Super Review March 2011

T H E L E A D I N G I N D E P E N D E N T J O U R N A L F O R T H E S U P E R A N N U A T I O N A N D I N S T I T U T I O N A L F U N D S M A N A G E M E N T I N D U S T R Y

The Federal Oppositionhas sent a clear messagethat it intends to legis-

late to change the rules re-lating to modern award de-fault funds in the event thatit gains office.

In particular, the Opposi-tion has signalled that therelative investment per-formance of default fundsmust be a part of the selec-tion criteria, suggesting thiswas something that was over-looked in the processes orig-inally initiated by the Gov-ernment and implementedby the Australian Industri-al Relations Commission.

The Coalition’s position hasbeen made clear in statementsby Opposition frontbenchersSenators Mathias Cormannand Eric Abetz, both of whomhave questioned the manner inwhich default funds have beenselected and have suggested abias towards industry funds.

Utilising the forum createdby the Senate Education,Employment and WorkplaceRelations Legislation Com-mittee last month, Abetzasked Government frontbencher Chris Evans whetherthe Government was con-cerned “that some of the

funds that are included in theawards reflect a union indus-try fund bias and self-interestof the industry union funds,because the organisationsthat appear before FairWork Australia are in factalso often partners in thesesuperannuation funds?”

When Evans asked Abetzto explain what he meant,the Opposition frontbenchersaid: “Well, you might havea trade union and an indus-try body that in fact partnerin an industry super fundand – surprise, surprise –the joint recommendation isthat their particular super-annuation fund is the one(or one of the ones) thatshould be included in themodern award.”

Abetz then claimed thatthe former Minister for Fi-nancial Services, Superan-nuation and Corporate Law,Senator Nick Sherry, had ac-tually written to the Indus-trial Relations Commissionsuggesting that fund per-formance should be a crite-ria in selecting default funds– but this did not now appearto have been the case.

In doing so, Abetz specifical-ly referred to the performance

of the MTAA fund, which hesaid “out of 49 super funds,came in last for rate of returnbut is nevertheless jammed inthere as a default super fund”.

“One wonders what ro-bustness actually went intodetermining that that onewas worthy of inclusion in amodern award,” he added.

Abetz then echoed the sen-timent of Cormann in claimingthe Government had commit-ted to asking the Productivi-ty Commission to review theselection of default funds dur-ing the election campaign.

Later, during questioningof Treasury officials withinthe Senate Economics Com-mittee, Cormann asked whythe Government would notsupport one of the CooperReview recommendations forequal representation on su-perannuation fund trusteeboards. SR

Default superannuation fund

arrangements under modern awards

appear certain to face significant change

in the event there is a new Government,

including ensuring that investment

performance is a key criteria.

Opposition targets default funds6 EDITORIALWho really benefits from fund consolidation?

9 FUND MERGERSIndustry a step ahead of the Government

For the latest news, visit superreview.com.au

16 FIXED INCOMEFixed income investing still in the driver’s seat

22 GOLF DAY PHOTOSAll the best photos from theSuper Review charity golf day

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COMPANY INDEX 2 NEWS 3 EDITORIAL 6 FUND MERGERS 9 FIXED INCOME 16 GOLF DAY PHOTOS 22 ROLLOVER 24

March 2011 Volume 25 - Issue 2

Mathias Cormann

The Government hadcommitted to asking

the ProductivityCommission to review

the selection ofdefault funds during

the electioncampaign.

2 PAGE TWO www.superreview.com.au

SUPERREVIEW * MARCH 2011

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COMPANY INDEXAuscoal ..............................................................................................................................3

Association of Superannuation Funds of Australia....................................................................4

CoreData ............................................................................................................................3

Financial Services Council ....................................................................................................4

Harvard University ..............................................................................................................3

Health Super........................................................................................................................3

Investec Global Aircraft Fund ................................................................................................3

Maritime Super ....................................................................................................................3

Russell Investments ............................................................................................................3Self-Managed Superannuation Funds Professional Association of Australia ................................3State Street ........................................................................................................................3UniSuper ............................................................................................................................4Wilshire Private Markets Asia Number 2..................................................................................3

HEALTH Super has released informationon tax saving strategies involving super-annuation aimed at its members.

Tips were compiled by Health Super’schief operations officer, Carol McKelson-Timmins, who said voluntary super contri-bution is one of the tax saving strategiesmost overlooked by members.

McKelson-Timmins said voluntary con-tribution could include salary sacrificing,spousal contributions and co-contributions,but noted many Australians were not awarethat they could use their superannuationfund to minimise their tax.

“In general, Australians are not engaged with

super at all until they start approachingretirement, and that is too late,” McKel-son-Timmins said. “We are trying to educatemembers and get the information out thereabout tax saving strategies involving super.”

She added these strategies do not haveequal benefits for all Australians and thatmembers needed to work out which oneworks best for them. SR

THE lowering of the supercontributions caps has had asignificant impact on retire-ment savings, with $15.1 bil-lion less going into super asa result, according to researchcommissioned by the Self-Managed SuperannuationFund Professionals’ Associ-ation of Australia (SPAA)and Russell Investments.

The research, which was con-ducted by CoreData/brand-management in November andDecember 2010, involved sur-veying 1,331 Australian con-sumers, of whom 431 were self-managed super fund (SMSF)

trustees and 258 high-net-worthindividuals without SMSFs.

SPAA chief executive AndreaSlattery said the research provedthat the lowering of the contri-butions caps had a significant im-pact as the retirement savingsof around half the SMSF trusteesquestioned had been limited. Theresearch showed that this groupwould have contributed on av-erage $72,704 each to their SMSFif contribution cap limits wereraised, equating to a collectivecontribution of some $15.1 billion.

“We believe that this legisla-tion is restrictive and prohibi-tive and counter to the intent of

the Government to have superas the main retirement savingsvehicle for Australians,” Slat-tery said. She added the SPAAwould like to see the contri-butions caps return to pre-2009levels.

The research also found thattrustees were working longerwith more than half (53.2 percent) intending to work part-time post-retirement comparedto 32 per cent of non-trustees.

“As trustees work longer, gov-ernment should look at extend-ing age limits for non-conces-sional contribution caps to 75years old,” Slattery said.

She added that clarity wasneeded around the borrowing insuper rules, as the research

found that while two in five ad-visers were advising on the rules,only one in five trustees were in-terested and even less were bor-rowing. Some 76 per cent oftrustees have not borrowed toinvest and do not plan to do so,the research showed.

However, confidence in thesuper system remained, withthree in four SMSF trustees(74.0 per cent) saying they wereconfident in super as a vehiclefor retirement savings, signifi-cantly higher than the propor-tion of non-trustees who sharetheir level of confidence (53.6per cent). SR

MARCH 2011 * SUPERREVIEW

Health Superreleases tax advice INSTITUTIONAL investor confidence has taken a hit this year, ac-

cording to the latest State Street Investor Confidence Index forFebruary.

The index revealed that global investor confidence had fallen for asecond successive month, down 9.2 points from its January figure.

The index analysis said that declines were evident across all re-gions with North American confidence falling 6.8 per cent while Asianinvestor sentiment fell 4.3 per cent.

However, it said the most telling signs of slipping sentiment wereevident among European investors, where confidence had declined13 points.

Commenting on the findings, Harvard University professor Ken Frootsaid the numbers were “fairly empathetic in signalling a decline in in-stitutional investor confidence”.

“Political turmoil in the Middle East and North Africa, policy tight-ening in emerging markets and qualms about the pace of the recentrun-up in developed markets equities are likely at the root of this,”he said. SR

www.superreview.com.au NEWS 3

Carol McKelson-Timmins

SMSFs miss out on billions due to contributions caps

By Chris Kennedy

A MERGER being consideredby Auscoal and MaritimeSuper funds will definitely notproceed in the near future, thetwo funds have confirmed.

The funds determined therewere greater savings to bemade through existing al-liances, which have generatedvarious synergies and cost sav-ings in investments, accordingto Auscoal chief executiveBruce Watson.

Over the past three years thefunds have worked together onthe Investec Global AircraftFund and the Wilshire Private

Markets Asia Number 2, andalso have a member educationalliance, Watson said.

Maritime Super chairPaddy Crumlin said there isa natural fit between the twofunds and there is much valueto be gained through strategicpartnership.

“We are keen to maintainand leverage this relationshipand will continue to supportexisting joint projects andlook for new ways to jointlyprovide value to members,”Crumlin said.

Auscoal Super chair ArthurWeston said that researchshows the savings for both

funds will be considerable, andthe value split more equitablethrough a well structured andmanaged alliance rather thana merger.

Both funds are keeping theiroptions open, Crumlin added.

“We have strong member loy-alty and engagement thanks toeach fund investing substan-tial time and effort in enhanc-ing their offerings. Both fundshave a suite of strategies de-signed to continually advance

this offering, increase scaleand remain highly competitive,with merger being but one op-tion for growth,” he said.

Maritime Super chief exec-utive Peter Robertson said thefunds are currently exploringwhether sharing financial ad-vice and clearing house capa-bilities will bring greater valueto members and employers.

Both funds agree that it’s im-perative to maintain appro-priate growth strategies andrecognise mergers as a way toachieve that growth, and areopen to merger discussions inthe future, according to a state-ment from Auscoal. SR

Auscoal and Maritime confirm merger won’t proceed

Andrea Slattery

Institutional investors turn nervous


4 NEWS www.superreview.com.au

By Chris Kennedy

THE Association of Superannua-tion Funds of Australia (ASFA) hasdisputed claims made by FinancialServices Council (FSC) chief ex-ecutive John Brogden that ex-panded intra-fund advice woulddilute the quality of advice receivedby Australians.

ASFA chief executive PaulineVamos agreed with much of whatBrogden presented and also sup-ported a level playing field, but point-ed out that the minimum licensingrequirements for super funds pro-viding full, scaled intra-fund adviceunder RG 146 were no less than thosethat applied to other planners.

In a speech outlining the FSC’s

position on proposed Future of Fi-nancial Advice (FOFA) reforms,Brogden said that expanded intra-funds advice was a poor substitutefor the tailored, quality financial ad-vice Australians need.

“Expanded intra-fund advice willbe delivered by super funds on mat-ters like transition to retirement andsocial security – areas that are far be-yond the duties and expertise of superfund trustees,” Brogden said.

But Vamos said that constant talk

about advice provided by super fundtrustees being less qualified thanother planners were incorrect. Mostfunds employ fully qualified finan-cial planners, she said.

“We support the professionalisa-tion of the industry but we also sup-port the delivery of scaled advice ina cost effective manner to all mem-bers of funds,” Vamos said.

“The most significant outcome fromFOFA has to be the regulatory frame-work around scaled advice.” SR

ASFA clarifies on intra-fund advice

Pauline Vamos

McCreddenquestionsMySuper A SUPERANNUATIONfund executive has ex-pressed doubt about theability of funds to lowersuper costs in line with My-super recommendations.

Speaking at an Associa-tion of SuperannuationFunds of Australia (ASFA)lunch, the chief executiveof UniSuper, Terry Mc-Credden, said that UniSu-per already had costs ofunder 1 per cent for mem-bers and that reducing theirfees any more would reducetheir revenue.

“I don’t believe our costbase is going to fall thatmuch,” McCredden said.

“What services are wegoing to offer, in particular,to reduce our costs? Are wegoing to do away with ed-ucation seminars? Onlineservices? Access to bene-fit quotes, or calculators,or other educational serv-ices?” he asked.

McCredden sarcasti-cally questioned whetherthey could reduce costs bynot answering emails orsending out membernewsletters.

Both disengaged and en-gaged super fund memberswould still want the extraservices they offered, Mc-Credden said.

“Realistically, how can wenot offer disengaged mem-bers those services that wecurrently offer?” he said.

The driver of adminis-tration costs in the indus-try over the last five yearswere compliance costs, notservices costs, he added. SR

In whose interest?

Less than a decade ago, thismagazine published a fea-ture titled ‘Top 300 Super-

annuation Funds’. Super Reviewstopped publishing the featurewhen the number of funds thatfulfilled the criteria of ‘top’ de-clined below 100.

To be included in the originalTop 300, a superannuation fundneeded to boast a given levelof membership and a given levelof funds under management(FUM). In the early days, onlythe top 20 or so of the Top 300funds could be expected to havemore than $1 billion in FUM.

Times have changed. Thesedays few mainstream funds haveless than $1 billion in FUM, andthe non-corporate funds that doare inevitably earmarked foramalgamation.

But it is not natural market

forces that have been respon-sible for the decline and fallof Super Review’s Top 300 se-ries. It has been Governmentpolicy and regulatory initiatives– the most recent of which isgiving rise to a further round ofnegotiations between super-annuation funds, and has beenprompted by the looming ex-piry of tax relief measureswhich have made such merg-ers more attractive.

Prior to the tax relief meas-ures, the major driving force be-hind superannuation fund con-solidation in Australia was theAustralian Prudential Regula-tion Authority’s (APRA’s) impo-sition of a new superannuationfund licensing regime – some-thing which, according to APRAchairman John Laker, saw a dra-matic drop in the number of su-perannuation trustees.

In 2007, Laker told a meetingof the then Investment and Fi-nancial Services Association that“at 30 June, 2004, the day beforelicensing began, there werearound 1300 trustees. At 30 June2006, there were just over 300 li-censed trustees”.

And he made clear that APRAitself was a major beneficiary of

the reduction, saying: “This con-solidation will impact on the wayin which APRA allocates its re-sources. In the past few years wehave allocated a greater pro-portion of our resources to su-perannuation to handle the li-censing transition. I expect thatfrom the next financial year wewill see a redeployment of someresources back to the other reg-ulated industries.”

More recently, the chairmanof the Cooper Review into su-perannuation, Jeremy Cooper,has pointed to the desirability offewer but larger funds, citing theexperience in Canada and theability of large funds to direct-ly invest in major infrastructure.

The evidence is clear to see:the consolidation that has oc-curred in the Australian super-annuation industry has occurredas a result of Government policyinitiatives rather than by marketforces.

What is more, the nature ofthe rules about superannua-tion fund mergers and amal-gamations means that indi-vidual members do not reallyhave a say. It may be members’money in the superannuationfunds, but it is the trustee

board members who decidewho will manage it.

Where the most significant re-cently proposed fund mergeris concerned – Westscheme andAustralianSuper – the views ofthe members of Westscheme willnot be canvassed. Notwith-standing the notoriously inde-pendent views of West Aus-tralians, they will be asked totake on trust the benefits thatwill flow from being taken underthe umbrella of mega-fund Aus-tralianSuper.

There exists a lingering ques-tion about whether ‘bigger’ ac-tually equals ‘better’, and overthe past decade there has beenplenty of evidence to suggestthat while some very small fundsmay struggle, many mid-size

funds manage to do perfectlywell in terms of investment per-formance and delivery of serv-ices to members.

There is no doubting that Aus-tralianSuper has an admirabletrack record, but it is worth not-ing that it has not been regularlytopping the charts maintainedby the major ratings houses. In-deed, the top performers haveinevitably been larger mid-sizefunds.

Perhaps the most disturbingfact to emerge from an exami-nation of the consolidation thathas occurred within the Aus-tralian superannuation fund in-dustry over the past decade isthat beyond Government policy,the major consideration for su-perannuation fund trustees hasbeen the rising costs associatedwith regulatory compliance.

Almost without fail, trusteesof funds that have chosen tomerge with larger funds havecited rising regulatory compli-ance costs and the consequentneed for better resourcing.

Fewer but larger superannu-ation funds will certainly makelife easier for Australia’s regu-lators and would certainly seemto fit with the views of peoplesuch as Jeremy Cooper, but itis uncertain whether the best in-terests of members will ulti-mately be served.

The Government may wellend up creating institutions thatare too big to fail. SR

Super funds are experiencing another round of mergers

and consolidation, but whose interests are really being

served? And will the funds become too big to fail?

Mike Taylor


6 EDITORIAL www.superreview.com.au

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www.superreview.com.au FUND MERGERS 9


Having started at a numberin the thousands beforereaching the sector’s cur-

rent population of around 67funds, industry super is nostranger to mergers and con-solidation. Yet while recentmerger activity may appear tobe driven by signals from theGovernment’s Super System Re-view that the industry is head-ing for fewer but bigger funds,the reality is that the super in-dustry has been on this path forsome time.

But mergers are nothing new– and according to Tria Invest-ment Partners managing part-ner Andrew Baker, the SuperSystem Review has got littleto do with it.

“I think that regulatory push-es are relevant at the marginbut I think even they have littleto do with the underlying trendtowards mergers,” he said. “It’sall about the changing eco-nomics of the industry.”

“The reality is that smallerfunds are finding it harder andharder to deliver a competitive,quality product at the rightprice,” Baker continued. “That’sthe ultimate problem and be-yond that most of them canprobably see a wave of newcosts coming down the pipelinethat they haven’t yet dealt with.”

“So advice, retirement in-come product development, it’sall yet to hit them and if they’vegot pricing issues now, it’s onlygoing to get worse.”

Russell Mason, Mercer world-wide partner and head of de-fined contribution consulting

for Australia, said that thebiggest impetus for mergers inrecent times had been new li-censing requirements from theAustralian Prudential Regula-tion Authority (APRA) and theAustralian Securities and In-vestment Commission (ASIC).

“That caused a number offunds to consider mergers butit’s also been a result of the con-solidation of unions,” he said.“Often there’s an alignment withthe union and employer asso-ciations between funds so I’veseen mergers where employerassociations and unions havemerged or consolidated and, asa result, they’ve realised thatthese two funds have got exactlythe same union, exactly thesame employer association, andyet we’ve still got a fund in NewSouth Wales and one in Queens-land, for instance.”

“So if they can merge into asingle fund and get someeconomies of scale, why not?”asked Mason. “When I joinedthe industry back in the late 80sthere were 4,500 funds. Thatnumber’s been gradually shrink-ing over time with many of thesmaller funds going earlier andthe bigger funds conductingmergers in more recent times.

“It’s a maturing industry andas competitive as it’s ever been.”

According to Mason, it is alsosignificant to note that compe-tition is not only between indus-try funds and retail master trusts.

“When you’re an industryfund now, your competitors arejust as likely to be other indus-try funds as they are retail

funds,” he said. “And Cooper’sinitiatives are only going to in-crease that competitiveness.

“If MySuper is implement-ed in a couple of years’ time andeach fund has a MySuper optionthat meets the modern awardrequirements, then it will beopen slather for competition,”Mason added. “But the questionis: will funds have the resourcesto compete?

“And it’s the pursuit of an an-swer to that question that Ithink is driving a lot of thesemerger discussions.”

MERGERS AND SCALEOffering the perspective of alarge industry super fund thathas already navigated a numberof mergers, AustralianSuper gen-eral manager for growth and newopportunities Paul Schroder saidthat scale was the key issue.

“In fact, our thinking and ourstrategy around scale is whatwas behind the fund’s origin, increating AustralianSuper be-tween Australian Retirement

Fund [ARF], SuperannuationTrust of Australia [STA] and Fin-super in July 2006,” he said. “Soone of the trends that was iden-tified then by the respectivetrustees of those funds was tosay that we think, with fundchoice and as the environmentbecomes more competitive, thathaving a known brand and ameaningful size and scale willbe a source of improving retire-ment outcomes for members.

“AustralianSuper was set upwith a view to seeking scale tobe able to extract benefits formembers and seeking scale tobe have a prominence and abrand recognition that wouldmake it likely that memberswould be attracted to that fund,that employers would be at-tracted to that fund and thatnot only can you gain scale butthat you can have a trajectorywhere you’re continuing to growscale,” Schroder continued. “Sowhilst there were many thingsin the Cooper Review [theSuper System Review, chaired

by Jeremy Cooper] that we wel-comed and many things that wethought were very sensible, ourplans to increase our scale start-ed before the creation of Aus-tralianSuper and actually bearno relationship to it.”

Yet in saying that Aus-tralianSuper’s own movementsin the merger and consolidationspace had little to do with therecent Super System Review,Schroder added that there wasno doubt that the discussionsabout scale that it had prompt-ed were significant.

“Each fund trustee has tomake their own decision abouttheir own strategic position: howthey will improve retirement out-comes, how they will improve in-vestment performance, how theywill lower costs, how they willoffer products and services, howthey will deal with the compli-ance burden, and how they willbe attractive and grow,” he said.“And if you say it’s not through

The Government may be creating the

environment for further superannuation

fund amalgamation but, as DAMON

TAYLOR reports, the industry has been

setting its own pace.

The invisible hand

Continued on page 10 ☞

scale, then what is it?“What is going to be that

fund’s unique strategic posi-tioning?” asked Schroder. “Nat-urally, there’ll be plenty of fundsthat carve out their own niche.

“We’ve just decided that theadvantages of scale, especial-ly if you can do everything else,are too significant to ignore.”

Of course, the background toSchroder’s views is the proposedmerger between AustralianSu-per and Westscheme an-nounced on 8 February. Themerger has come as a surpriseto many within Australia’s superindustry, and yet Westschemechief executive Howard Rosariosaid that after all the facts hadbeen examined, the right de-cision had been obvious.

“We started this process oflooking at economies of scalesome time ago,” Rosario said.“I think our first memorandumon the matter was in April of2004 when the discussionabout scale started to be ar-ticulated by Warren Chant[principal of research houseChant West] and Jeff Bresna-han [managing director of re-search house SuperRatings].

“So as a due diligence re-sponse to an important issuethat was being discussed at thattime, we had our funds undermanagement reviewed in theinterests of an assessment as towhether or not they represent-ed sufficient scale at the time,”Rosario continued. “So, initial-ly, our focus was on funds undermanagement and we were re-assured through assessmentsthat we continued to do everyyear that we had scale.

“The thing that changed in allof this was the election of theLabor Government in 2007 and,in particular, the announcementof the lost member consolidationinitiative by Nick Sherry [formerMinister for Superannuation andCorporate Law].”

Rosario said that when Sher-ry had announced that in a

population of 33 million su-perannuation accounts it was in-tolerable to have 6 million lostaccounts, he had introduced anentirely new way of looking atscale.

“Scale now became the issueof ‘how many people do youserve’, because under what Min-ister Sherry had set as an ob-jective, the Government wasgoing to take steps to ensurethat something like 6 million ac-counts were going to be re-united with the people they be-longed to,” he said. “So thatwould reduce the overall pop-ulation of the customer base bynearly 20 per cent and, if a fundhad a 20 per cent reduction andassuming that this was evenedout across the board, this wouldhave a huge impact on your ca-pacity to amortise your costs.

“So for the first time, therewas the prospect that you weregoing to have to incur higher ad-ministration fees, higher serv-ice fees, higher compliance feesand the Cooper Review only re-inforced that, showing that theGovernment had serious intentabout this inexorable growth inthe number of accounts overwhich you could spread thesecosts,” continued Rosario. “Sowe said that if you take a fundlike Westscheme with some-thing like 35 per cent inactivi-ty in our membership base (ie,for 35 per cent of our memberswe don’t get a current year con-tribution), then this is a goingto be a serious issue.”

According to Rosario,Westscheme had traditionallymanaged inactivity on a for-mulaic basis, transferring peo-ple out for small and inactiveaccounts, but that the prospectof amortising the cost the fundwas currently incurring for200,000 members over the130,000 that remained had beenan unsettling one.

“So that was the real driver,which took our minds awayfrom the quantum of fundsunder management, which theCooper Review has continued

to focus on,” he said. “And thenwe had this other thing emerg-ing in the competitive spacewhere the bigger funds startedto offer more and more services.

“So they were offering farmore flexible and substantialinsurance programs, they beganto offer much wider investmentoption platforms, and a lot ofthese funds were able to offerthose services for the same ad-ministration cost – $1.50 per

week – that Westscheme cur-rently charges,” continuedRosario. “And that’s where thedilemma really arises.

“So what do you do when youdon’t have the institutional im-perative which says ‘come whatmay, our institution must sur-vive’ and rather the really im-portant imperative is what’sin the best interests of yourmembers? Well, it’s a no-brain-er, isn’t it?”

FUNDS UNDER MANAGEMENTNaturally, not all super fund ex-ecutives and trustees will cometo the same conclusions asWestscheme and Rosario. Formany, funds under manage-ment (FUM) continue to be themain measure in this debateand so it begs the question:what then is the size, and there-fore scale, sweet spot?

Schroder suggested that anumber of funds were grapplingwith that very thing but addedthat the AustralianSuper takeon it was somewhat different.

“That’s a really interestingquestion and I think people arethinking about that a great deal

right now,” he said. “I think peo-ple are saying ‘well, how big doI need to be?’

“But our question is: ‘How bigdo you need to be to get themaximum benefit for yourmembers?’” explained Schroder.“And if you ask yourself thatquestion, I’d point out that thesuperannuation sector is veryfragmented so if we’re thelargest fund by some measures,we only represent 3 per centof market share.

“And how much influencedoes 3 per cent of market sharehave compared to say 10 percent of market share?”

For Schroder, the bottom linewas that there was no size andscale sweet spot.

“We haven’t said to ourselves‘once you get to that number,you stop,’ ” he said. “What yousay is: ‘can you get more bene-fit for members by growingscale?’”

“So one, can you do that? Yes.Two, are we doing that? No, notenough. Do we want to do moreof that? Yes, we do,” continuedSchroder. “So we’re goingthrough this process saying wewant to build scale becausescale unleashes potential.

“But then you have to exe-cute so that that potential is de-livered in a meaningful, no-ticeable benefit to members.”

Offering an altogether dif-ferent view, Mason said that ifa number in terms of FUM waswhat one was concerned about,$10 billion was probably it.

“They’re the ones that shouldhave sufficient size and scale,”he said. “And at the other endof the scale, funds under $500million are probably under a lotof pressure to determinewhether they’ve got the size andscale to remain competitive.

“Where the line falls in be-tween is going to vary betweenfunds, and I certainly don’tthink I could draw a line in thesand and say ‘here it is,’ ” Masoncontinued. “I’ve seen efficient


10 FUND MERGERS www.superreview.com.au

☞ Continued from page 9


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$1 billion and $2 billion fundsand I’ve seen some inefficient$5 billion and $6 billion funds,and one of the things that wecould run the risk of doing isbeing too superficial in lookingat the reasons to merge andwho to merge with.”

Mason said that to him, itwould be eminently possible fora fund of $1 billion to survive theregulatory and competitive pres-sures of Australia’s upcoming su-perannuation environment.

“If they target a certain in-dustry, don’t try to be all thingsto all people, don’t try to offer awhole range of investment op-tions (and their market acceptsthat), then I see no reason whythey can’t survive at a smallersize,” he said. “They’ll have theirchallenges but this is a debatethat goes well beyond size.”

FINDING THE RIGHT FITBut whether trustees are con-cerned with a marker in termsof FUM, a marker in terms ofmember inactivity or someother measure entirely, merg-ers are much more than a num-bers game. And from the per-spective of an industry fundcomprised of what was once 14smaller funds, Schroder saidthat the central issue is fit.

“So what has been fabulousabout all of the discussion be-tween AustralianSuper andWestscheme is that the execu-tives of both funds and thetrustees of both funds havesquarely in the front of theirminds what’s in the best inter-ests of the member,” he said.“They’re not thinking aboutwhat’s in the best interests of thisdirector or what’s in the best in-terests of this association or thisorganisation, or what’s in the bestinterests of this business partneror what’s in the best interestsof corporate hospitality - they’rethinking about what’s in the bestinterests of the members.

“And that idea of fit –what areyou about, what are they about,

and whether that aligns – iscentral to it.”

According to Schroder, thenext issue, and one that wasoften underestimated, was thepeople part of a merger.

“So the STA, ARF, Finsuperthing – what that taught us isthat even when the people aredoing similar jobs in similarways, there’s going to be dif-ferences and you’ve got to re-spect those differences and ne-gotiate proper arrangement andreach agreements about thosethings,” he said. “The assettransfer as well – we’ve had alot of experience in that butyou’ve got to know how to do it,when to do it, who owns theasset, when do they own it, thein specie transfer of the asset.

“These sorts of things, assets,are important and insurance isoften the pivotal thing – havepeople maintained their insur-ance, are their premiums goingto be the same, is their cover atleast as good, what happens ifthey were away from work thatday? All of those sorts of things,”Schroder continued. “And we’vegot a key advantage in theWestscheme/AustralianSuperdiscussion because Tower is theinsurer for both.

“So this question aboutwhat makes a merger suc-cessful – well, for one, it’s not

going to really happen prop-erly unless there’s a close fit andfrom there, you’ve got to havethe same objectives and thesame values and you’ve got torespect one another’s culture.”

Echoing some of Schroder’sthoughts on member demo-graphics and background,Baker said that there was a tra-ditional perception that merg-ers had the best chance of suc-cess between funds with acomparable background.

“So you’re either generalistslike AustralianSuper andWestscheme, and the state-based funds are generalistfunds, but most of the indus-try funds are industry-based ob-viously,” he said. “So there’s anassumption that they can only

merge within the industry oracross similar industries and Ithink that influences a lot of dis-cussions as well.

“But personally, I don’t seewhy that’s necessarily right,”Baker continued. “Someoneonce said to me that buildersand nurses will never mix, andmaybe that’s right, but I thinkconceptually, is that the rightperception?”

For his part, Mason said thatthere was another side to thepeople issue that was just as im-portant when it came to fundsdiscussing a merger.

“My advice to anyone con-templating a merger is, beforeyou do anything else, get theprincipal parties together andsee if they’re willing to supporta merger and talk to one an-other,” he said. “At the fundtrustee and executive level,that’s great but unless thoseprincipal parties who really atthe end of the day decidewhether or not the mergertakes place philosophically canwork with one another, that’sthe key to it.

“It’s the little things and itmight sound trite but things likewhether there are seats on theboard, who is going to havethose seats on the board,”Mason added. “If I’m a small-er fund, am I concerned about

representation on the board,and do I think my members areconcerned about representa-tion on the board? These are thethings that need to be negoti-ated upfront.

“These are things thatshouldn’t be left to the lastminute because I’ve seen merg-ers fall over because they can’tagree on what may seem simplethings like staffing and trusteerepresentation.”

Again offering insight into amerging fund’s considerations inthis area, Rosario admitted thata lot of funds in Westscheme’s

position tended to look formergers with funds of a small-er or equivalent size.

“But what my trustees un-derstood was that there weresome issues impinging here thatwere inexorable and unavoid-able but they also understoodthat superannuation is a long-term engagement,” he said. “Atthe moment, the industry is ab-solutely obsessed about longevi-ty risk for the individual and weare now beginning to really ter-rorise people with the thoughtthat they are going to outlivetheir money.

“An aspect of that which Inow see is beginning to be ar-ticulated in the industry iswhat’s the longevity risk relat-ing to the institution that holdsthe money,” added Rosario.“And it seemed to me that ifWestscheme did amalgamationsof like-minded funds, smallerfunds, we still wouldn’t be deal-ing with that institutional risk– that is, will this institution beable to survive the 80 years thatmany people get associatedwith funds for?

“So why would we waste ourmembers’ time trying to solvethese problems, which couldonly be short term solutions,rather than look for institutionsof substance that have a greaterability, on the scale of surviv-ability, to survive in the reallylong term?”

According to Rosario, far-sighted people are now begin-ning to see that there are twosides to the superannuationlongevity coin: there’s not onlythe individual, there’s the in-stitution that serves the indi-vidual as well.

“The other issue here is thatWestscheme is currently a veryviable fund. The surprise thathas greeted this proposed merg-er announcement is a very un-derstandable response,” he said.“But the way to make sure thatyou ensure the best outcomesfor your members is to negotiate





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when you’re strong on their be-half, not when you’ve got no otheralternatives, and the primary fac-tor that we had identified andthat made Westscheme a validproposition was the Western Aus-tralian servicing.

“AustralianSuper was will-ing to continue the Westschemedivision of AustralianSuper, andto locate a bolstered adminis-tration function and client serv-icing function and a call cen-tre here in Perth so that thecustomers of that division wouldstill be served in Western Aus-tralia,” continued Rosario. “And,more importantly, they gave acommitment that the 100,000 orso people who are currently Aus-tralianSuper members in West-ern Australia will be moved tothat division.

“So while our two funds areamalgamating, our members willbe better served by having astronger, better resourced, morecompetitive presence providingservices here in Perth.”

THE IMPACT ON MEMBERSYet while the members of merg-ing funds may indeed be betterserved as a result of a union, as isRosario’s prediction for the Aus-tralianSuper/Westscheme propo-sition, member disruption is in-evitable. A number of memberswill have joined one fund, somevery deliberately, and yet they maynot be happy to suddenly findthemselves members of another.

The reality is that certain mem-bers will undoubtedly exercisechoice of fund and go elsewherebut for Mason, this is somethingthat can be mitigated by strongand early communication.

“Communicate early, com-municate often would be my ad-vice,” he said. “Yes, in mergersI’ve been involved with thereis often some leakage but, in themain and being frank about it,the majority of members are rea-sonably unengaged.

“I get a letter as a membersaying my fund is folding up and

merging into fund A but unlessI’ve had a bad experience withfund A or I’m philosophically op-posed to what they do, 99.99 percent of members will say ‘okay,’”continued Mason. “Even thosewho might have some concernsin that they thought their pre-vious fund was the best fund out,the bottom line is that it doesn’texist anymore.

“There can be leakage but, inthe main and for the ones I’vebeen involved with, if it’s com-municated well, if the membersfeel they haven’t had anythingtaken away from them and thatthis is in their interests, they’regoing to get more investmentchoices or a better insurance of-

fering or whatever, leakage usu-ally isn’t too bad.”

Schroder admitted that mem-ber disruption was one of thethings that trustees and fund ex-ecutives should care very deeplyabout.

“We need to be able to demon-strate that the outcome for themember will be better as a con-sequence of doing this,” he said. “So in the case of theWestscheme/AustralianSupermerge, we’re able to say for theWestern Australians there’ll bemore staff in Perth for the peo-ple that were in AustralianSu-per previously – tick.

“We’re also going to be able tosay the insurance for almosteveryone who used to be inWestscheme will be better –tick,” continued Schroder. “We’llbe able to say there’ll be capa-bility from the administratorthat will be unleashed in a pos-itive way and will put more jobs

on the ground in Perth – tick.”Schroder said that the con-

stant challenge was to make thecase to the members and makethe case to the employers.

“They may well have theirdoubts, they might have madetheir own choices one way or an-other along the way and nowthey’re presented with a differentchoice so you have to approachthis on the basis that everybodyneeds to be convinced.”

FIDUCIARY DUTYBut whether mergers and con-solidation are now top of trusteeminds for regulatory reasons, forconcerns over FUM, for pursu-ing what is in the best interestof members or a combination ofall three, the end game here isclearly providing for Australians’retirement.

If the history of the super in-dustry is any indication, deci-sions of this nature are in-evitable and Rosario is quickto point out that decisions tomerge should not be thoughtof as exit strategies.

“I find that an extremelyslighting and disparaging com-ment because, in some senses,I could have decided to form aview that justified continuingWestscheme,” he said. “I don’tthink I would have had a prob-lem for the next three to fiveyears but putting members firstmeant that I couldn’t focus onmy personal requirements.

“Somebody was asking me theother day if I was happy with thissituation that had evolved and Ianswered that I didn’t approachit from the point of view of whatmy personal emotions would beabout this – it was purely aboutwhat was the right thing to do,”Rosario continued. “Funds needto talk with their lawyers verycarefully and be clear how theirfiduciary duty has to be dis-charged and I think that you willfind small funds that will come toconclusion that it’s absolutely pur-poseful for them to continue.”

Rosario said that such fundsmay have a strong affinity with

their members, they may be veryengaged with them and theymay have members who knowwhat they want and feel thatthey get that.

“So, on that basis, they will havegreat validity and they will haveserved their fiduciary duty,” hesaid. “There will be other fundswhere the fiduciary duty will forceyou to the conclusion that thesepeople, who are engaged with youon the basis of trust, need youto reciprocate that trust by doingthe right thing for them andrecognising that they can be bet-ter serviced somewhere else.

“And that will undoubtedly bea hard test.”

Schroder’s final comment wasthat he was certain all indus-try fund trustees were sharplyattuned to looking after mem-bers’ best interests.

“Each one of them will cometo their own conclusions aboutthe ways to best do that but re-ally it boils down to how do youimprove your investment re-turns, how do you lower yourcosts, how do you have the rightproducts and services and meetall your compliance obligationsin a way that is sustainable?” heasked. “That’s the minefieldeverybody has to traverse.

“So industry fund trustees andthat form of joint representationhas led to funds having a reallygood focus on what’s the best out-come for the members,” Schrodercontinued.

“But the challenge for the nextfive years is to say, given all of theconstraints, given the competi-tive pressures, given the fact thepeople can exercise choice, giventhe fact that retail competitorsare being much more aggressive,how do I improve returns, reducecosts, have the products, servic-es and advice that’s required anddo that all in meeting all my com-pliance and governance obliga-tions?”

“That’s the tiller that everysingle trustee and every singleCEO has their hand very firm-ly on, to ask: ‘How am I goingto navigate those waters?’ ” SR


The invisible hand

Howard Rosario

“We need to be ableto demonstrate thatthe outcome for the

member will be betteras a consequence of

doing this.”


16 FIXED INCOME www.superreview.com.au

In a year when investor sen-timent was largely dictatedby lingering financial crisis

doubts, there’s no doubt that2010 proved to be a fruitful yearfor fixed income. Strong andconsistent performance piqueda number of investors’ inter-est and according to Jeff Brun-ton, head of capital markets forAMP Capital, there is every in-dication that fixed income willbe similarly blessed in 2011.

Reflecting on the 2010 cal-endar year, Brunton said therewas no doubt it had been an in-credibly strong year for fixedincome.

“If you look at what 2010 didin terms of the one-year andthree-year performance num-bers, we had the median fixedincome manager in Australiancore fixed income deliver 7.5per cent on a one-year basisand close to 8.3 per cent on arolling three-year basis ending2010,” he said. “In the case ofAMP Capital, we were topquartile. So we were about 50-odd basis points above thosenumbers and, in fact, credit re-turns did even better than thatwith one of our credit fundsdelivering just over 10 per centfor the year.”

“So in a year when the moneymarket, the bank bill index, pro-vided a return of 4.6 per cent,fixed income really did step upand provide a huge returnabove bank bills,” Bruntonadded. “Now, I guess 2011 hasstarted really strong, so Janu-ary was an extremely strongmonth for performance butFebruary has given about a

third of our year-to-date gainsback.”

Brunton said that fixed in-come broad market indiceswere up approximately 60 basispoints for the year in terms oftotal return.

“So that’s like a run-rate of5 to 6 per cent total return an-nualised whereas, in January,they were annualising about 12per cent return for the year,” hesaid. “Any way you look at it,that’s very strong.”

Looking to trends already de-veloping for the next 12 months,chief executive officer of PimcoAustralia John Wilson agreedthat while it was still very earlyin the year, 2011 was shaping upto be a continuation of goodform for fixed income.

“It’s a bit early to tell whatthis year will be like but I thinkthat so far, it’s been a contin-uation of what we saw last yearwhich is that as the recoveryin the US economy became alittle more certain in the eyesof investors, you saw bondmarkets selling off,” he said.“So if you look at the way yieldshave moved from the end ofthe September quarterthrough to now, interest ratesin most markets other thanAustralia are considerablyhigher for 10-year bonds thanthey were in September.”

“In Australia they’ve gone up,though they haven’t gone up byanywhere near as much but theinteresting thing about that isthat while 10-year bonds andolder bonds have sold off, goneup in yield, central banksaround the world have kept

short term interest rates very,very low,” added Wilson. “So westill have 1 per cent rates in Eu-rope and 0.25 per cent in theUnited States and 10 basispoints in Japan and, in effect,the yield curves are gettingsteeper.”

HUNTING FOR OPPORTUNITIESWilson pointed to good oppor-tunities in corporate credit se-curities, residential mortgage-backed securities and emergingmarkets but said that the storyfor the last three years in fixedinterest had been about theability to be agile and take ac-tive positions.

“The world has certainlynot been one without riskand, in many respects, de-spair on the part of many in-vestors in the wake of theglobal financial crisis,” he

said. “It was a period that threwup as many opportunities asit did threats to capital and ifyou’ve been nimble over thelast couple of years, you’vebeen able to exploit those.”

Giving an indication of thestrength of credit markets inparticular, Brunton said 2011had already seen $158 billionworth of new bonds issued.

“This time last year we’d seen$110 billion and 2010 was arecord year, off the charts interms of a normal year, and we’realready running nearly 50 percent above that,” he said. “Sowhat we see at the coal face isnew deals in Australia and off-shore, when they get announced,you’ve got a day or two to put yourbids in, do your credit work andget set because the book sizes aretypically four or five times theamount of bonds available.”

“A corporate might come tothe market and say we wantto do $500 million worth of five-year bonds and the book willhave maybe $4 billion worthof orders 24 hours later,” Brun-ton added. “And you can imag-ine when your friendly invest-ment bank calls you up to tellyou how many bonds you got onyour order of $500 million,they’re likely to come back withmassive scaling.”

“Simply put, the technicalsin fixed income at the mo-ment, what we call the supplyand demand imbalance, arestrongly supportive of con-tinued performance.”

Yet while the performance offixed income is more than war-ranting institutional investors’attention, Rob Da Silva, man-aging director, Asia PacificFixed Income for Principal

There has been plenty of talk about

investors becoming more adventurous in

2011 but, as DAMON TAYLOR reports,

no one is seriously suggesting a move

away from the safety of fixed income.

Applying the safety-first

Global Investors, said that formany super funds the structureof fixed income portfolios wasstill being developed.

“When we came through thecrisis, a lot of investors went ‘ohmy god, there’s a lot more riskin credit than I thought therewas and it’s not as defensiveas I thought it was’ and peo-ple started to think about split-ting their fixed income betweenGovernment, which they viewedas safe and defensive, and cred-it, which they viewed as at-tractive at certain times butrisky at certain times,” he said.“So they were trying to put thatin a different category to the de-fensive category in portfolios.”

“Unfortunately though,there really is no safe place tobe in this world,” Da Silvaadded. “You might thinkthere’s a risk free place to be,

you might think cash is a riskfree place to be but if cashisn’t keeping up with inflationthen you’re going backwards.”

“You might still have your$100 there but it’s not worthas much in the future.”

GOVERNMENT BONDSDa Silva said the same logic ap-plied to Government bonds.

“You might have thought thatGovernment bonds were a safeplace to be and everybody diduntil Greece blew up, Irelandblew up, Portugal blew up,” hesaid. “If you were in Italy, Spain,Ireland, you would think Gov-ernment bonds were a safeplace to be and then, all of asudden, those places have melt-ed down because of their fis-cal problems and institutionalinvestors have come to the con-clusion that not all Govern-ments are created equal.”

“They’re not all as safe as youmight think and that’s now com-plicated the picture again be-cause it’s becoming more diffi-cult to say ‘oh, well Governmentbonds are safe’ because it de-pends on the Government,” DaSilva added. “In Australia, I’d sayyes, they’re pretty safe becausewe’re in very good shape. In theUS, they’re safe because the USis a reserved currency, it’s thebiggest capital market in theworld, everybody invests in theUS from central banks to pen-sion plans all over the world.”

“But if you look at their bal-ance sheet, they don’t look soflash and they’ve got some fis-cal problems down the track -they’re okay now but they needto get their budgetary place inorder.”

The bottom line, accordingto Da Silva, is that super fundinvestors still have a variety ofviews on fixed income.

“Some people are still usingfixed income in a diversified

www.superreview.com.au FIXED INCOME 17


principleT

hough fixed income mayhave performed well in2010 and appears to have

opened its 2011 account in sim-ilar fashion, fund managerswith their fingers on the pulsewill have noticed a growingtrend towards super funds in-creasing the size of their in-ternal investment teams.

Such moves have already re-sulted in the transition of atleast one fixed income man-date in-house but according toRob Da Silva, managing direc-tor, Asia Pacific Fixed Incomefor Principal Global Investors,size is the key issue.

“It’s extremely difficult fora small super fund to be able toafford to hire a fixed incometeam to run their money forthem,” he said. “They’d have tohire whatever it is - four or fivepeople, Bloomberg terminals,data feeds - there’s a lot of fixedcosts and those fixed costs, ifthey’re being applied to a small-er size of money, could end upvery expensive compared to giv-ing it to a passive manager whomight have $10 billion or $20billion or even $30 billion andthey’re spreading their costsmuch more broadly.”

“But certainly, as you growand you get some of the verybig funds who have multiplebillions then it’s more viable tothink ‘well okay, we’ve got XYZpassive manager, they’recharging X number of basispoints, that means we’re writ-ing a cheque for $1 million or$2 million or whatever it is,can we hire a fixed incometeam and run passive moneycheaper than that?’” Da Silvaasked. “When it gets to thoselarge sizes, it’s possible thatthat’s the case because you’recutting out the profit marginfor the manager.”

“If you hire your own team,you’re doing it at cost.”

Da Silva said the clear ad-vantages of this kind of ap-proach were that super fundscould avoid paying a margin totheir fund managers, they haddirect control and, more sig-nificantly, they had the abilityto change their strategies andmandates more quickly.

“If you’re running externalmanagers and you’re not happywith them, then you’ve got tofire that manager and transi-tion the whole portfolio to anew manager and that can costa fair bit of money just doingthat,” he said. “If you’re runningyour own team and you’re nothappy with the way they’regoing, well usually it’s a case of‘okay, we’re going to fire one ortwo of them and replace themwith better people’ and it pos-sibly doesn’t cost as much.”

“So I expect that in the moreliquid, more commodity-likeparts of the market, then costis that issue,” Da Silva added.“They think they can do itcheaper themselves and whynot? But when you get to themore specialised markets, thenit becomes a much more diffi-cult proposition.”

“An Australian super fund isprobably not going to find thatit’s viable to buy a high yieldmanagement team to run theirown high yield for them; there’sa lot more cost involved, it’s alot more specialised and itprobably wouldn’t make sense.”

In similar fashion, Jeff Brun-ton, head of capital markets forAMP Capital said while he hadnoted the size of super funds’internal investment teamsgrowing; those fixed incomemanagers who were well po-sitioned within the market-place need not worry.

“When we look at what ourcomparative advantages arein fixed income and try tothink about whether thoseadvantages are easily or read-ily replicable, the reality isthat we’re a very large cor-nerstone fixed income in-vestor in the Australian mar-ketplace with circa $30 billionunder management in bonds,”he said. “We spend a lot of timeon research and our networksand our access and we’re partof a large investment housewith well over 200 investmentprofessionals.”

“We tend to think widehere where we really do lever-age and collaborate acrossthe whole of AMP Capital tobring the investment insightsinto better investment deci-sions for our clients,” Brun-ton added. “Now that’s noteasily replicable. I know thereis a movement to bring thatin-house but, ultimately, timewill tell.”

“You’ll need to see thatthrough a few cycles and you’llalso need to ask yourself if,without that scale, you’re com-promising on risk systems andultimately long term returns.”

Brunton said the unavoidablereality was that the scale issuewas crucial in fixed income.

“The fixed income portfolioanalytics are incredibly com-plex and they require state ofthe art systems which are ex-pensive and require mainte-nance and development,” hesaid. “So I wonder whether thatmove to in-house managementwill, at some point, need to lookat those benefits that they’regiving up.”

“If they’re not a $30 billionfixed income team, are theyable to replicate that scale andthat efficiency?” SR

In-housing investment decisions


sense, in a traditional sense of de-fensive asset class,” he said. “Oth-ers have tended to say that thesafe part of fixed income is Gov-

ernment bonds and that’s going tobe our defensive sector and thenthe other part, so credit, is goingto go into either an alternativescategory or an equity-like kindof investment.”

“These are the kinds of thingsthat you see people thinkingabout,” added Da Silva. “Somehave executed them already butmost are in the process of tryingto make a decision before doing

something about it.”Offering a significantly differ-

ent view, Wilson questionedwhether defence had ever beenthe goal of super fund allocationto fixed income.

“If that was the goal,then the simple fact isthat they would haveowned a lot more of it,”he said. “If you look at theOECD (the Organisationfor Economic Coopera-tion and Development)data that Towers Watsontrots out, allocations tofixed interest by Aus-tralian super funds arethe lowest in the OECD.”

“So why is that? It’s avery curious situation be-cause you’ve got thefourth largest asset poolin the world and yet it’svery equity and equity-like risk heavy.”

“So what’s that about?Well, I think the bestreading of that, the mostgenerous reading, is thatmost superannuationfunds in Australia seetheir mission as accu-mulating up memberbalances over the longterm and, because westarted with award superand are still relatively im-mature, the idea wasthat if you biased it to-wards growth assets sothat you could ramp upmember balances asquickly as possible,” Wil-son added. “But at somepoint in the next fewyears, there has to be atipping point.”

A GIANT POOL OF MONEYWilson said with re-search already indicat-ing that one third of allassets in the superan-nuation system would beowned by Australians re-lying on that pool as theirprimary source of in-come by 2016, fixed in-come portfolios wouldhave to be reassessed.

“In that sort of envi-ronment, you’re going tohave to have a whole lotmore respect for incomecertainty and capital sta-bility in a way that mostinvestors haven’t hadheretofore,” he said. “AndI think there’s going to besome new skills that peo-ple will be required to

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Applying the safety-first principle


learn around proper productdesign, particularly for retireeswhere there will no longer beany income or any contributionsto their fund.”

“People will have to think awhole lot harder about fixed in-terest in a way they haven’tdone yet in my career.”

Yet whether fixed incomeportfolios are a work in progressor not, trends do exist andmany, or at least the temptationfor many, have come about as adirect result of experiencesthrough the global financial cri-sis. One such trend is the seg-regation of risk within fixed in-come but Da Silva said it wasnot one he would recommend.

“The global financial crisiswas one of these one in 100years, 30 years, 20 years, what-ever number of years you wantto pick event,” he said. “It wasextremely severe, extremely un-usual, and even in that circum-stance you found that the cor-relations between different partsof the fixed income universe,they went up quite dramatical-ly but they didn’t go to one.”

“So if you had a more diver-sified approach, you had a bet-ter chance of faring better thanotherwise,” Da Silva added.“There are some parts of themarket that did fine like Gov-ernment bonds and other partsof the market that did poorlybut not disastrously, so invest-ment-grade credit, agenciesin the US, semi-Governmentsin Australia, and then therewere yet other parts of the mar-ket that did badly like high yieldand lower grade credits, lever-aged loans.”

“Finally, there were thoseparts of the market that werecomplete and utter disasterslike CDOs (collateralised debtobligation) and the lower ratedsub-prime securitisations andthings like that.”

According to Da Silva, if aninvestor had been in one of thebetter performing sectors, as inpurely in Government or semi-Government bonds, then they

would have been very fortunate. “But if you happened to pick

the wrong horse in that race,like CDOs, you got wiped outand we had a couple of exam-ples of that in Basis Capital andAbsolute Capital,” he said. “Theproblem there was that that wasa great sector for quite a whilebut then, when it hit the skids,it melted down completely.”

“So if you take a diversifiedapproach and you have the in-frastructure and the staff andthe resources to put proper in-tellectual thinking around it,then I think it’s a better wayto go because you’re able tomove that mix around,” Da Silvaexplained. “And in more normaltimes, having that diversifica-tion means that you do get asmoother pattern and, at theend of the day, you’re able tofind more opportunities for in-vesting in cheap assets whenyou’ve got a bigger universe tolook at.”

FOCUSING ON CREDITFor his part, Brunton said thereal benefits of avoiding segre-gation over the next two to threeyears would be the ability tohave a bias towards credit.

“You want to have a reallygood bias for credit over rates,over sovereigns who are doinga lot of the issuance, and youwant to have a view on inflationin portfolios,” he said. “For in-stance, we’ve found at AMPFixed Income that over the lastfew years, we’ve used durationlevers in our credit portfolios toprotect capital.”

“So I’d say it’s about havingthose flexible tools in your toolk-it to be able to manage total riskand in having a segregated viewyou do need somebody at the

super fund or at the asset con-sultant level making real-timedecisions across what the wholelooks like.”

“Splitting them up into twodifferent portfolios is still goingto give you a resultant total port-folio in fixed income and thatwill still need to be managed.”

Of course, portfolio structur-ing trends, irrespective of whichasset class you care to exam-ine, are not always dictated bymarket movements and cir-cumstance. In fact, the super in-dustry’s upcoming MySuper en-vironment has manyexecutives thinking about costsand, in the case of fixed in-come, the relative merits of anactive versus passive approach.

However, the reality, accord-ing to Wilson, is that while afocus on costs was appropriate,the cheapest option was notnecessarily the best option.

“One of the unfortunate as-pects of MySuper is that there’sbeen a tendency by many peo-ple to say that the requirementto deliver a low cost productmeans that you’ve got to havelow cost investments, whichmeans passive investment infixed income,” he said. “Now Ithink the whole industry needsto focus appropriately on costbut focus much more on after-fee, after-tax returns becauserealistically that is the onlything that matters.”

“My view is that MySuper hasbeen distorted in many peoples’minds,” Wilson continued.“What I think Cooper (JeremyCooper, chair of the Super Sys-tem Review) was trying to dowas ensure that people got valuefor money.”

“He didn’t necessarily meanthat they should get the

cheapest investment optionavailable because if that’s the wayit has to be, then that does verylittle in the way of service tomembers.”

Admitting that MySuper andthe theories behind it would in-deed have an impact on in-vestment decisions for superfund trustees, Da Silva saidPrincipal would be looking todevelop products that were at-tractive and useful in the newenvironment.

“And we’ll be recognising thatcost is part of that equation,” hesaid. “So we have to figure outhow we can blend our capabil-ities in ways that deliver goodvalue at a reasonable cost.”

“It won’t be an index cost,” DaSilva added. “But we do have torecognise that there is morecost consciousness around ingeneral and work out ways ofdelivering products that aregood value for money.”

LOOKING AHEADSo as investment managers fin-ish the first quarter of this year,it seems the most importantquestion yet to be answered iswhether 2011 will be a year torival 2010 for fixed income.

And though Brunton’s out-look is positive, he said AMPFixed Income would be prepar-ing for what could be anothervolatile year.

“There are a lot of headwindsout there at the moment aroundthe re-regulation of the bank-ing system, unwinding of un-conventional measures, mon-etary policy mechanisms overthe last few years, unwinding of

the fiscal support packages wehad in many countries,” he said.“We have a new dynamic nowwhich is one of inflation inemerging markets, possiblyflowing back into developedmarkets, oil price fears in theMiddle East are a part of that,and then we’ve got the ongoingsovereign debt woes in Europewith some countries having al-ready called in the IMF (In-ternational Monetary Fund).”

“So with many of those issues,unfortunately we’re not goingto get the final act play out onthose things this year,” Bruntonadded. “Markets will need todeal with at times uncertaintyon those things - markets hatethat uncertainty and so you’llget swings of excessive and pes-simism and optimism.”

“But that’s a great environ-ment for active fixed incomemanagement.”

Looking to the future morebroadly, Wilson said Pimco wasvery focused on what would beemerging demand for high qual-ity income.

“And that’s important be-cause all super funds will findthemselves needing to lookmore closely at their membersand work out the needs of dif-ferent cohort groups,” he said.“Broadly speaking, those whoare older members are going toneed more income because theydon’t have a wage anymorewhile those who are youngerwill be appropriately servedunder current arrangements.”

“So one of the things we’refocusing on is trying to educatepeople about the very impor-tant role fixed interest secu-rities can play in generatingincome,” Wilson continued.“And our intention is to workwith super funds in terms ofdeveloping appropriate strate-gies around that so that we, asan industry, can deliver highlevels of capital certainty withthe income people require fortheir retirement years.”

“That’s the big prize for usand the really burning need forthe industry is to solve thatproblem.” SR



Applying the safety-first principle☞ Continued from page 16

Rob Da Silva

22 SUPER REVIEW CHARITY GOLF DAY www.superreview.com.au


Golfing in aid of quake victims

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Super Review held its eighth Annual CharityGolf Day at Sydney’s Roseville Golf Club in early March, sponsored by PillarAdministration and Bank of New York Mellon.The team stableford event was ultimately won by the team from Fiducian, with thePillar team emerging as runners-up. Thewinner of the mens competition was AMP’sBarrie Sundstrom, while Shree Singh won theladies competition. All proceeds from the daywent to the Christchurch earthquake victims.

www.superreview.com.au SUPER REVIEW CHARITY GOLF DAY 23


1. Pillar Team: Philip Small, Noel Davis,Peter Beck; and Chris Woodwing

2. Portfolio Team: Shree Singh, FrankKhouri, Michael Dale; and Indy Singh

3. Alex Masters from JP Morgan4. Bryn McGeever from Super Review,

Martin Kely from BT, Simon Ibbetsonfrom 385 Investment Consulting;and Keith Griffith from BNY

5. Keith Griffith, and Simon Ibbetsonfrom BNY

6. James Manning and Alex Mastersfrom JP Morgan, Doug Roberts andJohn Griffith from Super Review

7. Russell Mason from Mecer, PhilKearns, Roz Lyon from Mercer; andJeff Newcombe

8. Damon Taylor and Phil Hart from Super;and Tom Burns from Legg Mason

9/10. Mike Taylor from Super Review,Ian Mcphedran from News Limited;and Richard Gilbert from ISFA

11. Rob Plow from NAB12. Ian Manton-Hall from Mercer, Rob Plow

from NAB; and Guy Holley from Mercer13. Best female player: Shree Singh

from Fiducian Portfolio14. AMP Team: Paul Willis, Andrew Nunn,Barrie Sundstrom; and Peter Lynch15. Barrie Sundstrom from AMP16. Best Team: Fiducian Portfolio

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ROLLOVER T H E O T H E R S I D E O F S U P E R A N N U A T I O N

Got afunnystory? about people in the superannuation industry?

Send it to Super Review and youcould be raising a glass or two. Super Review is giving away a bottleof bubbly for the funniest story published in our next issue.

Email [email protected] send a fax to (02) 9422 2822.

ON the subject of policy andpolitics, Rollover notes thatthe Opposition’s spokesmanon superannuation matters,Senator Mathis Cormann,appears to be rapidly com-ing to terms with the arcanenature of the administrativearrangements around Com-monwealth superannuation.

Reading a transcript ofa recent Senate EconomicsCommittee hearing in Can-berra, Rollover noted thatCormann had trouble dif-ferentiating between theroles of ComSuper and the

Australian Reward Invest-ment Alliance (ARIA).

It seems the good Sena-tor had a few questions hewould have liked to haveasked the chaps from ARIAbut was informed that theywere rarely invited to at-tend Senate Committeehearings.

Rollover discerns fromthe tenor of Cormann’s com-ments that those runningARIA ought to start review-ing the organisation’s oper-ations with a view to gettingtheir answers straight. SR

ROLLOVER has long recog-nised the disconnect betweenthe ‘mainstream’ superan-nuation industry and theself-managed superannua-tion fund (SMSF) sector,not least the fact that one is regulated by the

Australian Prudential Regulation Authority

(APRA) and the other bythe Australian TaxationOffice (ATO).

He therefore feels amodicum of sympathy forthe Tax Commissioner,Michael D’Ascenzo whofelt compelled to writeto a certain nationaldaily newspaper ex-plaining that he didnot, in fact, agree with

reports that penalties relating to ex-cess contributions were “draconian”.

However, an astute reading ofD’Ascenzo’s letter put Rollover inmind of that great UK television se-ries, Yes Minister, particularly thefollowing paragraph:

“In relation to excess contribu-tions tax, we have been adminis-tering the law according to its termsand intent. Any changes to the cur-rent settings are a matter of poli-cy, and we have been keeping theTreasury advised of the work we aredoing and of community and indus-try views.”

Rollover interprets this to meanthat the ATO believes it was re-flecting industry and communityviews, not its own, but that the Gov-ernment would do well to have beenlistening. SR

NO names, no pack drill butRollover notes that at the re-cent Association of Super-annuation Funds of Aus-tralia charity golf day heldat Sydney’s challenging StMichael’s Golf Course, a cer-tain funds management typehit his drive exceedinglyclose to the pin on a long parthree.

Rollover and his friends inthe following team ap-plauded the effort and thor-oughly understood why thegolfer in question raised hishands in triumph andskipped a little dance to cel-ebrate his shot.

His dancing stopped how-ever when he missed theone foot putt and needed tocall on someone else in hisAmbrose team to finish thejob.

Just goes to show howtrue the old golfing sayingreally is: “You drive for showand putt for dough”. SR

Finishingthe job

Asking the wrong questions

Getting thingsback to normalROLLOVER notes that the New Zealand Government is doingall it can to reassure tourists that it is still safe to visit the “ShakyIsles” following the Christchurch earthquake.

However, he notes that the superannuation industry hasalready shown its faith in that other natural disaster-hit des-tination – Queensland.

The Self-Managed Superannuation Professionals’ Associa-tion of Australia (SPAA) completed its national conferencein Brisbane in late February and the Conference of Major Su-perannuation Funds (CMSF) kicks off on the Gold Coast at theend of this month.

The theme will be maintained by the broader financialservices industry later this year with a couple of further con-ferences.

Tourists can’t do much to help those impacted by natural dis-asters but there is a lot to be said for keeping the economiesof those states moving. SR


The language ofbureaucracy

Super Review March 2011

Documents

Transcript of Super Review March 2011