Super Review (June, 2011)

3 MERGER TALKSStatewide Super and Local Superare conducting merger talks.

10 PUT OPTIONSUtilising put options can protectinvestors from major downswings.

For the latest news, visit superreview.com.au

12 ASSET ALLOCATIONThe GFC has caused funds to reconsider their asset allocations.

18 MYSUPERThe devil is in the detail when itcomes to the MySuper changes.

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COMPANY INDEX 2 NEWS 3 EDITORIAL 8 ASSET ALLOCATION 12 MYSUPER 18 APPOINTMENTS 23 ROLLOVER 24

June 2011 Volume 25 - Issue 5

The Federal Governmentneeds to ensure that thetax treatment of post-re-

tirement incomes is appropri-ately handled within theframework of its planned Oc-tober Tax Forum, according tothe chief executive of the As-sociation of SuperannuationFunds of Australia (ASFA),Pauline Vamos.

Participating in a Super Re-view Retirement Incomesbreakfast in late May, Vamosreflected the broad view ofpanellists at the breakfast byclaiming successive AustralianGovernments had failed to ap-propriately address the post-retirement phase as part of thebroader superannuation poli-cy debate in Australia.

She said the tax treatment ofretirement incomes productsneeded to be a cornerstone ofthe debate and that the debatehad been started on the issue.

“It is my understanding thatit will be part of the OctoberTax Forum and, flowing fromthat, we would be hopingchanges might be announcedin next year’s Federal Budget,”Vamos said.

For his part, Mercer re-tirement incomes specialistDavid Knox urged both theindustry and the Governmentto adopt a graduated ap-proach to the implementationof any policy changes relatingto superannuation.

Knox said he believed poli-cy certainty was essential.

“Confidence in the system isa crucial element,” he said.“That is why we believe thereis nothing wrong with movingtowards significant changeover 15 to 20-year transitionperiods.”

The Super Review breakfasthad earlier been presentedwith new research funded byMetlife, which confirmed Aus-tralians are still ill-preparedfor retirement, with only onein four saying they haveachieved their retirementgoals or are likely to do so.

The new research foundonly four in 10 Australianshave planned for retirement interms of utilising investmentsover and above those con-tained within their superan-nuation fund.

“Sixty per cent of Aus-tralians are relying solely ontheir superannuation for theirretirement planning,” Metlifechief marketing and distribu-tion officer Eric Reisenwitz

told the breakfast.However, he said that most

employees had not accumu-lated enough towards their re-tirement, with the average su-perannuation balance forAustralians aged over 50 sit-ting at $52,500 for men, andless for women.

Reisenwitz said womenwere at greater risk due tolonger life expectancy andless planning.

The good news contained inthe research is that peoplewho had actively planned fortheir retirement appeared con-fident in their ability to reachtheir goals in the next fiveyears, with fewer than a thirdof such people feeling theywere still behind.

The Opposition spokesmanon Financial Services, SenatorMathias Cormann, said theCoalition recognised the chal-lenges with respect to retire-ment incomes, but added thatthe state of the Budget pre-cluded any significant moveswith respect to tax relief. SR

As the debate about retirement

incomes gains momentum, the issue is

expected to be a key part of the

agenda at the Federal Government’s

proposed October Tax Forum.

Preparing Australians for retirement

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Pauline Vamos

The Coalitionrecognised thechallenges with

respect to retirementincomes, but addedthat the state of the

Budget precluded anysignificant moves

with respect to taxrelief.

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

2 PAGE TWO www.superreview.com.au

SUPERREVIEW * JUNE 2011

Issued by Apostle Asset Management Limited (“Apostle”) (ABN 60 088 786 289) (AFSL No. 246830). Please contact Apostle to obtain more information about the products and services we offer as not all products and services may be suitable for you.

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Financial Synergy Administration Energy Super NA

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and Retirement Fund

Received by Type of mandate Issued by Amount

Mercer Administration and client facing The Retirement Benefits Fund NA

GBST Investment technology Unisuper NA

SimCorp Investment technology Schroders Australia NA

SuperChoice Clearing services SuperBPO NA

Statewide Super and Local Super conducting merger talks

JUNE 2011 * SUPERREVIEW

By Milana Pokrajac

TWO South Australian superannuationfunds, Statewide Super and LocalSuper, have confirmed they are havingdetailed discussions about a merger.

But due diligence would need to becompleted and shareholder approval re-

ceived before a merger between the twocompanies could take place, accordingto the chair of Statewide Super, NicholasBegakis AM, and chair of Local Super,Juliet Brown.

Begakis and Brown said the recent re-lease of the Federal Government’s Coop-er Review into the governance, efficien-

cy, structure and operation of Australia’ssuperannuation system had encouragedsuper funds around the country to considermerger and acquisition opportunities.

A merged entity would manage morethan $4 billion in funds, with StatewideSuper’s $2.4 billion and Local Super’s $1.7billion in funds under management. SR

Mergers could hang on member votesMERGERS may not all be up to super fundtrustees if the Federal Opposition has its wayon making mergers the subject of memberballots.

The opposition spokesman for FinancialServices, Senator Mathias Cormann, hasflagged such a move amid reports that amerger of two major industry superannua-tion funds – Vision Super and Equipsuper –had collapsed.

Commenting on the failed merger, Cor-mann said reports suggested trusteesmay have been putting their own inter-ests ahead of the best interests of theirmembers.

“To scuttle a proposed merger becauseunion-backed trustees don’t want democraticelections but want guaranteed union-nom-inated positions smacks of institutionalisedself-interest,” he said.

Cormann said he believed there should bebetter regulatory supervision and reviewof merger arrangements and more adequateremedies for members when the handling ofa merger by trustees ended up disadvan-taging those members.

“Superannuation funds hold the money oftheir members on trust,” he said.

“Those members should have a say aspart of the merger process instead ofrelying on the trustees doing the rightthing in satisfying their trustee fiduciaryduties to act in the best interests of theirmembers.” SR

Quality trumps cost in MySuper debateBy Benjamin Levy

THEsuper fund industry debate has beensidetracked, in the opinion of StrongerSuper consultative group chairman PaulCostello, who attempted to redirect thedebate back towards quality of productsrather than on lowering costs.

Speaking at a Financial Services Coun-cil/ Deloitte lunch in Melbourne, Costel-lo told the audience that the industry wastoo focused on lowering costs in the beliefthat that would solve all their problems.

“That is too premature; I don’t for a mo-ment think that there was anything fromTreasury or government to indicate thatlowering costs was the final outcome,”Costello said.

MySuper is fundamentally about im-proving the quality of what super funds did,and cost was just a part of that, he said.

The structure of super fund productsshould be made simpler for investors, andthat alone would reduce costs, he said.

Active management or high costs mar-ket assets should not be binned in favour

of lowering costs, he added.Costello also warned the industry not

to “publicly voice their differences” overaspects of the MySuper legislation.

The government wanted to imple-ment their agenda without industrycriticism of what they are trying to do,he said.

“There is little value in your time andmy time, spending three or four monthssimply reiterating differences and pre-senting [them] to the government,”Costello said. R

UNISUPER has delved into the after-tax investment worldby appointing technology firm GBST to provide after-taxbenchmarking solutions designed to boost member portfo-lio returns by up to two per cent each year.

The new partnership will come into play from 1 July,and would see UniSuper’s Australian shares managershave their performance calculated on an after-tax basis.

Excess returns would then be measured against a GBST-calculated S&P/ASX series of after-tax indicies.

As super fund members accumulate their retirement sav-ings and retire on after-tax returns, this could significantlyboost the funds available to them on retirement, accordingto UniSuper’s head of portfolio analysis and implementation,Dharmendra Dayabhai.

He said the fund had been considering an after-tax bench-mark and return methodology for some time and that theCooper Review had heightened the issue.

“We recognise the importance of post-tax considerationsand assessing after-tax performance means we are furtheraligning our investment managers to the best interest of ourmembers,” Dayabhai said.

UniSuper noted the Cooper Super System Review by Gor-don Mackenzie of ATAX University of NSW claimed the after-tax benchmarking and returns methodology could boost mem-ber portfolio returns by as much as two per cent each year.

The quantitative data services business, GBST Quant, pro-vides benchmark solutions both pre- and post-tax. Thecustom benchmarks could range from slight variations tostandard industry indices through to completely custom cal-culations, according to Neil Detering, head of GBST Quant.

“As the industry moves towards after-tax measurementand performance becoming the norm, the next challenge is forfund managers to make tax considerations an integral com-ponent of their investment process,” Detering said. SR

www.superreview.com.au NEWS 3

Russell ups industry fund offeringBy Ashleigh McIntyre

RUSSELL Investmentshas tar-geted industry and governmentfunds with the launch of a newconsulting service.

Russell Future ProofingConsulting (RFPC) will offeradvice and solutions to assistindustry and government funds

retain members during this pe-riod of regulatory change.

To lead the new service anda team of 15, Russell has ap-pointed former AMP CapitalInvestors executive MichaelClarke as managing director,industry and governmentfunds.

Chief executive for Aus-

tralasia, Chris Corneil, said thenew appointment and servicewill help funds with gover-nance issues, developing re-tirement solutions for membersand MySuper requirements.

He said one of the major is-sues for funds leading up to leg-islative change has been theprospect of scale requirements

for MySuper products, whichhas left some funds feeling thatmergers are the only option.

Corneil said one alternativecould be keeping the existingfund but outsourcing fixedcosts, while areas like productdevelopment and memberservices can be made morecost-effective. SRChris Corneil

UniSuper moves into after-tax realm


By Ashleigh McIntyre

SUPERANNUATION associations havecome out in support of the Govern-ment’s $55 million levy to assist vic-tims of the Trio Capital collapse, butquestion the fairness of the proposedcalculation.

Earlier this month, the Governmentannounced the levy on regulated fundswould be calculated by multiplying therate of 0.0001977 by a fund’s assets, witha maximum levy set at $500,000.

Both the Association of Superannu-ation Funds of Australia (ASFA) andthe Australian Institution of Super-annuation Trustees (AIST) have queriedthis calculation, stating it creates inequitybetween larger and smaller funds.

In a submission to the Government,ASFA stated that very large funds wouldpay comparatively less than smaller bal-ance funds, which would impact great-ly on members’ balances.

“A fund with $5 billion in funds undermanagement would have their levy

(calculated as $988,500) capped at$500,000. If this fund has 750,000 mem-bers, the levy payable by each memberwould be $0.67.

“In contrast, a fund with $1 billion infunds under management would be sub-ject to a total levy of $197,700. If this fundhas 15,000 members, the levy payable byeach member would be $13.18,” said thesubmission.

ASFA stated that greater equity couldbe reached by increasing the maximumlevy and decreasing the applicable rate,

so as to spread the burden across fundmembers.

One thing the associations disagreedon, however, was the amount of timegiven to funds to pay the levy.

AIST said the Government’s proposedtime limit of 28 days from the com-mencement date of the regulationswould be enough time for funds to meetthe payment.

ASFA stated it believed the payment dateshould be set at a minimum of six monthsfrom the start of the regulations. SR

CFS hands H2O firstAustralian mandateCOLONIAL First State hasawarded H20 Asset Managementa global fixed income and cur-rency mandate of $270 millionas an allocation within itsFirstChoicemulti-manager funds.

The London-based fund man-ager was sourced through Apos-tle Asset Management.

Apostle’s director of sales,Richard Borysiewicz said H20’sfixed interest capabilities havefound strong resonance in inter-national markets, with this beingtheir first Australian mandate.

H20 was launched in Julylast year in partnership withNatixis Asset Management by

Bruno Crastes and VincentChailley, formerly of AmundiAsset Management. SR

Bendigo Wealth to add MySuper productBy Chris Kennedy

BENDIGO Wealth will be look-ing to add a MySuper-compli-ant product to its low-cost Trin-ity3 platform in the first quarterof the next financial year.

The group has its own sep-arately managed account withthe Trinity3 product that is get-ting good traction with its retailcustomers and independent fi-nancial advisers want to knowif they can provide the samesort of product to their clients,said Bendigo Wealth executiveJohn Billington.

Billington also said he wouldbe looking to sign off on a newincome fund to build thegroup’s funds capability that

would be launched in the nextmonth or two, and an indexfund that would be available inthe first quarter of the next cal-endar year.

The changes come on the

back of strong interest in theunified Bendigo Wealth brand,which was launched early lastmonth and brought togetherthe bank’s previously separatewealth management services,including Adelaide Bank,Leveraged Equities, SandhurstTrustees and its low-cost in-vestment platform Trinity3.

Billington said he was sur-prised by the level of interest,with the site recording threetimes the average number ofclick-throughs.

“We’ve had a great mix of ex-isting Bendigo retail customersand new customers and also fi-nancial advisers wanting to knowabout the products and serviceswe’re offering,” he said. SR

APRA-regulated schemes onGovernment’s radarTHE Federal Government is planningto tighten regulations surroundingpublic sector superannuation schemesthat have become regulated funds.

An exposure draft proposes to re-view the list of funds which are ex-empt from regulation under the Su-perannuation Industry Regulations1994, as they are already subjectto regulation under their enablinglegislation.

The changes are in response to anumber of public sector schemes be-coming regulated by the AustralianPrudential Regulation Authority(APRA), yet still remaining on the

list of exempt funds.The proposed regulations would re-

move those schemes that have cho-sen to become APRA-regulated fromthe exempt list, and would amendlegalisation to ensure that schemesremain exempt where their enablinglegislation has been amended.

It would also insert a new sub-reg-ulation to specify that a schemeceases to be exempt at the time it isregistered as a registrable superan-nuation entity, and therefore, be-comes APRA-regulated.

Submissions on the exposure draftcan be made until 14 June, 2011. SR

Trio levy unfair for smaller funds: ASFA, AIST

4 NEWS www.superreview.com.au

SuperChoice teams up with SuperBPO

CLEARING HOUSE SuperChoice has an-nounced it will partner with back-office ad-ministration provider SuperBPO to deliverpayment infrastructure support for clients.

SuperBPO is the newly re-branded in-stitutional arm of Mainstream BPO which

provides member administration, unit pric-ing and accounting services to super funds.

SuperBPO chief executive MichaelHoulihan said the partnership will stream-line back-office activities for SuperBPO andincrease focus on other value-added andfront-office services.

“We see opportunities in the market withmany larger super funds taking a hands-offapproach to servicing employers strugglingwith administering choice-of-funds.”

SuperChoice general manager MikeFielding said his company had chosen towork with SuperBPO as they had an ex-isting non-cash payment licence and otherclearing house infrastructure.

“So it made sense for them to stay frontand centre in servicing their fund and em-ployer clients,” Fielding said. SR

Michael Houlihan

Richard Borysiewicz

John Billington



LEGALSUPER has reported a 15per cent jump in employer con-tributions for the nine months to31 March, which it says is proofthat smaller industry funds are stillviable against larger multi-indus-try funds.

Chief executive Andrew Proeb-stl said increasing inflows demon-strated that while some industryexperts believe funds must be largeto work best, this was not neces-sarily the case.

“As a smaller fund, Legalsupercan in some respects be a more agileinvestor relative to mega super

funds, is more responsive to theneeds of its target market, and isbetter able to build engagementwith our members,” he said.

Proebstl said members of thefund valued its close associationwith, and knowledge of, the legalprofession.

“These continued increases in

inflows are evidence that spe-cialised funds like Legalsuper,which serve a well-defined tar-get market, will continue to be at-tractive to that target market byproviding an environment in whichmember’s savings thrive,” he said.

Legalsuper now manages morethan $1.5 billion. SR

Strong Australian dollar dents super returnsBy Chris Kennedy

The median superannuationgrowth fund returned 0.2 per centin April, but would have returnedmore had further appreciation ofthe Australian dollar not reducedthe unhedged returns of inter-national shares, according toChant West data.

It brought the cumulative returnfor the median growth fund to 10.2

per cent in the financial year todate, meaning a likely secondstraight year of positive returns forfund members, said Chant West di-rector, Warren Chant.

The inflated Australian dollarappreciated against all major cur-rencies over the current financialyear, including a 30 per cent riseagainst the US dollar, he said.

“Unless you hedged againstthat currency movement, it took

a big chunk out of the value ofyour overseas investment re-turns,” Chant said.

“We estimate that currency de-tracted about 3.5 per cent from thetypical growth fund return over thefinancial year to date, with the bet-ter-performing funds being thosethat hedged more against the ris-ing Australian dollar,” he said.

International shares returned2.5 per cent in hedged terms in

April but recorded a loss of 1.4 percent in unhedged terms, and theAustralian share market wasdown 0.3 per cent for the month.Australian and global real es-tate investment trusts grew by 0.3 per cent and 4.4 per cent respectively, Chant West stated.

Industry funds just edged outmaster trusts, returning 0.2 percent against 0.1 per cent for themonth, Chant West stated. SR

Inflows prove bigger isn’t always better: Proebstl

6 NEWS www.superreview.com.au

Andrew Proebstl

Warren Chant


NEW figures show a cou-ple looking to have a com-fortable retirement willneed $53,879 a year, up 0.3per cent over the Decem-ber quarter.

The Association of Su-perannuation Funds ofAustralia (ASFA) Retire-ment Standard also foundcouples wanting a modestretirement will need tospend $30,708, up $150 onthe previous quarter.

The rising costs includ-ed food, alcohol, tobacco,transportation and domes-tic holidays – of which,food, transport and recre-ation spending form a largepart of retiree budgets.

Retirees had to face a 2.2per cent increase in thecost of food over the lastquarter, but fortunatelyprice rises over the yearwere a modest 2.5 per cent.

Meanwhile, the cost ofhealth services, clothing,audio visual and comput-ing equipment decreasedover the quarter.

ASFA measures a com-fortable retirement as en-abling retirees to be in-volved in leisure activitiesand afford private healthinsurance, a reasonable car,good clothes, and domesticand occasionally interna-tional holiday travel.

A modest retirement ismeasured as being bet-ter than the age pensionbut still only allowing re-tirees to afford fairlybasic activities. SR

INSTITUTIONAL investors are in-creasingly interested in emergingmarkets and alternative assets toenhance portfolio diversification,according to Mercer’s Global Man-ager Search Trends 2011 report.

The report revealed that global-ly manager search activity increasedin 2010, with activity in Australia al-

most doubling, from 120 in 2009to 216 in 2010. The report noted thatin Australia there was a sharp risein assets placed, from US$7.7 bil-lion to US$14.9 billion.

The survey also revealed an in-creased interest in real estate,emerging market equities and nicheareas, like commodities. Investors

also sought diversification throughinternational and domestic equity.

“We saw a lot of manager move-ment in Australian equities last yearand search activity focused onsmaller fund asset managers withhighly rated teams,” said Mercerhead of manager research for AsiaPacific, Marianne Feeley. “Our

clients have also been looking forsmall cap managers, as small capoutperformed large cap in 2010.Another possible driver behind theincrease in Australian equitysearches is the tendency of somemanagers, particularly boutiquesand small cap, to close to newinvestments.” SR

www.superreview.com.au NEWS 7


Food, transport push up cost of retirement

Marianne Feeley

Instos attracted to EM and alternatives


8 EDITORIAL www.superreview.com.au

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The political clock is ticking

How many people hold po-sitions on multiple super-annuation fund trustee

boards in Australia today? And,of those people, how many couldbe described as political or unionoperatives?

While, for the vast majority ofmembers of Australian super-annuation funds, these mayseem obscure and possibly ir-relevant questions, they arenonetheless issues that shouldbe focusing the minds of super-annuation fund executives –particularly those who keep aclose eye on the ebb and flowof Australian politics.

On the conservative side ofAustralian Federal politics, twoof the most often-mentioned is-sues over the past three yearshave been trustees serving on

multiple superannuation boards,and the ability for superannua-tion fund trustees to act on merg-ers without any direct referenceto fund members or particularoversight by a regulator.

Anyone working in the su-perannuation industry will knowthat those references point di-rectly to a concern within theFederal Opposition parties aboutthe power and influence of in-dustry superannuation funds.Further, the reference to multi-ple trustee board membershipsdirectly refers to the power be-lieved held by around a half-dozen industry fund luminaries.

What has prompted the par-ticular attention of the Feder-al Opposition is that most ofthose half-dozen industry fundluminaries can be viewed asbeing linked to either the Aus-tralian Labor Party (ALP) or theAustralian trade union move-ment, or both.

What the critics of peopleholding multiple membershipsof superannuation fund trusteeboards often overlook is that, notso long ago, the Australian Pru-dential Regulation Authority

acted to lift the bar on what wasrequired to become a superan-nuation fund trustee director.

However, notwithstanding anytougher requirements imposedby the regulator, the make-up ofsuperannuation fund trusteeboards is never the subject ofa member ballot, with industryfunds boards being made up ofemployer and employee-ap-pointed representatives.

Of course, no one ever com-ments or objects to business lu-minaries with political affiliationsholding directorships on theboards of multiple publicly listedcompanies, but the rules per-taining to the duties of compa-ny directors and those pertainingto superannuation fund trusteesare somewhat different. Unlikesuperannuation fund members,shareholders in publicly listedcompanies hold voting rights.

It is an accident of history andthe evolution of the superan-nuation funds in Australia that,notwithstanding the billions ofdollars being managed bytrustee boards, the transparen-cy of their conduct falls short ofthat expected of the boards of

publicly listed companies.Notwithstanding these issues,

a person’s political affiliationsand background should have noparticular bearing on their ca-pacity to deliver good and ob-jective service as a member ofany well-run trustee board of asuperannuation fund adheringto the broadly accepted princi-ples of corporate governance.

The problem, of course, is thelegislated, compulsory nature ofthe superannuation guarantee;the beneficial taxation status su-perannuation funds have beengranted; and the bloc that manyof the industry funds haveformed, which is perceived bymany as having direct linkagesto both the ALP and the tradeunion movement.

It is in these circumstancesthat the Federal Opposition hassignalled that, were it to gainpower in Canberra, it would belooking to alter the rules ap-plying to superannuation fundtrustees boards, including giv-ing fund members a greater sayby way of the ballot box.

The Opposition spokesman onFinancial Services, Senator Math-ias Cormann, made his viewsplain when he late last monthsuggested the scuttling of a merg-er between Vision Super andEquipsuper may have been theproduct of union-backed trusteesacting to defend their position.

He made reference to per-ceived conflicts of interest on

the part of trustee board mem-bers, “especially where sometrustees serve on multiple su-perannuation boards or wherethe trustees have not directlybeen appointed by the membersin the first place”.

Cormann’s words should beregarded as a shot across thebows of the superannuation in-dustry, and a signal that a Coali-tion Government would act tochange the current regulatoryenvironment relating to themake-up of trustee boards.

At least a part of the motiva-tion for such changes is the be-lief that it would act to stripaway the perceived power of anumber of individuals seen asinfluential in the industry su-perannuation funds movement.

For better or worse, the fi-nancial services industrychanges being pursued by theGillard Labor Government arebeing perceived as helping theindustry superannuation funds.It follows that if the politicalpendulum swings the other way,the industry funds will findthemselves being viewed in avery different light.

The industry funds move-ment will have every right todefend its position, but it mayfind it very difficult to argueagainst giving individual su-perannuation fund members agreater say in appointing thosethey want to run their trusteeboards. SR

A strong perception exists that forthcoming changes to

financial services regulations will unduly benefit the

industry funds, writes MIKE TAYLOR, but the political

pendulum is capable of swinging the opposite way.

Mike Taylor

Average Net DistributionPeriod ending Sept '102,300

ABN 80 132 719 861 ACN 132 719 861


10 OPTIONS www.superreview.com.au

The global financial crisis(GFC) ravaged the retire-ment savings of most Aus-

tralians. A lot of us are look-ing at 10-year super returnsbarely above the returns fromcash, and certainly below re-turns from bonds. A tough pillto swallow if you’re over 10 yearsfrom retirement – and a devas-tating outcome if your twilightyears are closer.

There is no doubt the tra-ditional risk management ap-proaches of diversification andtail risk hedging failed dis-mally as markets fell. I arguea new approach to managingrisk and volatility is essen-tial to ensure future genera-tions are protected.

One such solution is con-structing a portfolio of high-ly liquid, exchange-traded op-tions to dynamically adjustportfolios based on a fund’srisk profile. This approachprovides superior outcomes todiversification and tail riskhedging by reducing volatility

and ultimately benefiting long-term investors such as super-annuation funds.

Options are often misunder-stood, but they are the most ef-fective tool to manage volatili-ty because they can reshapeportfolio distributions more re-liably than simply diversifyingassets.

HOW OPTIONS CAN REDUCEVOLATILITYBecause index options are oftennot fairly priced, options can be

a highly effective tool for volatil-ity management. A persistentovervaluation stems from ashortage of those willing to sup-ply options versus those wish-ing to buy them, opening up op-portunities for skilled investorsto find sources of alpha.

As an example, since 1990the implied volatility (used inpricing options) was greaterthan the volatility subsequent-ly realised by the S&P500 87 percent of the time. In other words,the put option on the S&P500

is overpriced 87 per cent of thetime – demonstrating the levelof mispricing and thereforeavailable alpha.

For those with the appropri-ate experience, capturing thisalpha can help to reshape prof-it profiles and reduce portfo-lio volatility without diminish-ing expected returns. The otherside to this strategy is that, tech-nically, an investor could keepportfolio volatility the same anduse options to increase returns.

The advantage of an option-based solution is it can be to-tally customised for an in-vestor’s risk and return profile,ultimately leading to better out-comes than diversification orsimple put buying strategiesprovide (ie, tail risk hedging).

DIVERSIFICATION FAILS WHENYOU NEED IT MOSTWhile risk reduction throughdiversification of a portfolio’sassets still has merit, ulti-mately it is a blunt tool. Cross-correlations between assetsand markets have steadily in-creased during the last fewdecades eroding the benefitsof diversification.

This was apparent during the

global market declines of 2001and 2008 when correlationsspiked and the weakness of di-versification was exposed.

These events seem to suggestthat portfolio diversification isnot enough to protect returnsduring extreme market events.There has been interest in re-cent times for strategies suchas tail risk hedging, but the re-sults show this approach alsofalls short.

THE PROBLEM WITH TAIL RISKHEDGINGTail risk hedging strategies buyput options to cut the distri-bution of returns to the left,avoiding extreme losses. How-ever, buying put options monthafter month becomes very ex-pensive (they are overpriced 87per cent of the time). Most im-portantly, the solution is stat-ic and does not accommodatespecific portfolio requirements,as shown in figure 1.

Figure 1 plots a strategy in-vesting in the S&P500 over a 10-year period, together witha tail risk hedging strategy com-prising one unit of the S&P500and one unit of a one month 90per cent strike put.

A strategy that utilises put options can cushion investors

against dramatic market downswings, writes SIMON HO.

The safest option

0.4

1/8/0

0

7/3/0

1

15/10/0

1

21/5/0

2

23/12/0

2

30/7/0

3

4/3/0

4

7/10/0

4

12/5/0

5

14/12/0

5

21/7/0

6

27/2/0

7

1/10/0

7

6/5/0

8

15/7/0

9

8/12/0

8

18/2/1

0

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2S&P500

Tail risk hedge strategy

FIGURE 1: PERFORMANCE OF A TAIL RISK HEDGING STRATEGY

02/08/0

0

02/08/0

1

02/08/0

2

02/08/0

3

02/08/0

4

02/08/0

5

02/08/0

6

02/08/0

7

02/08/0

8

02/08/0

9

0.5

0

1

1.5

2

2.5

S&P500

Dynamic options strategy

FIGURE 2: PERFORMANCE OF DYNAMIC OPTIONS STRATEGY

www.superreview.com.au OPTIONS 11


Although the strategy re-duced volatility of monthly re-turns by 40 per cent, it also se-verely impacted returns.Looking at the graph moreclosely, very rarely did the tailrisk hedging strategy exceed theS&P500 and actually under-performed for large periods.

The reason tail risk hedgingdoes not work can be explainedby the way options are priced.While the one month put optioncushioned the portfolio initially

from a downturn, subsequentone-month options become ex-pensive during volatility and arepurchased at exorbitant prices,impeding returns.

OPTIONS IN ACTIONInstead of cutting off the lefthand side of the distributionthrough tail risk hedging, a newapproach using a mix of indexoptions can achieve superiorvolatility management.

The strategy is based on the

principles of dynamic asset al-location in that it takes a flex-ible and customisable approachto portfolio weights depend-ing on economic conditions,maximising returns subject topre-defined levels of volatility.

If we take a portfolio com-prising of the S&P500 and adda basket of call and put optionsto dynamically reshape the dis-tribution curve, volatility re-duction and superior long-termreturns can be achieved.

Ultimately, this strategy is de-signed to cushion a portfoliofrom extreme fluctuations –making it incredibly valuableduring flat and bear markets.Of course in contrast, the strat-egy is likely to underperform itsbenchmark during extreme bullmarkets (as can be seen in fig-ure 1 between 2003 and 2007).But that’s the price you pay toavoid devastating market loss-es like those recorded in 1987,2001 and 2008.

Options are a formidable toolin managing volatility and risk ifused in the correct way. Althoughoften misunderstood, funds withlong-term horizons should con-sider using a dynamic optionsstrategy, as it can be an optimalway to ensure long-term returnsfor investors. SR

Simon Ho is executive director of volatility management specialistsTriple 3 Partners.


12 ASSET ALLOCATION www.superreview.com.au

As Australia’s superannua-tion industry contem-plates what will un-

doubtedly be a very differentsuperannuation environmentcome July 2013, it seems theone certainty is that compe-tition will continue to be aconstant.

In line with that reality,funds’ asset allocations haveevolved markedly in recentyears and according to Fron-tier Asset Consulting man-aging director Fiona Trafford-Walker those funds seeking todifferentiate must, and there-fore will, evolve them further.

“Over a number of yearsthere’s been a fairly naturalevolution in asset allocationsas people realised that re-liance on equity markets todeliver the goods was proba-bly going to give you a prettybumpy ride,” she said. “So themain desire is producingsmoother and more diversi-fied return patterns over timeand, from that we’ve observed,an allocation to things like in-frastructure and property andprivate equity are becomingkey parts of what clients aredoing to do that.

“There’s also been furtherdiversification into invest-ments like hedge funds andcommodities,” Trafford-Walk-er continued. “More global in-vestments as well, and that’snot only in equities, becausethere are a broad range ofasset classes that people areinvesting in overseas.

“But the key development

in asset allocation is thatthere’s now far greater diver-sification in portfolios thanthere was ten years ago.”

Russell Investments di-rector of consulting and ad-visory services Greg Liddellsaid that his main observa-tion had been that manywithin the industry, Russellincluded, were moving awayfrom growth/defensive splitsin asset allocation.

“They’re looking at differ-ent markets now and havinga different nomenclature fordefining the characteristics oftheir portfolio buildingblocks,” he said. “So at Russellwhat we’ve done is move tofive buckets, those being eq-uities, fixed interest, otherreal assets like commoditiesor property or infrastructure,alpha-driven or skill-basedstrategies and finally oppor-tunistic investments.

“So in the case of the lat-ter, those are things that youdon’t necessarily want tohave a permanent exposureto, through a full marketcycle,” Liddell added. “Thatsaid, there are going to betimes when the risk/rewardto be had from those assetclasses or investment strate-gies is going to make themattractive.”

Like Trafford-Walker, Lid-dell said that he had also seenmoves towards less relianceon equity risk premium todrive returns.

“Equities are still very sub-stantial components of asset

allocation in most funds, par-ticularly most default offer-ings, but over the last fewyears there’s been a trend tomove more into alternatives,”he said. “For instance, theChant West numbers showthat at the end of 2007 theoverall average for alterna-tive asset exposure was 6.2per cent.”

“Contrast that to the end of2010 and it had increased to10.2 per cent,” Liddell con-tinued. “So people are clearlybuying more infrastructure;

they’re buying more hedgefunds and that certainlyseems to be a global trend.

“So, just the way that fundsthink about asset allocationhas changed and, within that,there’s been small but signif-icant movement at the edgesin terms of asset exposures.”

DYNAMIC ASSET ALLOCATIONYet while investment into al-ternative assets has un-doubtedly become more com-mon, following on from times

of uncertainty, Liddell’s op-portunistic investments cat-egory is arguably as favoured.

For some time now, theindustry has had a numberof proponents of dynamicasset allocation or strategictilts and according to thehead of Mercer’s Australiaand New Zealand dynamicasset allocation team, DavidStuart, such strategies re-main well used.

“This was probably a trendin place before the global fi-nancial crisis (GFC) and, tobe fair, some funds have beenadjusting their asset alloca-tions for quite some consid-erable time,” he said. “Butaround the middle of the lastdecade I think it began to getmore impetus and, follow-ing the GFC, I think thosethat were still standing bystatic asset allocations won-dered whether it was theright thing to do, given thesheer scale of the marketmoves around that time.

“There certainly seems tobe a strongly increasing trendtowards varying your asset al-location through time, in re-sponse to perceived valuationanomalies in markets.”

Trafford-Walker said thatdynamic asset allocation con-tinued to be popular, simplybecause the thing that mostdetermined the future per-formance of an asset was theprice at which it was bought.

“Obviously the environmentthat you end up having is im-portant but if you can buy

high-quality investments atgood, cheap prices then thatshould set you up for a pret-ty good return over the lifeof that investment,” she said.“That’s the heart of dynamicasset allocation; it’s trying tofind investments that are goodquality but a little bit out offavour, and therefore cheap.

“Secondly, it’s about iden-tifying risks so that if some-thing is very expensive andyou’ve made a lot of moneyon it, it’s time to move on,”Trafford-Walker continued.“But the difference betweenstrategic asset allocation

Asset allocation has been the key differentiator with respect to superannuation

fund returns but, as DAMON TAYLOR writes, the continuing fallout from the global

financial crisis has caused many funds to re-examine their settings.

Smoothing out the bumps

David Stuart

www.superreview.com.au ASSET ALLOCATION 13


(SAA) and dynamic asset al-location is really a willing-ness to look at how much youpay for something.

“The old SAA approach wasbasically ‘set and forget’ andwe just think that that setsyou up for a pretty rocky ride.”

Of course, the key questionhere is not about the popu-larity of dynamic asset allo-cation but rather whether thestrategy’s effectiveness hasbeen borne out in superior re-turns over time. Stuart saidthat the aim was not just re-turn-enhancing but risk-dampening as well.

“We do measure the per-formance of our own recom-mendations and obviously webelieve that our tilts haveadded value but we also ed-ucate our clients not to expectit to add value in every short-term time period,” he said. “Sothat may include a year inwhich you adopt a positionand the markets continue tomove against you.

“The other thing we wouldstress is that not only wouldwe hope to add value by en-hancing the returns of thefund but we’d also hope tolower the overall risk of the

fund and I think that didcome through in the GFC,”Stuart continued. “We feltthat a variety of assets hadbecome quite expensiveand, of course, they tendedto fall significantly, so thosewho were adopting a moredynamic approach probablycushioned the scale of thefalls.

“And that’s really one of themost important things forsuper funds – to realise thatavoiding really poor returns isjust as crucial as enhancingreturns over time.”

According to Trafford-

Walker, the return advantageyielded by dynamic asset al-location was most noticeablewhen viewed over longertime horizons.

“We look at how ourclients have performed andthe clients that we’ve hadfor a long time – say morethan ten years – and we seeabout a one per cent excessreturn above the averagefund,” she said. “And whenwe look at what has led tothat one per cent, the assetallocation positioning hasbeen a key part of it.

“We think it works and, if

you look at the market, youknow that there are otherfunds that follow the sameprocess and you can see thatthey’ve done pretty well overtime as well,” Trafford-Walk-er continued. “The importantthing is not to look over theshort-term but to look overthe medium- to long-term.

“That’s how you can knowthat this stuff works and ourstrong view is that it’s a veryimportant way to manage theportfolio, a very good sourceof value over time and we feel

Continued on page 14 ☞

that fact is well borne out inthe numbers.”

WORKING POPULATION CHANGESThe one issue that has yet tomeaningfully impact superfunds’ asset allocations, butone that has been flagged bya number of industry pundits,is the impending retirementof an ever-increasing numberof baby boomers.

The premise is that as thisdemographic enters retire-ment, they will be in need ofincome-generating assetsrather than the growth assetswhich now dominate superfund allocations. But for Stu-art, the issue isn’t thatstraightforward.

“The first thing to point outis that demographics, al-though they’re imminentlyforecastable compared tomost forecasts that we makein economic markets, dochange pretty slowly,” he said.“They’re very gradual changes,almost glacial [in speed].

“So, in Australia, whilethere is this retirement ofbaby boomers, we’ve also gotpositive immigration thattends to be of a lower agerange,” Stuart continued.“And Australia is like the restof the developed world, in thatit’s going to see changes, par-ticularly in the size of itsworking population relativeto the retired population, butit isn’t going to happenovernight.”

Stuart said that when itcame to moves towards in-come-generating assets likebonds, again it would not hap-pen overnight.

“But the other thing thatwill hold it back is the fact

that life expectancy is nowgetting longer and longer,” hesaid. “When people retire, typ-ically they’ve probably got alife expectancy of at least an-other 20 years and that’s ac-tually a time horizon whichwe would say most normalbalanced funds are probablyquite good for.”

“If you switched immedi-ately into a substantially fixedincome-focused portfolioupon retirement, the risk isthat you will run out of moneybefore you run out of life,”Stuart continued. “So wewould say that you still needa fairly balanced mix and,again, the income require-ment may mean that youmake different changes.

“You might change yourgrowth assets to higher in-come-producing assets butstill potentially retain a rea-sonably significant weightingto growth assets.”

Similarly, Trafford-Walk-er said that the big pictureissue wasn’t as much aboutincreasing allocations to in-come-generating assets as itwas about what asset allo-cations in retirement oughtto be.

“That’s the dilemma here –what asset allocations oughtto be in the retirement phaseversus the accumulationphase, because there’s nodoubt that they should prob-ably be different,” she said.“There also ought to be someconsideration given to the taxposition because that’s obvi-ously vastly different in thosetwo phases as well.

“And this is probably a keything that funds learned outof the global financial crisis –that you do need to build tai-lored options for people in

that phase,” Trafford-Walkercontinued. “They could wellbe balanced options or growthoptions but considerationneeds to be given to offeringthe products that people wantto buy that give them thatcomfort in retirement.

“For a lot of people, thatwill be something that’s lower-risk, maybe more of a guar-anteed-type structure. Maybeit’s more bond-type invest-ments, maybe it’s more float-ing rate-type investments but

whichever one it is, makingsure people have effective al-locations in retirement is rap-idly becoming a priority.”

Naturally, the asset allo-cation issue waiting in thewings for all super funds re-lates to how fees will enterinto the allocation equation.The upcoming MySuper envi-ronment has put fees cen-trestage and front of mind, soit will undoubtedly be inter-esting to see how allocationsdevelop as a consequence.

THE SIMPLE VIEW“I have the view that all assetsshould be justifiable on anafter-tax, after-fees basis,”said Liddell. “What’s impor-tant is the net return in the

pocket of the member and Ithink that all investmentstrategies should be predi-cated on that basis.

“In saying that, I think asresult of the Cooper Reviewand MySuper, there cer-tainly seems to be a push forMySuper funds to be morecost-conscious, more cost-aware,” he continued. “Andthe response from a numberof the retail houses has beento come out with superan-nuation offerings that arelargely passive with few, ifany, alternatives.”

Liddell claimed it would beinteresting to see how suchpassive options fared whencompared to funds employingproperty assets, private equityor similar illiquid alternatives.

“Because if the fee is ap-propriate, they do bring di-versification benefits to port-folios,” he said. “Sometimesthe fees are too high but, atthe end of the day, a premiumis warranted for exposure togood assets in that space.”

Trafford-Walker said whilefees were definitely a hottopic, Frontier clients hadbeen negotiating with man-agers, both in the unlistedspace and with listed man-agers as well.

“It’s really just about mak-ing sure that you pay what’s afair price for a fair service andyou’re getting decent value,”she said. “In fact, the realityis that some listed managersare really bad value and someunlisted managers are reallygood value. So, while unlistedand alternatives for the mostpart will be more expensive,there’s no hard and fast rulehere.”



☞ Continued from page 13



Fiona Trafford-Walker

That’s the dilemmahere – what asset

allocations ought tobe in the retirement

phase versus theaccumulation phase.

CONSOLIDATION CONTINUES“From a helicopter view, thisissue of fees is definitely on-going and it is definitelygaining momentum with a lotof funds, especially the bigfunds that are really lookingto benefit from their scale,”Trafford-Walker continued.“So what we’ve said to thefunds management commu-nity is that you need to be in-novative with how you thinkabout your fee structures be-cause the consolidationthat’s occurring in the su-perannuation industry todayis just going to continue.”

“We’ve made it clear thatthere are going to be fewerand fewer mandates for themto fight over and that theyneed to think carefully abouthow they want to be paid and,more importantly, how theywant to be rewarded in termsof performance fees.”

Looking specifically at thefocus on investment fees thatwould result from MySuper,Trafford-Walker said thatwhatever fee guidance wasprovided had to be practical,implementable and had to re-flect the nature of the busi-nesses that offered theseproducts.

“There are some small busi-nesses which manage verysmall amounts of money andcharge higher fees becausethey need to have a certainamount of dollars coming inthe door,” she said. “If thatprotects the ability of thatmanager to deliver excess re-turns to clients – well youmight consider that that’sworth paying for.

“But if there was some pre-scription around what the fee

could be, then those sort ofproducts will become muchharder for the funds to ac-cess,” Trafford-Walker point-ed out. “In terms of any like-lihood that there will begreater allocations to passiveinvestments, one of the bigreasons behind why our long-term clients have done pret-ty well is that they’ve had goodasset allocation but alsothey’ve tended to use activemanagers – not for the wholeportfolio but for most of theportfolio.

“Good manager selectioncan add quite a lot of value, soif it’s just for cost reasons thatpeople start to say ‘no moreactive management’, thenthere is definitely a risk thatreturns will be lower.”

Yet when it comes to assetallocations, the constantquestion lies in what consti-tutes the yardstick by whichtheir efficacy can be meas-ured. Within the industry,there is often talk that re-search house ratings on superfund performance are of lim-ited use, since past perform-ance is no measure of whata fund’s returns will be like inthe future.

If that’s the case, what dic-tates whether a given asset

allocation has done its job andfulfilled a trustee’s objectives?

Trafford-Walker said that itwas a question to which therewas no easy answer.

“The way that I think aboutit is that the market gives youwhat the market gives you,”she said. “It’s like there’s thegod of the market and hewakes up one morning andsays, ‘it is going to be thistoday’.

“Most people have no con-trol over what that number is,so the inclination is for peo-ple to try to change the thingsthey can control – fees andthings like that,” Trafford-Walker continued. “But whenyou look at asset allocation,you can have the best faith inthe world in what you think isa good asset allocation and inany one year it might not per-form very well at all.”

For Trafford-Walker, if aclient gets a good return overseven-to-10 years, that’stelling you something.

“So you then have a lookat what makes up those num-bers, have a look at the short-er-term numbers and see

whether it was just one yearwhere they’ve shot the lightsout, or was there a steady pat-tern of doing okay year afteryear, with the odd good or badyear?” she outlined. “It’s real-ly about trying to pull apartthe numbers to see wherethey come from and what theycan teach us.”

PEER COMPARISONSLooking at the issue of peercomparisons in the super in-dustry and how it related toasset allocation decisions,Stuart advised funds to bevery careful about focusingsolely on relative perform-ance.

“One thing we will do is lookat where a client fund’s nom-inated peer group may havedifferent allocations to themand we’ll assess why it is theymay wish to retain theirpoints of difference or maybeconverge more,” he said. “Butultimately the danger is thatwhoever is at the top of thetable will be in the assetswhich performed best mostrecently and to have a policywhereby you constantly chase

the table-topping fund is adangerous chasing-tails typeof approach.

“We constantly look atwhether there are new ideaswhich maybe this fund hasn’ttaken onboard and, if wethink that they’re long-lastingand durable, then potentiallythe fund should incorporatethem,” Stuart continued. “Butthat shouldn’t be just becausethey’ve done well recently.”

“That’s really the source ofmost market misevaluations– people start chasing assetsthat have gone up and, tosome extent, chasing thefunds at the top of the tablemakes for a risk that you’redoing exactly that.”

According to Trafford-Walk-er, peer risk and peer compe-tition was one of the biggestnegatives to come out of fundchoice.

“It creates this continual‘looking over the shoulder’ bysome funds at what otherfunds are doing and the re-ality is that they’re looking ata number of funds that havenothing to do with their in-dustry or business,” she said.“You have to say to yourself,‘this is what I’m going to try toachieve for my members, thisis my philosophy, this is howI’ll invest and this is myroadmap for investing’.

“That way, when things geta bit tough they can go backto their roadmap and say, ‘whyam I doing this? Okay, yepthat’s right. Do I still want todo that? Yes, let’s press on’,”Trafford-Walker said. “And youtend to find that those fundsdoing that are the ones thatdo better over time. Theydon’t get sidetracked by noisein the market or noise fromcompetitors.” SR





Greg Liddell

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18 MYSUPER www.superreview.com.au

Coming out of the 2011Federal Budget, it hasbecome very clear that

the industry will be facingan entirely new superannu-ation environment in a littleover two years. Yet while 1July 2013 (and the MySuperlegislation set to launch onthat date) is just around thecorner, the industry’s pri-mary concern is the detailsof the changes.

Trustee of industry fund NGSSuper John Quessy said that hehad a number of concernsabout MySuper and for a rangeof different reasons, but that hisgreatest concerns revolvedaround a lack of clarity.

“As with so many of thesethings, the devil is still in thedetail and we haven’t seenanywhere near enough of it,”he said. “I’m obviously talk-ing about nitty gritty detailbut in this day and age, if youwant to do something in 18months to two years’ time,the lead in to the systemsand a range of other thingsto cope with that is aboutthat same length of time.

“Even this far out, we re-ally ought to have had a lotmore detail from the Feder-al Government about what isand what is not going to beokay in MySuper.”

Providing a counter view,Mercer Worldwide partnerand head of defined contri-bution consulting for Aus-tralia, Russell Mason, saidthat like it or not, MySuperwas coming and that it wastime for Australia’s super in-dustry to accept it.

“At this point, I think we’vegot to accept it,” he said. “Likeall change, there is some theindustry likes and some itdoesn’t like.

“But the Government hasstated its intention very clear-ly. It wants MySuper in placeand it believes it’s a consumerprotection that allows membersto make fair comparisons,”Mason continued. “So, subjectto it being in a form that’s fairto the industry, then I think myview is that we accept it andlet’s move on with it.”

GETTING DOWN TO WORKFortunately, ‘getting on withit’ seems to be something thatfunds are already on top of.According to Pillar chief ex-ecutive Peter Beck, mostfunds are specifically think-ing about their value propo-sitions in the market.

“In my view, funds all needto be thinking about wherethey want to position theirproducts in terms of fees, in

terms of investment options,investment approaches, andin terms of advice,” he said.“We think they should bethinking about insourcing ver-sus outsourcing, and not justin their accumulation prod-uct, but in their pension prod-uct as well.”

“MySuper seems to begoing in the direction of peo-ple being asked to demon-strate that they’ve got scaleand efficiency and that they

can create value for money,”Beck added. “So it seems to methat a lot of them need to bethinking about how they candemonstrate that they havesufficient scale to do that.”

According to Mason, thereis no doubt that funds want-ing to succeed in the new My-Super environment have to bepreparing now.

“In fact, I’ve already seenone fund that’s resolved to getthe ball rolling by putting in

place a very low-cost optionthat will work on about fivebasis points, a balanced-typeoption with everything in-dexed and using extremelylow cost products,” he said.“And their view, subject to itgetting some traction withmembers, is that that will be-come their MySuper option.

“So I think funds have gotto start looking at their bal-anced option, or whatever istheir current default option,

The Australian superannuation

industry may have accepted the

inevitability of MySuper but, as

DAMON TAYLOR writes, many

trustees and executives are looking

for more detail.

The heart of the matter

www.superreview.com.au MYSUPER 19


and asking themselveswhether that’s going to betheir MySuper option or not,”Mason continued. “If it is, theyneed to ask themselves wherethey need to tweak it andwhat they need to do to makesure it meets with the re-quirements of MySuper.”

Of course, one of the keypremises of MySuper is thatmost super funds – and in-dustry funds in particular –will need to do little to alter

their current default fundsin order to satisfy the newrequirements. Yet Masonsaid that minor tweaking, atthe very least, would still benecessary.

“A lot depends on the cur-rent structure of their defaultoffering and its suitability,” hesaid. “I’m aware of one fundthat is actually looking at cre-ating their new MySuper op-tion right now because theyeither can’t change the cur-rent default or it becomes toomessy and too costly in termsof redemptions and lost re-turns to do so.

“So I think this is wherefunds are still in the earlydays, in starting to think whatthey’re going to have to do tosatisfy MySuper, what changesare going to have to be made,”continued Mason. “But whilethe vast majority of corporateand industry funds won’t haveto make a lot of wholesalechanges, there is clearly animpact on the master trustsin terms of pricing models.

“We’re yet to see the final out-come of that but, again, thatneeds to be fair to everybody.”

Similarly looking towardsMySuper’s impact on thewider superannuation mar-ketplace, Beck agreed thatany change by industry fundswould be minimal – althoughchange on the retail sidewould be interesting to watch.

“The retail funds clearlyhave to do something,” he said.“So they’ll separate their prod-uct from the advice and they’realready introducing cheaperversions of their products and,as far as we can tell, AMP, BTand Colonial have all got prod-ucts now with the advice un-bundled that are essentiallyMySuper-lookalikes.

“So I would suggest thatmost of them would be readyto launch a strong campaigninto that MySuper space, butthat’s where this interestingdynamic comes in,” Beck con-tinued. “Industry funds havealways been positioned as thelow-cost product, but MySu-per will mean that they’ll becompeting against the retailfunds in a way they haven’tdone before.

“Add to that the fact thatthe retail funds do have scale– manufacturing scale – thatmeans they can produce prod-uct very cheaply and I thinkyou’ve got an interesting tus-sle on your hands.”

However, for Quessy, thefact that industry funds needonly make small changes orthat retail funds are likely torequire larger changes is notthe point.

“I’m taking that as a givenfrom comments made mymembers of the committee atthe ASFA [Association for Su-perannuation Funds of Aus-tralia] conference last year,”he said. “And if members ofthe committee are publiclymaking that statement, thenI’m assuming that to satisfythe requirements of offeringa MySuper product, our fund’s

and most other funds’ defaultproducts will tick the boxes.

“But ticking the boxes isn’tgoing to be enough if, in fact,what you’re then going to haveis some website that has acomparison of MySuper fundsbased on costs,” Quessy con-tinued. “And that’s simply be-cause most trustees have notdeveloped default products onthe basis of what they cost.”

Using NGS Super as an ex-ample, Quessy said that theexecutive had developed a de-fault product on the basis ofthe best possible returns tomembers given the variety ofrisk appetites that existedamong clients that who in thedefault fund.

“That can be everyone frompeople starting to work intheir very first full-time jobright through to those who areweeks away from retirement,”he said. “It’s still a pretty ‘one-size-fits-all’ product that’saimed at getting good returnsand it has achieved that.

“It is, however, activelymanaged,” Quessy pointedout. “Now, if that’s going to becompared on the basis of itsreturns, then I’ve got no prob-lem with that. If, however, it’sgoing to be compared on thebasis of costs, which are al-ready absorbed anyway, thenI have serious concerns aboutthat because (a), it’s sayingto people, superannuation isall about costs and that’s theonly thing you’ve got to giveconsideration to, and (b), it’san unfair comparison.

“If something costs 20 basispoints and gives you a CPI[consumer price index] re-turn and then something elsecosts 60 or 80 basis points and


Peter Beck

Ticking the boxesisn’t going to beenough if, in fact,what you’re thengoing to have is

some website thathas a comparison ofMySuper funds based

on costs.

gives you 3 per cent aboveCPI, which one do you want tobe in? We all know the answerto that but we’ve got an un-engaged group of people whodon’t and therein lies theproblem.”

THE VALUE PROPOSITIONThe importance of value and,furthermore, communicatingthat importance to members,is the key here. But with re-gard to investment options,the reality is that the con-cept of value is open to in-terpretation. According toMason, funds are consciousthat cost is a focus but thereis no set formula when itcomes to implementation.

“If cost does become a driv-er, I suspect that while a lotof funds may not move entire-ly to passive investments fortheir default MySuper option,they will certainly look at re-moving their high-cost prod-ucts,” he said. “So some of theinfrastructure and private eq-uity products are quite expen-sive and they will perhapsmove out of performance-based fee products where theirMER [management expenseratio] can be pushed up quitesignificantly by good perform-ance, though I realise that it’salmost a contradiction thatthose investments are the onesthat will be penalised.”

However, Mason said thatone interesting point was thatin all the documentation thusfar released for MySuper, therehad been no explicit statementthat a MySuper fund had to bea low-cost product.

“Certainly, it must be sus-tainable, but I think the in-dustry has taken it, and some

in Government have said this,that it needs to be pretty lowcost,” he said. “So most peo-ple are assuming that the op-tion they offer for MySuperwon’t necessarily be the onewhere they have perform-ance-based fees or high costinvestments like private eq-uity or infrastructure.

“But if that did eventuate,it would be a little bit of ashame because it means thatthis will be a product that mayor may not produce the sortof returns that trustees aretrying to achieve,” Mason con-tinued. “My concern is that wedon’t make it so simple or solow-cost that it underper-forms what the typical bal-anced option does today.

“If that’s the case, that willquite obviously be a stepbackwards.”

Illustrating his fund’s ownpreparation, Quessy said thatNGS Super’s executive wasthinking through the poten-tial implications of whateverscenario eventuated.

“We’re not going to startmaking serious changes to ourcurrent default investmentportfolio on the basis of whatwe don’t know,” he said. “How-ever, it may well be that oneof the things that we do is westart building a portfolio inanother option, either a newor currently existing option,that is very mindful of costs,fees and MER.

“We will try to have some-thing that will be based onan index, so that’s in placeand we can therefore marketthat immediately if that’swhat happens,” Quessy con-tinued. “But I would alsopoint out that there’s a fun-damental problem with con-centrating on fee-free or

cheap investments for peo-ple who are disengaged andin this for the long haul.”

Quessy said that if someonewasn’t engaged in their su-perannuation and yet werenonetheless going to be in itfor a long time, they were aclassic example of someonewho was never going to makeany switches or liquidity de-mands on their superannua-tion provider.

“So that person is just nevergoing to ring them up and say,‘get me out of equities, moveme into cash’ and then ringthem up a couple of weeks

later and say, ‘okay, the mar-ket’s down, now’s a good timeto buy,’” he said. “They’re justnot going to do that. So here isa group of people who you canreally afford to take some illiq-uidity risk premium with be-cause they’re not going to saythat they want their moneyin something liquid. They’regoing to say, ‘I don’t care whatyou do with it, I don’t knowwhat you do with it, just giveme a good return and don’tcharge me too much’.

“You’ve got an opportunityto get a great return for theilliquidity investment, butoften that illiquidity invest-ment is one that does have

fees attached to it,” continuedQuessy. “So if fees are allyou’re worried about, I thinkyou’re going to miss out onsome great potential returns.”

Bringing another perspec-tive on value to the table,Beck suggested that there wasalso a question around whichservices funds would incor-porate into their MySuperproducts.

“I think if we go back towhat the objective of MySu-per is, it’s to have defaultfunds that suit most Aus-tralians,” he said. “Therefore,it’s important to have a prod-uct that’s not just the cheap-est but that offers value formoney for most Australians.The classic example is thatyou can either offer single-issue advice in the productor you can actually makethat a choice on top of theproduct.

“Now, if everyone goes downthe cheap and nasty option,then there’s going to be no sin-gle-issue advice included inMySuper products and I don’tthink that suits most Aus-tralians,” Beck continued. “Sothere’s this debate takingplace between whether youhave a ‘cheap and nasty’ andthen you let everyone dial upunder choice or whether yougo for something that’s gotmore value for money in it asyour MySuper product anddial up from there.

“You could envisage a verylow-cost product which hasgot indexed investment op-tions, no advice, limited serv-ices, minimum insurance andminimum options but thedanger is that if that becomesthe MySuper product or the





Russell Mason

The heart of the matterNow, if everyone

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default option, that’s proba-bly not going to suit mostAustralians.”

MEMBER ENGAGEMENTNaturally, the last piece of theMySuper puzzle is memberengagement. Over a numberof months, any number of in-dustry pundits have expressedthe view that MySuper will en-trench member disengage-ment and undo much of thehard work done by the superindustry to this point.

Yet while he admitted thatengagement needed to remaina trustee priority, Beck saidthat he did not foresee a neg-ative impact from MySuper.

“My view is simply thatthere’s a certain amount ofpeople who are disengaged andwill end up in a default option,”he said. “And I don’t think thatthe introduction of MySuper isgoing to change that.

“What’s happening is thatover time, as SG [superan-nuation guarantee] contri-butions mature and as mem-bers’ account balances startgetting higher, people areshowing more interest insuper,” Beck continued. “Andthat’s a secular trend towardsa little bit more engagement.

“MySuper or no MySuper,there will be more engage-ment over time, but it’s a long-term proposition.”

Alternatively, Quessy saidthat he had grave fears thatMySuper would take the in-dustry backwards in termsof member engagement.

“My concern is that MySu-per will end up being some-thing that essentially ‘dumbsdown’ superannuation and po-tentially undoes all of the

work that the industry hastried to do to engage mem-bers,” he said. “I think thisis an opportunity for completeand total disengagement be-cause, if we’re not careful,what it will mean for somepeople is that they’ll be overthere in some MySuper optionthey know nothing about, it’snot going to give them greatreturns but the message willbe, ‘look, you don’t have toworry about it’.

“I think one of the thingsthat people have underesti-mated in regard to memberengagement and basic finan-cial literacy is that this is anevolutionary process,” addedQuessy. “It’s not a revolution.You’re not going to changepeoples’ knowledge and atti-tudes to anything financialovernight.

“This has got to be a processthat the community and thefunds and the lawmakers un-dertakes for the long haul,knowing that it’s going to takea generation.”

Providing an example,Quessy said that when he wasgrowing up, the televisionnews consisted of what washappening in the state, whatwas happening in the nation,what was happening overseas,the weather and the sport.

“There was no finance re-port and I don’t think news-readers ever mentioned theword ‘sharemarket’,” he said.“But sometime in the last 15years, or thereabouts, theAustralian people have start-ed to have a bit of an inter-est in that.

“Now, it didn’t happen sud-denly one day. The fact of thematter is that people are grad-ually taking an interest inthese things and I think we’ve

got to take the same attitudeto making people aware oftheir superannuation,” con-tinued Quessy. “I don’t thinkwe’re ever going to have a sit-uation where an 18-year-oldis excited about his superan-nuation and really wants totalk about it over lunch.

“That’s not going to happen,but that doesn’t mean we justgive it up and don’t engage inthose conversations. They still

have to happen and my con-cern is that under MySuperthey may not.”

PLAYING THE WAITING GAMEYet when all is said and done,the reality is that the super in-dustry will have to wait untilthe final MySuper legislationis released for firm answers toall of its questions. And forBeck, what does seem clear isthat the industry is headingtowards an even more com-petitive superannuation en-vironment in which products

are more easily understoodand compared.

“The first point here is thatthe intent is to create a morecompetitive environment andI think that will happen,” hesaid. “Retail funds are alreadypositioning to competeagainst industry funds at aproduct level, and I think theindustry funds have got tonow start thinking about howto compete at an advice level.

“Traditionally, the retailfunds have offered their prod-ucts with advice and there’sbeen no competition for it andthe industry funds have of-fered their product withoutadvice and they haven’t re-ally been competing againstretail,” Beck continued. “Butnow I think both retail andthe industry funds are goingto compete both at a prod-uct level and at an advicelevel, and there’s no doubtthat that makes for an entirelynew super industry dynamic.”

For Quessy, however, thefact that so many of the in-dustry’s questions remainunanswered is a concern.

“We will get answers tothese questions but I just can-not believe that the Govern-ment have had the Cooper Re-view’s findings for as long asthey’ve had it and we stilldon’t have detailed answersas to what they want MySuperto look like,” he said. “Clearlywe’re going to have it; what-ever the industry thinks aboutwhether it’s going to happenor not, it is going to happen.We just want to know whatit is that’s going to happen.

“And there are some posi-tive aspects to it. We might, infact, get a whole series of re-ally no-frills superannuationproducts and there are awhole lot of people who mightbe attracted to a simple, low-cost product,” Quessy contin-ued. “These might be the peo-ple who chase bargainsaround supermarkets forwhatever reasons, some be-cause they just love gettinga bargain even if it costs theman awful lot to go and chase itand others because the house-hold budget just requires themto shop at the cheapest placeeven if it’s not convenient.”

But according to Quessy,there would also be otherswho not only wanted but val-ued convenience, choice anda whole range of services thatinevitably came at a cost.

“And my concern is thateverywhere I go, I go to thepoliticians, I go to the mem-bers of the committee, I hearfees, fees, fees as though thatwas the only thing,” he said.“But if it’s all about fees, Ithink we’re coming at thingsfrom the wrong angle.” SR




The heart of the matter

www.superreview.com.au APPOINTMENTS 23


RUSSELL Investments’ global consult-ing division has strengthened its pres-ence in the region with two key ap-pointments in Australian and Asia.

Frank Russo will join the team as a sen-ior consultant at Russell Consulting inAustralia, based in Melbourne. He comesto the role from independent asset con-sultant Access Capital Advisers, wherehe served on the board of the AMP In-frastructure Fund of India. Russo pre-viously held senior positions at Equipsu-per and Westpac Banking Corporation.

In a second move, Trevor Persaud willtake on the role of practice leader forconsulting and advisory services inASEAN, India, Hong Kong and Taiwan.He will be responsible for leading thestrategic development and delivery of in-vestment consulting services for Russell’sclients in the region and will be based inSingapore.

The Federal Government has recom-mended Greg Medcraftbe appointed thenew chairman of the Australian Securi-ties and Investments Commission (ASIC).

Medcraft joined ASIC as a commissionerin February 2009, with responsibility forinvestment banking, investment managers,super funds and financial advisers.

Treasurer Wayne Swan said Medcraftwas widely respected among financialmarkets, regulators and governmentsaround the world after almost 30 yearsexperience at global investment bank Société Genéralé.

If approved by the Governor Gener-al, Medcraft will be appointed for a termof five years. He will take over the posi-tion from the incumbent Tony D’Aloisio,who was appointed ASIC chairman for afour-year term in 2007.

In his new role, Medcraft said thathe would be concentrating on disclosureto consumers, creating an efficient and

fair marketplace and ensuring an effi-cient and cost-effective licensing system.

Jonathon Armitage has joined MLC In-vestment Management as portfolio man-ager, moving from Schroders’ globalequities division in London.

He had worked as global equities ex-pert for Schroders, gaining 18 years ofexperience in equities across several in-ternational markets including New York.Most recently he was head of US equitiesand global portfolio manager as part of ateam managing US$12 billion in assets.

Armitage will start on 1 August and re-port to MLC chief investment officerNicky Richards, who joined MLC in Jan-uary from Fidelity in London.

According to Richards, the appointmentof Armitage completes a wave of en-hancements to MLC’s portfolio manage-ment team across the major asset classes.

UBS Global Asset Management has ex-panded its Australian fixed income teamwith the senior appointment of BenSquire as head of credit research for AsiaPacific, and the appointment of Christ-ian Baylis as portfolio manager.

Squire joined the bank from SociétéGenéralé in London where he was a sen-ior credit analyst, while Baylis’ most re-cent role was senior analyst investmentsat the Reserve Bank of Australia.

With over 17 years of experience incredit research and credit portfolio man-agement both domestically and globally,Squire will take responsibility for cred-it research and issue selection for AsiaPacific issuers. He will also be a memberof the UBS Global Asset Managementglobal credit research team.

Baylis will work on inflation-linkedportfolios, undertake market analysis andexecute credit and related over-the-counter derivatives. SR

FUNDS managementgroup Aurora Funds hasappointed Chrys Wickre-meratne to the position ofchief financial officer.

The company statedthat the appointment ofWickremeratne wouldstrengthen the manage-ment and oversight of thefinancial and risk controls

of the group and its vari-ous investment schemesand mandates.

Wickremeratne hasover 18 years of experi-ence in the financial serv-ices industry, specialisingin corporate and trust ac-counting, operations,compliance and risk man-agement for a number of

global financial institu-tions.

Most recently heworked as chief operatingofficer at Natural Capi-tal Funds Management,before which he was abusiness unit manager inthe Perpetual CorporateTrust’s investor servicesdivision.

Aurora nabs WickremeratneEvents Calendar

Super Review’s monthly diary of superannuation industry events around Australia and abroad.

AUSTRALIAN CAPITAL TERRITORY

2 – ASFA Policy Roadshow. Light atthe end of the tunnel? Venue: HyattHotel Canberra. Assembly Room,Commonwealth Avenue, Yarralumla.Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

NEW SOUTH WALES

3 – FSC Economist Briefing. Venue:Financial Services Council. Level 24, 44 Market Street, Sydney.

6 – ASFA Policy Roadshow. Light at theend of the tunnel? Venue: WesleyConference Centre, Wesley Theatre. 220 Pitt St, Sydney. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

7 – FSC CEO Breakfast. Venue: FinancialServices Council. Level 24, 44 Market Street, Sydney.

9 – FSC Insurance Capital ReviewSeminar. Venue: Perth Room. 61-101 Phillip Street, Sydney.

21 – ASFA Luncheon. Speaker: PaulCostello, chair of the Peak ConsultativeGroup. Venue: The Westin Hotel,Ballroom, Lower Ground Floor. No. 1 Martin Place, Sydney. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

QUEENSLAND

9 – ASFA Policy Roadshow. Light at theend of the tunnel? Venue: The Sebel &Citigate. King George Square, Kennedy Room. Cnr Ann & Roma Streets, Brisbane.Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

WESTERN AUSTRALIA

15 – ASFA Policy Roadshow. Light atthe end of the tunnel? Venue: PanPacific Perth. Golden Ballroom North,207 Adelaide Terrace, Perth. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

SOUTH AUSTRALIA

16 – ASFA Policy Roadshow. Light atthe end of the tunnel? Venue:InterContinental Adelaide. Blake's Room,North Terrace, Adelaide. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

TASMANIA

22 – ASFA Policy Roadshow. Light atthe end of the tunnel? Venue:Salamanca Inn. Churchill Room, 10Gladstone Street, Hobart. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

VICTORIA

8 – FSC CEO Breakfast. Venue: Deloitte.Level 10, 550 Bourke Street, Melbourne.

27 – ASFA Policy Roadshow. Light atthe end of the tunnel? Venue: SofitelMelbourne on Collins. Arthur StreetonAuditorium, 25 Collins Street, Melbourne.Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

NORTHERN TERRITORY

28 – ASFA Policy Roadshow. Light atthe end of the tunnel? Venue: NorthernTerritory Superannuation Office.Conference Room, 3rd Floor. 38Cavenagh Street, Darwin. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.

Aurora Funds has a new chief financial officer,with Chrys Wickremeratne stepping into the role.

Fax details of conferences, seminars and courses to Super Review on (02) 9422 2822

JUNE

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

The corporate spin cycle

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.

AS hard as life may be for superannuation fund executivesin explaining declining returns to some angry fund mem-bers, Rollover believes life is very much harder for thoserunning the administration of the various Commonwealth Gov-ernment superannuation funds within the peculiarly labelled‘Australian Reward Investment Alliance’ (ARIA).

Not only do the guys at ARIA have to accommodate theodd angry shot from public servants, they must also endure therigours of an appearance before Parliamentary committeeswherein they find themselves at the mercy of politicianshungry for information.

And it seems to Rollover that life must have been particu-larly difficult for the ARIA staffers who had to fend off ques-tions from Opposition senators about the likely impact ofthe Government’s proposed Mineral Resource Rent Tax andcarbon tax on investment returns.

He offers the following torrid exchange as an example:

Senator Ryan: Before, you stopped mid-sentence and thenstarted another sentence. You were alluding to discussions youmay have had about the impact of this tax upon this sector,not just now but over the last six weeks. The second phase Iwould like to explore is what discussions you have had aboutthe impact of this tax upon your investments if it were to beintroduced. What would you expect to happen to the shareprice of your investments if this tax were introduced by thisparliament or a subsequent parliament?

Mr Crafter: Sorry, it is important to make a clear distinction.This is not analysis that ARIA has done. This is analysis which was

done by ARIA’s investment managers. They are engaged in se-curities valuation on a daily basis.

Senator Ryan: Presumably you pay them for that purpose.Mr Crafter: Yes. So this is not ARIA’s analysis; this is ARIA’S

investment managers’ analysis and the analysis of other se-curity analysts in the market. From our understandingand interrogation of those financial market participants, theimpact of the tax would be in the order of 10 per cent.

The Parliamentary fishing expeditions will no doubtcontinue. SR

AS an old hack working in the financial services industry, Rollovercan only imagine the fabulous salaries paid to the corporate com-munications chaps employed by the likes of the Financial ServicesCouncil (FSC).

Thus, Rollover has concluded that the FSC’s director of com-munications, Stephen Woodhill, must have been offered a fabu-lous amount to depart the role he has been filling for most ofthe past two years as spin-meister-in-chief to FSC chief executive,John Brogden.

Woodhill, who had toiled in the service of such major organi-sations as the Civil Aviations Safety Authority and the AustralianSecurities and Investments Commission, is heading off to spinin the interests of a major retail-related corporate.

Rollover understands the head-hunters are already searchingfor Woodhill’s replacement, but that things are already in goodhands thanks to the FSC’s media relations manager and formerRollover colleague, Sara Rich.

Another former FSC spin-doctor, Simon Disney, can be foundworking for Bendigo and Adelaide Bank.

Ah, the corporate relations merry-go-round keeps turning. SR

ON the subject of musicalchairs, Rollover notes the num-ber of ex-Metlife personnelwho have turned up at new in-come protection insuranceoutfit, Windsor.

While former Metlife headof institutional business,Michael Burke has emerged asa consulting director to Wind-sor, one of his old Metlife col-leagues, Aaron Stokeld hasemerged as Windsor’s gener-al manager for sales and op-erations.

Of course, when Burke re-tired from Metlife he firstturned up at Australian In-come Protection (AIP) and itseems a number of otherWindsor players also put intime at AIP.

It was announced in earlyApril that AIP would be ac-quired by Beazley Group, inwhat was described as a sig-nificanct expansion of its pres-ence in the Australian groupdisability market.

All of this has occurred atmuch the same time as thechanges at one of Australia’sother income protection in-surance specialists, Interna-tional Underwriting Services,which saw its life team headover to Zurich. SR

Jobprotection

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