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Business and operational management insights for
multi-manager investors, clients and service providers
Newsletter 10
Welcome to the November 2009 newsletter!
Twelve months ago we were all "stuck in the headlights" staring into oblivion. The collapse of Lehman Brothers had shred any remaining confidence in markets. With the end of another year rapidly approaching, I thought I would summarise past newsletters to help illuminate opportunities and capture enduring lessons.
I hope you enjoy the newsletter, and I look forward to your feedback.
Best regards
Brett Elvish
Financial Viewpoint
04 1317 6164
brett@financialviewpoint.com.au
Blinded or illuminated by the GFC light
- your choice!
This time last year we were all stuck in the proverbial headlights looking into oblivion. Lehman Brothers had collapsed, taking markets and any shred of confidence with them. Projects were being cancelled or put on hold, people were focused on keeping their jobs and the long term was what will happen in the US and Europe overnight.
In November 2008 Financial Viewpoint was well into its second year, and I was certainly questioning the wisdom of going solo. I too could get paid for staring into the headlights! It took nearly six months for confidence to return to the market (at least from a financial viewpoint!).
Whilst many may be financially poorer from the last 2 years, we certainly can be far richer in wisdom, and better prepared for future market challenges. I hope that my newsletters have helped to illuminate issues and opportunities, particularly as considerable content was inspired by the experiences and learnings of the past 2 years.
I have summarised below the key business and operational management insights from each newsletter. I have also provided links to the resources that I created. I trust it is a valuable resource for you and your colleagues:
- Market events have reminded us that a service provider here today may not be here tomorrow. Immediate replacements are essential in business critical roles like transition management.
- Multi-manager investors should have in place a formal transition manager panel, with each transition manager contractually ready to act immediately.
- Transition managers need to be subjected to the same level of rigour as investment managers, and given that in some instances they may also be acting as principal in transactions, greater rigour is arguably necessary.
- "Choice" has been the catalyst for many changes increasing pressure on funds to better manage their liquidity, and also to have more liquidity available to be deployed at short notice.
- 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.
- Don't focus purely on unlisted alternative assets...the word "unlisted" is purely a distraction. Whilst unlisted assets have particular issues and complexities, traditional assets can have many of the problems of alternative assets (e.g. infrequent trading, model driven prices, etc) and therefore present similar valuation problems.
- There are far broader and strategic considerations that require focus, with valuation policies being a subsidiary consideration.
- Boards should question whether their strategic choices are consistent with their offer to members and the fund's operating model, and ultimately valuation policies.
- To achieve great success in long-term investing, your operating capability must be one step ahead of the complexity of your products and investment strategies, otherwise losses are inevitable.
- Whilst this may appear blatantly obvious, most funds are consistently adding investment resources in advance of enhancing their operating capability .
- Unfortunately, innovation and expertise around implementation and operational risk management amongst funds is generally scarce, yet often by passive choice. That is, decision makers not appreciating the risks and issues that need to be addressed, and therefore not making the necessary investment in people, processes and systems.
- We have collectively hidden behind overused expressions like "unprecedented times" and "not in our lifetime".
- The inconvenient truth is that many of the lessons of the past 12 months have happened before, and in the lifetime of many superannuation funds.
- Crisis management has seen a focus on short term fixes, and now is the time to take stock and adapt operating models and businesses for enduring solutions.
- When thinking about conflicts, do not think narrowly. Conflicts are present in every business, and at many levels.
- Those consultants that have less conflicts need to do more to both understand their conflicts and improve their governance around conflict management.
- Funds should focus on identification first and then scrutinise their management. And for every conflict there is often a benefit. The question is whether you are materially better or worse off due to conflicts, and the answer is not always straight forward.
- If you draw a diagram of the inner workings and relationships within the current superannuation system, it is like a spider's web of money flows between multiple parties. However, in many cases the flows are for mutual convenience and benefit, rather than a clean fee payment for an explicit service.
- The core of the problem is that so many activities and businesses are supported by indirect fees and subsidies. The net result is significant inefficiencies and costs, and enormous tension as the various parties try to preserve the status quo or improve on their position.
- If we all paid our own way ("go Dutch") we would have a more accountable and transparent system. We would have less conflicts and ultimately better retirement outcomes from which we all benefit.
- Despite prescriptive product disclosure statement requirements, the complexity of the investment industry has well surpassed the legislated rules governing disclosure, resulting in "true" cost comparisons being near impossible.
- There are at least 33 different strategies which I have observed where funds knowingly or inadvertently enhance the presentation of their relative fee competitiveness.
- So whilst the Government's desire to lower costs for members to below 1% is admirable and desirable, without sound measurement, the objective is meaningless.
- The intentions behind the Enhanced Fee Disclosure regulations were to quantify for an investor the additional costs associated with investing via a collective investment vehicle. However, the regulations have not kept pace with the evolution of the industry, its participants and investment instruments, resulting in distorted behaviour and inefficiencies.
- Our primary interest as members should be the fees we are directly paying the superannuation fund trustee acting as our fiduciary, and any related party dealings and associated conflicts of interest.
- Whilst other fees and charges are of interest, they should not be our primary concern. It is the role of the trustee to make financial decisions on our behalf with the aim of achieving the best after tax, after fees returns.
Summary Viewpoint
A New Year's resolution...Take a day out to discuss the experiences of the past 2 years. The objective of the day being to capture the enduring lessons and embed them in the corporate memory of your organisation. Similar to your investment philosophy, develop a short document which summarises the key lessons so that they become guiding principles for future investment and operational activities.
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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