 Oct-10Mathews Velocity Fund 0.73 37.93 45.77 34.30 62.30 8.66 50.25 Jul-06MM&E Capital Takeover Target Fund (AUD - Onshore) -0.53 5.75 10.36 12.81 43.50 -30.85 20.48 Aug-05Naos Absolute Return Fund (EurekahedgeHF) -4.05 19.48 8.20 13.83 20.32 -25.96 5.77 Feb-05Naos Small Companies Fund (EurekahedgeHF) 3.51 56.50 21.00 28.41 174.85 -63.59 21.69 Feb-05OC Concentrated Equity Fund -0.24 31.91 17.47 22.60 156.64 -58.04 9.95 Dec-03Optimal Japan Fund USD 3.04 4.51 6.00 12.27 -8.92 -15.68 -9.23 Oct-99Pengana Asian Equities Long Short (Offshore) Fund -1.80 -5.75 6.75 7.37 17.94 8.46 Jul-08Pengana Global Resources Fund 2.19 30.07 19.90 21.86 52.98 -32.87 49.13 Mar-07Platinum Asia Fund -0.90 4.34 19.40 15.00 40.04 -29.30 31.15 Mar-03Platinum European Fund 5.30 9.15 11.85 17.54 28.11 -25.01 -2.93 Jul-98Platinum International Brands Fund 0.50 15.99 13.44 11.06 31.71 -18.32 3.27 May-00Platinum International Fund 3.90 -4.90 13.54 11.67 19.73 -7.40 3.37 May-95Platinum International Health Care Fund 3.90 6.60 2.74 13.01 7.65 -15.75 0.02 Nov-03Platinum International Technology Fund 5.20 -3.36 8.27 19.27 30.98 -14.77 -2.17 May-00Platinum Japan Fund - AUD 5.50 2.11 14.61 17.74 9.01 -7.79 -6.95 Jul-98Platinum Unhedged Fund 4.50 8.01 10.96 13.44 30.71 -20.67 4.38 Feb-05Plato Australian Shares 130/30 Composite 0.13 1.63 -8.46 19.12 29.06 -42.02 Jan-08PM CAPITAL Absolute Performance Fund AUD 8.60 -0.61 6.20 20.51 31.94 -43.12 -16.20 Nov-98PM CAPITAL Australian Opportunities Fund AUD 0.20 8.32 11.24 16.10 60.64 -47.84 12.20 Jan-00Prodigal Equity Relative Value Fund (EurekahedgeHF) -1.87 4.97 9.37 4.70 12.57 13.68 Jan-08RAB Europe Fund Ltd-Class A (EUR) 0.90 -3.17 9.62 11.16 8.91 1.35 12.30 Nov-99RAB Global Mining and Resources Fund Ltd. Class B (USD) -1.10 22.72 6.75 27.37 76.52 -45.49 5.90 Nov-07Ramius Value & Opportunity Fund, Ltd. 0.78 31.20 17.33 13.17 16.89 -20.80 6.33 Oct-02SPARX Long-Short Fund Ltd - USD 1.97 8.46 8.04 9.43 0.43 -5.95 -11.95 Jun-97Summit Water Equity Fund, L.P. -2.69 7.76 9.79 9.81 5.36 -8.43 7.02 Jan-99Tribeca Alpha Plus Fund -0.06 7.18 9.43 18.11 55.95 -38.99 29.60 Sep-06WaveStone Capital Absolute Return Fund (EurekahedgeHF) 0.72 1.26 11.76 12.63 37.18 -20.71 28.35 Sep-06Market Neutral Equity Amazon Market Neutral Fund (USD - Offshore) -1.74 21.83 22.95 13.91 38.59 -8.23 32.05 Sep-05Atrium Australian Equity Market Neutral Fund 0.61 -4.18 -3.56 3.63 -1.16 Oct-09Bennelong Long Short Equity Fund(NET) -0.59 12.72 21.77 12.67 23.65 17.81 20.77 Jan-03BlackRock Australian Equity Market Neutral* -0.21 2.63 14.61 6.41 16.82 -6.29 28.45 Sep-01Fortitude Capital Absolute Return Trust 0.31 4.34 9.55 3.05 5.91 12.05 9.48 Mar-05Macquarie Global Multi Events Segregated Portfolio -0.09 8.93 7.14 5.08 -0.92 13.37 8.41 Jan-07Pengana Australian Equities Market Neutral Fund 2.10 12.60 11.40 6.51 8.49 4.08 Sep-08Plato Australian Shares Market Neutral Fund -0.06 4.37 1.33 5.86 -5.24 -2.76 8.96 Aug-07QIC Asia Pacific MArket Neutral 0.21 28.42 23.03 5.54 7.89 Jul-09Tasman Market Neutral Fund (AUD - Onshore) -1.45 33.23 25.02 15.35 50.65 -9.80 29.49 May-07Taurus Global Resources Hedge Fund Limited -1.78 2.43 0.61 4.96 Feb-10Multi-Strategy BlackRock - Multi Opportunity Fund* 1.82 15.25 9.81 4.92 13.06 -1.33 7.04 Jul-04E.I.P. Aleph Fund (EurekahedgeHF) 0.26 6.31 8.79 6.92 9.48 Apr-09E.I.P. Overlay Fund 0.81 2.86 9.54 6.68 8.34 17.31 22.90 Jun-02Merricks Capital Multi-Strategy Fund 0.70 11.07 7.90 5.73 7.36 5.29 Jan-08Prodigal Absolute Cayman Fund -3.80 8.51 10.02 14.11 57.39 -20.38 8.50 Jun-07Hedge Fund of Funds Global Low Volatility Aurum Investor Fund Ltd (EurekahedgeFOF) -0.66 2.49 7.99 7.62 8.48 -6.28 5.58 Sep-94Aurum Isis Fund Ltd (EurekahedgeFOF) 0.34 1.43 7.35 3.29 7.46 -4.90 9.82 Apr-98Lyxor Global Arbitrage Fund Ltd Class (USD) 0.18 3.37 2.90 3.20 3.49 -1.91 5.46 Jul-06



2010Return

%



Deviation %

2009Return %

2008Return %

2007Return %

InceptionDate

Global Macro Focus Special Opportunities Fund Ltd -3.10 -0.60 -6.22 14.22 Jul-10FRM Sigma Fund PCC Limited - Class A -0.73 17.58 12.81 15.05 -10.19 33.23 19.98 Nov-05Ibbotson Global Trading Strategies Trust -0.07 11.91 -0.45 7.18 5.91 -13.07 -4.52 May-07Ramius RTS Global Fund -1.74 4.61 3.05 6.44 Mar-10Long/Short Equity APAM Absolute Equity - Asia Fund -0.16 -3.38 4.56 11.85 -3.98 10.76 18.56 May-06Attalus Long-Short Equity Fund Ltd 0.43 2.45 6.68 6.79 7.98 -18.12 17.24 Feb-01AWJ Fund 0.07 1.46 10.45 6.77 8.79 -9.71 28.63 Jul-00AWJ GSF 0.41 1.91 2.54 4.82 Mar-10BNP Paribas - Fauchier Partners Absolute Equity Trust 0.07 7.51 6.98 5.29 Jan-10BT Total Return Fund (EurekahedgeFOF) -0.11 3.14 5.47 3.14 9.84 -8.61 8.92 Jan-01Coastal Hedged International Equity Fund (AUD - Onshore) -0.21 7.33 5.02 6.29 4.63 -19.33 2.64 Sep-02Focus Europa Fund -1.11 4.39 8.69 8.31 13.41 -16.09 5.90 Jan-97HFA International Shares Fund HW 0.23 8.07 6.05 4.97 8.17 -4.76 11.16 Apr-01NZAM Global Fund Ltd (Class AUD - AUD - Offshore) 2.14 0.78 5.08 5.11 2.93 Dec-09Penjing Asia Equity Fund - Class A -0.51 5.13 -2.29 13.32 25.09 -30.84 2.31 Oct-07Multi-Strategy Alpha Titans Ltd: Multistrategy 0.75 8.58 3.31 6.11 12.18 -11.10 1.89 Nov-07Alpha Titans Ltd: Multistrategy 2x 1.58 20.30 3.58 13.52 24.28 -28.29 2.93 Nov-07Attalus Multi-Strategy Fund Ltd 0.39 1.85 5.61 4.96 12.54 -21.42 12.40 Feb-00Aurum Multi Strategy Dollar Fund Ltd. -0.12 4.39 4.09 5.13 10.74 -5.99 8.50 Jan-07BNP Paribas - Fauchier Partners Absolute Return Trust 0.38 6.43 3.90 7.13 17.72 -12.86 3.98 Sep-07CCP Global Inefficiencies Fund Segregated Portfolio (USD) 0.53 4.58 0.38 3.94 4.06 -9.63 2.51 Jul-07CCP Strategic Fund (USD) -1.21 5.54 1.03 10.77 11.40 -30.02 21.53 Jun-06Coastal Magnum Diversified Performance Fund (AUD - Onshore) 0.84 3.93 6.15 5.65 11.32 -11.86 8.66 Jul-00Dexia Alpha Dynamic Fund 0.83 2.56 14.37 5.57 Nov-10Focus Opportunity Fund 0.01 3.53 5.90 7.47 8.21 -14.73 11.32 Jul-96Focus Select Fund Ltd. -0.10 4.68 6.82 7.87 15.32 -20.96 16.68 Aug-04FRM Absolute Alpha Fund PCC Ltd Diversified 0.74 9.37 6.14 6.22 13.42 -23.47 16.71 Nov-02FRM Absolute Alpha Fund PCC Ltd Opportunistic -0.89 5.86 5.88 5.16 5.29 -2.74 14.14 May-98FRM Credit Strategies Fund PCC Ltd - Class A 1.75 8.26 6.80 6.37 12.84 -14.88 18.30 May-06GMO Multi-Strategy Trust 0.49 1.11 6.47 5.65 -2.01 18.52 5.37 Jul-03HDF Eurovest Class A USD -0.17 8.08 10.17 8.85 14.76 -22.43 7.06 Jan-00HDF Fixed Income Alternative Class A USD -0.41 4.68 4.81 3.35 8.11 -15.56 7.93 Jan-97HDF Xiphias International Class AA USD -0.36 3.86 2.09 7.32 6.94 -19.68 9.27 Oct-05HFA Diversified Investments Fund HW 1.36 5.99 4.56 7.02 19.05 -28.79 9.37 Apr-01Liongate Multi Strategy Fund - USD Class 0.30 4.89 9.75 6.16 8.43 -9.99 17.71 Apr-04Lyxor Diversified Fund Ltd Class (USD) 0.04 5.06 3.59 5.06 3.64 -6.71 10.63 Jul-06Ramius Alternative Replication Fund Ltd 0.07 -0.69 1.20 4.40 2.25 Oct-09Select Alternatives Portfolio (AUD - Onshore) -1.24 11.75 6.19 7.85 12.53 -15.60 9.64 Apr-04Specialist CCP Greater China Fund Segregated Portfolio (USD) -0.66 6.13 5.56 9.88 16.63 -20.06 25.22 Apr-07Penjing Asia Market Independent Fund - Class A -0.39 3.36 3.62 3.47 12.27 -3.88 1.32 Oct-07Focus Recovery Fund Ltd. 0.69 6.06 7.57 5.51 19.51 -13.43 10.16 Mar-03



2010Return

%



Deviation %

2009Return %

2008Return %

2007Return %

InceptionDate

performanceApril 2011Investment Magazine64


LONG-ONLY SURVEY

COMPANY NAME 1 Y RETURN 3 Y RETURN 5 Y RETURN

Alliance Global Thematic 13.9 (1)

Goldman Sachs 11.5 (2) -0.6 (7) -0.3 (3)

Dimensional 11.5 (3) -2.3 (13) -3.3 (9)

Schroder Global Active Value 10.1 (4) 1.6 (5)

BT Wholesale 8.3 (5) -1.1 (9) -3.7 (12)

Russell 8.2 (6) -3.6 (17) -4.1 (14)

Schroders 8.1 (7) -0.9 (8) -2.3 (6)

Perennial 8.0 (8) -5.0 (23) -3.8 (13)

AMP Capital 8.0 (9) -4.5 (20) -4.2 (15)

IOOF MultiMix 7.9 (10)

Capital International 7.8 (11) -2.6 (14) -3.2 (8)

Legg Mason 7.8 (12) -4.8 (22) -5.1 (20)

ING 7.8 (13) -2.1 (12) -4.5 (16)

Marvin & Palmer 7.7 (14) -7.0 (25) -4.8 (19)

Realindex Global Share 7.4 (15)

INTERNATIONAL SHARES - 28 FEBRUARY 2011


Independent 18.1 (1) 5.4 (1) 10.4 (2)Bennelong Concentrated 16.0 (2) Bennelong 14.7 (3) Macquarie High Conviction 13.1 (4) 3.6 (8) 10.6 (1)SG Hiscock 13.0 (5) 2.9 (16) Perpetual 12.7 (6) 3.4 (9) 6.0 (13)JCP- Bmark Based 11.9 (7) 4.2 (6) 7.1 (7)ING 11.7 (8) -0.6 (45) 5.1 (29)Macquarie 11.5 (9) 1.1 (33) 5.9 (18)Schroders 11.0 (10) 4.7 (3) 7.0 (9)BlackRock (ex BGI) 10.9 (11) -1.0 (48) 4.1 (41)Legg Mason Aust Value Eq 10.8 (12) 3.1 (14) GS Aust Quant 10.7 (13) 0.0 (42) 5.4 (24)Plato 10.5 (14) -1.2 (49) AMP Capital Quant 10.1 (15) 1.4 (30) 5.6 (22)

AUSTRALIAN SHARES - 28 FEBRUARY 2011

Returns are gross of tax and ongoing feesInvestor index: Australian Bonds Investor Index. Created 11th March 2011.

DISCLAIMER© Morningstar Australasia Pty Ltd (Morningstar) ABN: 95 090 665 544, AFSL: 240892 (a subsidiary of Morningstar, Inc). All rights reserved. The data and content contained herein are not guaranteed to be accurate, complete or timely. Neither Morningstar, nor its affiliates nor their content providers will have any liability for use or distribution of any of this information. To the extent that any of this information constitutes advice, it is general advice that has been prepared by Morningstar without reference to your objectives, financial situation or needs. Before acting, you should consider the appropriateness of the advice and obtain financial, legal and taxation advice before making any financial investment decision. Investors should obtain the relevant product disclosure statement and consider it before making any decision to invest. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/fsg.asp

ESSENTIAL INFORMATION FOR THE ASTUTE INVESTORThe tables shown are an extract from the Sector Funds Performance Survey which compares more than 390 specialist sector funds. If you want to measure your investment performance against your manager peers and your performance benchmarks, then contact Peter Gee by email at [email protected] or call him directly on

(02) 9276 4540.

MORE USEFUL SURVEY INFORMATIONMorningstar provides a wide range of wholesale investment manager research survey results and analytical software via subscription for investment managers and superannuation fund trustees. These include regularly updated surveys of industry performance indicators; asset allocations; industry sector and market capitalisation allocations; performance tables

for diversified and specialist funds; and fee comparisons for pooled funds and individual accounts.


Macquarie 7.9 (1) 8.4 (9) 6.2 (10)Legg Mason 7.8 (2) 9.2 (2) 6.5 (6)AMP Capital 7.5 (3) 9.0 (4) 6.6 (4)Perpetual 7.4 (4) 8.9 (5) 6.3 (8)Russell 7.3 (5) 9.1 (3) 6.7 (3)Perennial 7.2 (6) 9.9 (1) 7.0 (2)ING 7.0 (7) 8.7 (6) 6.3 (7)Schroders 7.0 (8) BlackRock (ex Merrill Lynch) 6.9 (9) 7.0 (14) 5.5 (12)SIM 6.6 (10) 8.2 (10) 6.1 (11)Tyndall 6.4 (11) 8.6 (7) 6.6 (5)Goldman Sachs Core Plus 6.3 (12) 8.2 (11) Colonial First State 6.3 (13) 8.5 (8) 6.3 (9)Vianova Core Plus 6.0 (14) 7.2 (13) Vianova 5.8 (15) 8.0 (12) 7.0 (1)

AUSTRALIAN BONDS - 28 FEBRUARY 2011

INDICES 1 Y RETURN 3 Y RETURN 5 Y RETURN

Australian Shares 8.7 -0.3 4.0International Shares (Unhedged) 7.0 -3.2 -3.8International Shares (Hedged) 17.9 -0.4 0.7Unlisted Property 10.5 0.0 7.8Listed Property 6.8 -13.9 -8.9Australian Bonds 5.5 7.7 5.9Inflation-Linked Bonds 7.0 5.4 4.9International Bonds (Unhedged) -6.9 1.7 0.7International Bonds (Hedged) Cash 4.8 5.1 5.7CPI (to Dec-10) 2.7 2.8 2.9AWOTE (to Dec-10) 3.9 5.1 4.7

MARKET INDICES - 28 FEBRUARY 2011

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WAY2710 Inv & Tech FP 297x220 V1 FA.indd 1 15/2/10 11:07:42 AM

FSC viewpoint Investment MagazineApril 2011 67

Look out for FoFA’s furfiesThis year the financial services

industry has a once-in-a-

generation opportunity to

improve the professionalism,

transparency and quality of

financial advice, writes John

Brogden, CEO of the Financial

Services Council.

We have advocated and embraced much of the Government’s

proposed reforms to financial ad-vice. From the outset we endorsed the guiding principles of the Future of Financial Advice (FoFA) pack-age.

The Government has always acknowledged the reforms need to strike a balance to improve transparency and professionalism and at the same time ensure the affordability and accessibility of financial advice.

When announcing the reforms last year, then financial services Minister Chris Bowen said:

“Financial advice must be in the client’s best interest – distortions to remuneration, which misalign the best interests of the client and the adviser, should be minimised.”

He went on to say:“In minimising these

distortions, financial advice should not be put out of reach of those who would benefit from it.”

This clearly recognises that there is a balance that needs to be struck. We believe that balance can be struck in a way that ensures:

• greaterpowerinthehandsof consumers;

• transparencyinthecostofadvice for consumers;

• ahigherqualityofadvice;and

• higherstandardsandprofessionalism for financial advisers.

The foundation of these

reforms is a new best-interest duty for financial advisers, requiring them to put the interests of their clients ahead of their own. This legal and ethical framework almost has unanimous support. However, other proposals fail to strike the necessary balance.

The Government has proposed an annual renewal requirement for financial advice and a ban on volume-related payment.

Both measures have a simplicity about them which is undoubtedly attractive at first. Unfortunately, it is their very simplicity that drives perverse outcomes which are contrary to consumers’ best interests.

The introduction of an annual renewal requirement will actually undermine the strength of the FoFA reforms by reducing consumer protection. It will result in financial advice skewed towards short-termism and create a fast food style of advice industry – one that provides the McDonald’s equivalent of advice and churns through customers as quickly as possible.

A superior outcome is the introduction of a three-year renewal framework where consumers can opt-out and cease paying for advice at any time.

This framework would be supported by the requirement for advisers to provide consumers with an annual statement outlining their fees and services over the past year and for the next 12 months.

On the matter of volume-related payments, the financial services industry acknowledges that some practices need to change – volume-related payments that distort advice and are not in the best interest of consumers should be banned.

But not all volume-related payments distort advice. And a blanket ban on all volume-related payments will sacrifice the benefits of scale that deliver savings currently enjoyed by consumers.

We propose that the following volume-related payments that can and do distort advice be banned:

• preferentialpaymentswhichincrease a product’s accessibility or visibility on a platform or approved product list;

• adviserremunerationschemes which are based solely on sales volume and which are biased towards the placement of business in a specific product and platform; and

• volume-relatedpaymentsfrom funds managers directly to licencees or advisers.

But other payments that provide the benefits of scale need to be maintained.

In the debate about remuneration it has been suggested that asset-based fees are the same as commissions. This is wrong.

An asset-based fee provides a mechanism for consumers to pay for advice out of their investment balance, rather than up-front out of their bank account. Critically, the fee must be disclosed in dollars and not simply as a percentage.

Asset-based fees differ from commissions in three key respects.

First, an asset-based fee is determined between a financial adviser and their client. Second, it can be turned off by the client at any time. Third, the consumer is free to negotiate an alternative means of paying for the advice which is not asset-based.

With some important refinements, the FoFA reforms can meet their objectives of improving trust and credibility in financial advice and ensure advice is not put beyond the reach of those who need it most.

John Brogden

The introduction of

an annual renewal

requirement will

actually undermine the

strength of the FoFA

reforms by reducing

consumer protection.

It will result in financial

advice skewed towards

short-termism and

create a fast food style

of advice industry –

one that provides the

McDonald’s equivalent

of advice and churns

through customers as

quickly as possible

Update your calendar in 2011 with these important AIST dates...

Fund Governance Conference

3 & 4 May - The Swissotel Sydney This conference will put the challenges on the table and identify ways in which the not-for-profit representative superannuation sector can lead the way.

Member Engagement Symposium (MES) - formerly Member Services Symposium 22 June - Sofitel Melbourne On Collins This event is designed to assist funds in developing member engagement and member education strategies and services.

Superannuation Administration Symposium (SAS) 16 August - Sofitel Melbourne On Collins This forum addresses current issues, raises new ideas, and challenges participants to think about the future of superannuation administration.

Australian Super Investment Conference (ASI)

7 - 9 September - Grand Chancellor Hotel, Hobart ASI is a specialist event addressing superannuation investment issues and trends, and attracts trustee directors, fund staff and investment professionals.

Superannuation Insurance Symposium (SIS)

Venue and date to be advised This conference addresses the key issues affecting superannuation insurance and its impact on working and retiring Australians.

Awards for Excellence

24 November - Sofitel Melbourne On Collins The AIST Awards for Excellence, held annually since 2008, were created to acknowledge the pursuit of excellence and professionalism of the people working in the representative superannuation industry.

For more information, please visit the website www.aist.asn.au or contact AIST on +61 3 8677 3800 or [email protected]

Australian Institute of Superannuation Trustees Ground Floor, 215 Spring StreetMelbourne VIC 3000

FullPage_Calendar.indd 1 11/03/2011 2:26:43 PM

Wouldn’t you like 12% super?

Go to the facebook page 12%: your future, your call and click ‘Like’

Support AIST’s campaign and help make this happen!

To learn more about the 12% campaign, visit the website www.12percent.com.au

AIST_Qtr_Facebook_Apr.indd 1 10/03/2011 12:46:19 PM

AIST Viewpoint Investment MagazineApril 2011 69

In search of the Charlie Sheen effectPerhaps more than any other

industry, the super industry is

used to change. Just think of

the number of times that rules

have been tinkered with over the

years, before we even mention

Jeremy Cooper. And we’re not

afraid to try new things – even

social media, writes FIONA

REYNOLDS, CEO of AIST.

Social media is revolutionis-ing the way we communi-cate, both as individuals and

as businesses. Twitter, Facebook, Linkedin, YouTube – businesses are increasingly using them to commu-nicate with customers and to gain interest from outsiders.

The whole notion of ‘going viral’ never existed until these social media platforms were invented. Now, a video posted on YouTube can become a hit, watched by thousands or even millions of people because people share them within their own networks.

With over 200 million Facebook users, and close to that on Twitter, these two platforms alone present great opportunities for businesses – and super funds – to capture interest and engage consumers. But how can the super industry use these tools effectively, and is there a real role for them in

increasing member engagement?Member apathy and

engagement has long been one of the biggest issues facing our industry and one that funds continue to grapple with. It’s definitely a challenge to engage young members who are probably 40 years away from retirement and more concerned about paying off their university fees, saving for overseas travel, or saving for their first home.

But while superannuation doesn’t register on their radar, Facebook certainly does, as any parent battling to get their teenagers to complete homework can attest.

Given Facebook’s average user is a secondary school or university student, it’s the perfect medium for funds to attempt to engage

young members and create brand awareness.

HESTA Super Fund did this quite successfully in 2009. The fund won AIST’s platinum communication award for its advertising campaign on Facebook, which targeted student nurses. The fund offered a freebie in exchange for students registering their details with the fund, and it was overwhelmed at the number of responses.

While it’s not new to be able to target particular groups with advertising, social media allows businesses to do this instantaneously. Twitter, in particular, provides the perfect opportunity for businesses to communicate what they’re working on in nice, neat little soundbites.

A number of funds are present in the ‘Twittersphere’ – Telstra Super, Care Super and HOSTPLUS are some of the most active – tweeting news, updates and new initiatives to their followers. Yet Twitter has a much older user-base, with an average age of around 40, and in a world where everyone is time-poor it’s no wonder businesses are flocking to Twitter in droves.

Twitter appears to be more of a business-to-business interface.

Businesses follow businesses, and it seems a similar case with super funds – the industry follows each other, but there are so few ‘members’ in comparison.

AIST too has jumped into the deep end: we’re running a CMSF Twitter feed as part of the iPhone and Blackberry app, as well as our own AIST Twitter account. CMSF 2011 will also be the launching pad for our Facebook campaign to gain support for a 12 per cent superannuation guarantee, with a website (www.12percent.com.au) inviting visitors to sign up to an online petition.

Social media hasn’t been something that we’ve used extensively, and given people’s apathy towards superannuation, it will probably take some time before we see members ‘following’ their super funds in droves. Likewise, it will be interesting to observe the success of our campaign – on Facebook and more generally online – and of our foray into Twitter, and to see whether they assist in achieving that milestone of 12 per cent.

On the upside, Charlie Sheen had one million people follow him in the space of just 24 hours – there’s hope for us yet.

Fiona Reynolds

unbalancedApril 2011Investment Magazine70

‘Neutralising fee debate’ is the nice way to say it

Last month, the chief executive of Colonial First State, Brian Bis-saker, broke bread with a bunch of journalists for the first time in his four-year reign.

The retail veteran was about to announce a 98.5 per cent reduction in the minimum investment for Colonial’s FirstChoice platform , but overt aggression is never a good look in financial services. One can imagine the self-coaching that went on in the mirror beforehand.

“Do not…mention the war.”Straighten tie.“Do not…mention the industry

funds.”Remember not to shoot cuffs. Or

Cuffe, for that matter…UniSuper’s sort of an industry fund, right?

And so it was that over lunch, Bissaker positioned his bold grab for the mum-and-dad superannu-ants as “neutralising the fee debate”, rather than the face-off with Mel-bourne’s finest that it clearly was (at least to some of the more excitable journalists present) .

One hopes the Industry Super Network was careful what they wished for all those years ago, because now they’ve got it.

Price and performance have been the two areas where the not-for-profits traditionally claimed su-periority over retail. However, now that the long-running campaign against trailing commissions has finally succeeded – and the master trusts have unhooked their product fees from any advice fee – the prod-ucts themselves cost basically the same if there’s no friendly financial planner in the picture.

To be honest, the Colonials at the lunch didn’t seem too fussed about how the new-generation

First Choice Wholesale, with its minuscule minimum investment of $1500, would be sold. Whether it’s via an adviser or not, Bissaker admits he needs to get plenty of middle Australia through the door, to make up for the fact there will be a lot more marginal accounts to service than in the days of the $100,000 minimum.

It wasn’t mentioned over lunch, but you’d have to think that Colo-nial’s parent Commonwealth Bank will eventually follow what Westpac has done with BT Super For Life, and risk adviser ire by selling First Choice Wholesale over the counter at branches.

BT Financial Group’s head of superannuation, Mel Evans, reck-ons 75 per cent of inflow to Super for Life is driven by the tellers.

Is it any surprise that Members Equity and industry funds are now opening branches as well?

The big difference in the armouries of the two combatants is now asset allocation.

The retail crowd still avoid un-listed investments like the plague, even though AMP and Colonial in particular have sister funds man-agement companies bulging with expertise in things such as direct property and infrastructure.

Bissaker’s crew place an empha-sis on getting the daily unit price ex-actly right, and point to the inequi-ties created by holding assets which are only re-valued once a year. It’s an obsession that Unbalanced has never really understood. Sure, it all helps Colonial get customers their tax statements within three weeks of the financial year close, but wouldn’t the punters prefer to wait another month to learn of a higher return assisted by private equity?

Expect to hear a lot more of this type of argument out of Melbourne in the coming weeks and months.

Members don’t care who their

fund’s trustees are, so the split between retail boards made up of executives and independents, and industry fund boards of employer/employee reps and independents, isn’t going to matter in the battle for hearts and minds.

And yes, the retail funds by and large have better administration and service, but expect this gap to close once Superpartners finally installs its new platform more than two years after the original launch date.

Price and investment returns are the weapons that matter in this war. And price has, indeed, been neutralised.

Our post-Cooper conference

Jeremy Cooper seems to have become the closest thing the super industry has to a celebrity.

Witness last month’s ‘Post-Re-tirement Solutions for Super Funds’ conference in Melbourne, organised by our publisher, Conexus Finan-cial.

The man who was once a rela-tively anonymous ASIC lawyer gave the keynote speech, and ran out of time to answer all the questions from the floor.

So the audience just kept grilling Cooper after subsequent

sessions, even as he was sitting back down among them.

Support Erik MatherMany readers of this page

will have crossed paths with Erik Mather, the amiable funds manager who has done more to advance the cause of good corporate governance in Australia than most.

The founder of Regnan, and before that BT Governance Ad-visory Services, has been helping superannuation funds to hold their investee companies to account for many years.

However Erik’s battles for executive remuneration reform and corporate action on climate change pale in comparison to the fight he is now facing – he was recently diag-nosed with multiple brain tumours, lung and bone cancer.

Those who know Erik know he will fight, and keep a great sense of humour while doing so, but he and his family have asked for messages of love and support.

To help, and to keep updated on Erik’s new role of “knocking off cancer cells”, visit www.teamerik.net. We at Conexus wish him all the best.

the lighter side of a serious industry

Erik plans to ride out his biggest battle yet

* Assets as at 30 June 2010. This advertisement is issued by Martin Currie Investment Management (MCIM). MCIM is registered in Scotland (no 66107), registered office Saltire Court, 20 Castle Terrace, Edinburgh EH1 2ES. Martin Currie Investment ManagementLimited (“MCIM”) is exempt from the requirement to hold an Australian Financial Services Licence under the Corporations Act 2001 in respect of financial services provided to Australian wholesale clients by virtue of the application of ASIC Class Order 03/1099.MCIM is authorised and regulated by the UK Financial Services Authority (“FSA”). The FSA’s regulatory regime differs from the Australian regulatory regime. This document was prepared/issued by MCIM. Equity Trustees Limited (“EQT”) (ABN 46 004 031 298)AFSL 240975 is the Responsible Entity of the Martin Currie Global Alpha Fund (ARSN 130 718 419) (the “Fund”). This document is only provided for information purposes and does not contain investment recommendations nor provide investment advice. Westrongly encourage you to obtain professional advice and to read the Fund's product disclosure statement in full before making an investment decision. Units in the Fund will only be issued upon receipt of a completed application form accompanying a currentproduct disclosure statement. MCIM, EQT and their officers, employees, agents and affiliates may have an interest in the Fund and may receive fees from dealing in the Fund. For investors outside Australia, it is your responsibility to find out about, and observe,all applicable laws and regulations of any relevant jurisdiction. If you, or your client, plan to buy shares, you must find out the legal requirements for doing so as well as any applicable exchange control provisions and tax implications.

It’s a questionof conviction

Big enough to be powerful.Small enough to be agile.

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From our headquarters in Edinburgh, we manage A$18 billion in active equity portfolios for clients aroundthe world.* Our short lines of communication andcollegiate culture ensure swift decision-making. We alsobelieve in being close to our clients, which is why wehave teams in London, New York, Shanghai, Melbourne,Singapore and Zurich.

In 2008 we made a long-term commitment to Australiaby opening a Melbourne office under Kimon Kouryialas.We now manage over A$700 million for investors inAustralia and New Zealand.*

Global equitiesOur expertise in global equities has made this a focal pointof our business. The Martin Currie Global Alpha Fund, anAustralian-regulated unit trust, is our flagship strategy.

This offers an unconstrained portfolio of our 30–45 beststock ideas outside Australia – a distinctive solution froman experienced and highly rated team.

Emerging marketsOver 50% of Martin Currie’s funds under managementare invested across Asia and emerging markets. Thisincludes over A$5 billion in China, where we have 15years’ experience and one of the best-resourced teamsin the business.

Emerging markets are increasingly important to both the global economy and our clients. To build on ourstrengths here, six more emerging-markets specialistswill join us this year. Kim Catechis, a highly ratedemerging markets specialist with 23 years’ experience,will lead our expanded team – which will be one of themost experienced and deeply resourced in the world.

For more information about Martin Currie's services,contact Kimon Kouryialas on (03) 9653 7314, by e-mail on [email protected], or visitwww.martincurrie.com/auinstitutional

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