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Business and operational management insights for
multi-manager investors, clients and service providers
Newsletter 2
Welcome to the March 2009 newsletter! Liquidity management is a hot issue in the industry, however the focus has primarily been on investment issues. Liquidity management is a far broader issue that impacts all aspects of business and operational management, and needs to be considered in this context.
I hope you enjoy the newsletter, and we look forward to your feedback.
Best regards
Brett Elvish
Financial Viewpoint
04 1317 6164
brett@financialviewpoint.com.au
Legislated dehydration, with an excessive choice chaser
If you spoke to someone outside the superannuation industry about liquidity management, they would probably think about the drought, or perhaps the importance of hydration for elite athlete performance. And if you have spent three or four days last week at CMSF or were celebrating the start of the football season, then perhaps you wish you knew a bit more about liquidity management.
When you turn to superannuation, the whole notion of liquidity management seems a bit bizarre. Funds have been awash with liquidity given legislated growth via the superannuation guarantee charge and the preservation of superannuation until retirement. Not so long ago discussion was focused on whether the Australian capital markets were going to be able to absorb the liquidity of superannuation funds, so excess liquidity was the problem, at least at an industry level.
Superannuation's leaky bucket
However, at an individual fund level, over the past decade a series of holes have been made in the superannuation liquidity bucket. Choice of fund has provided the setting for mobility of superannuation accounts, increased competition amongst funds and a proliferation of investment choices. Other changes over the past decade include:
- Closure of defined benefit funds
- Funds becoming public offer
- Trend towards unlisted and less liquid investments
- Increasing international exposures, and associated hedging activities
- Increasing derivative usage and associated collateral requirements
- Increasing public profile of superannuation funds and investment performance
Thus, we have had legislated dehydration via "Choice". It has been the catalyst for many changes that have increased the pressure on funds to better manage their liquidity, and also to have more liquidity available to be deployed at short notice.
Spotlight on age old risks
Courtesy of the global financial crisis, risk management policies have been given an almighty stress test, and appear to have caught some funds off-guard. The combination of a rapidly falling Australian dollar and member switching to more conservative options has quickly drained excess liquidity from the liquidity bucket of many funds.
If you go back to Investments 101, two fundamental investment risks are liquidity and counterparty risk. However, it is fair to say that it has been a long time since these two risks were front of mind for many investors. Unfortunately, just like many hangovers, the lessons of the past are often forgotten until they again present themselves.
Taking a broader viewpoint
For a superannuation fund, liquidity is a far broader issue than purely an investment consideration. It is the risk that a fund is unable to meet its obligations. These obligations extend to making a benefit payment to a member within the promised period of time, facilitating a switch from one investment option to another, or meeting pension payments at the agreed times. Thus, liquidity considerations also impact upon product design and associated rules, member communication and operational management practices.
Click here for a checklist of issues to cover in a Liquidity Management Policy.
When considering liquidity management, broader considerations include:
- Legal obligations: What are your obligations under the trust deed and product disclosure documents?
- Marketing commitments: What has been stated or implied on your website or in other documents about the liquidity of investment options and the ability of members to move between investment options, or to exit the fund?
- Product design: What are the implications for liquidity of frequency of switching/exiting, notice periods, timing of switches/exits and buy/sell spreads offered to members
- Default fund as a balancing item for member investment choice: How do your liquidity commitments, rebalancing policies and legal obligations impact on members of the default fund?
- Operational management practices: Have all the roles and responsibilities for liquidity management issues been defined including legal, product, marketing, accounting and investment.
- Stress testing: Has stress testing been applied across all operational activities?
Liquidity management policies touch on all aspects of your promise to members, and therefore all operational management activities. Whilst, the liquidity of your investments is your ultimate hydration, it is the design and management of your fund and business that determines your hydration needs.
Summary Viewpoint
Most of the attention around liquidity has been on investment issues, which is equivalent to tackling a hangover with a panadol. It provides some temporary relief, but doesn't deal with the fundamental causes. Funds need to develop Liquidity Management Policies that cover all aspects of their operating model, of which investments is only one component.
Resources
Financial Viewpoint website
Financial Viewpoint
Financial Viewpoint provides business and operational management advice, research and tools supporting multi-manager investors, clients and service providers, including:
- Strategy and governance advice for funds and businesses, including reviews and opportunity identification
- Advice on management of custodians, transition managers, asset consultants and investment managers
- Tools, systems and research for better management of businesses and funds
Financial Viewpoint quick links...
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Example projects include:
- Working with board and investment committees on investment beliefs, investment governance, investment models, investment policies, service provider appointments, competitive positioning, delegations and peer risks
- Working with CEOs, CIOs and COOs on strategy, successor fund transfers, operating models, organisational design, as well as staff mentoring and training
- Working with teams on investment and operational due diligence (internal and external), service provider management, project implementations, conflict identification and management, and team development
- Reviews and advice relating to investment consultants, implemented consultants and custodians, along with related due diligence both domestically and internationally
- Negotiation of arrangements with outsourced service providers including fees, service standards and agreements
- Specialist work assisting investors reduce foreign exchange costs working closely with FX Transparency
Investment consulting reviews
Investment manager capability reviews
Investment managers
(Australian & international shares, bonds, property)
- Target market
- Product design
- Pitch material
- Mock reviews
- Operational due diligence
- Investment consulting market
- After tax returns
- Fees, including performance fees
Negotiation strategy & implementation
(fees, service standards, commercial terms, litigation)
- Retail platform
- Commercial multi-manager
- Industry funds
- Public sector funds
- Corporate funds
- Retail fund
- Covering:
- Custodians
- Investment managers
- Administrators
- Investment consultants
Strategy off-site facilitation
- Strategic review of investment positioning
- Alignment of investment strategy and business (fund) strategy
- Alignment of internal resources and expertise with areas of greatest impact
- Alignment of external resources with investment strategy
- Internal capability self assessment
- Peer risk sensitivity analysis
Investment administration (custody) reviews
Operational due diligence reviews
- Multi-managers
- In-house investment managers
- External investment managers
Industry superannuation fund
Strategic and operational advice to guide the establishment of common infrastructure to support multiple funds, tax structures & investment options:
- Current operation, competitive landscape and regulatory environment
- Strategic positioning
- Investment governance
- Member entitlements
- Operating models
- Custodian review and selection process
- Asset consultant selection process
- Unit pricing and taxation
- Operational transition
Multi-manager and private equity fund
Strategic and operational advice:
- Business model
- Target market
- Product design
- Investment administration providers
- Investment systems and infrastructure
- Operational due diligence framework
- Investment manager due diligence
- After tax returns
- Transition manager panel
Investment platform provider
Implementation efficiency review for an investment platform provider
- Business model and governance
- Investment menu
- Investment manager relationship management
- Operational implementation models
- Fee and service re-negotiation
- Product changes
- Operational changes
Industry superannuation fund
Project managed the asset transition for a $200 million defined benefit to defined contribution conversion
- Strategy determination
- Detailed implementation planning
- Implementation
- Post implementation review
Specialist debt investment manager
Strategic and operational advice:
- Business concept
- Business model
- Financial modelling
- Equity raising
- Product design
- Fund raising
- Target market
Multi-manager
Project manage a $1.5 billion asset transition for a multi-manager and retail investment platform
- Appointment and termination of over 50 investment managers
- Trading across multiple markets and asset classes
- Implementation of new investment strategies
- Launch of new investment trusts
New market entrant
Strategic advice for an international company considering acquisitions
- Australian superannuation industry
- Member administration
- Key issues and trends
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