investment & technology Super. Building Confidence 23-25 March 2009 Gold Coast Convention and Exhibition Centre AIST considers move to FUM membership model after ‘astonishing’ year AIST has flagged moving to a different model for revenue, based on funds under management, in the face of an expected decline in sponsorship money over the next two years. Fiona Reynolds, AIST chief executive, told the association’s annual meeting yesterday morning that a small profit was being budgeted for this year but this was looking less likely because of the global financial crisis. “We expect to eat into reserves this year and next, which means we have to be smarter and leaner in what we do,” she said. Ian Robertson, AIST chair, described the past year as “astonishing” and the work of the AIST management and staff as “stunning”. He said that given the big research agenda and lobbying agenda it would be a challenge for AIST staff over 2009 and 2010. All of last year’s increased revenue, from $4.13 million to $6.91 million, had been reinvested in the AIST’s programs. Membership also increased, by 13 per cent. Reynolds said that AIST would consider the funds under management model of charging for fund membership for 2010, which was more in line with other industry associations. AIST is implementing this year a new marketing plan, including a revamped website and database segmentation project for more targeting of events and programs. The association would also likely introduce a new tagline for its logo, to replace “Serving Super, Protecting Futures”. Policy focus for this year would include the global financial crisis and its impact on funds, in particular liquidity and valuation issues. AIST would also be monitoring many ongoing issues, such as climate change and consumer and superannuation issues. There were no plans to increase the number of staff, currently at 31, including part-time staff. The meeting voted in two changes to the AIST rules, removing the board position available to independent trustees, thereby reducing the minimum number of directors from 10 to nine, and changing the names of ‘chair’ and ‘deputy chair’ to ‘president’ and ‘deputy president’. Robertson said that the “electorate” for independent directors had shrunk to “four or five” and it was therefore inappropriate to continue to offer the AIST board position. He said the new title of ‘president’ (“which was not my idea”) better reflected the honorary nature of the role. The changes are effective from March 15 next year. Three trustee representative directors were re-elected – Robin Buckler, Angela Emslie and Robertson – and two new staff representative directors were elected – Greg Cantor of Catholic Super and Retirement Fund and Andrew Proebstl from Legalsuper. Members still like super but voluntary contributions get hit Liquidity-stretched super funds risk losing a large source of inflows this year, with more than one third of members who make voluntary contributions to super planning to stop these contributions in the next 12 months. A Newspoll survey commissioned by the AIST, conducted mid-March, revealed 37 per cent of those who currently make voluntary contributions won’t do so this year. However, somewhat surprisingly given the large losses facing most funds, four out of five working Australians (81 Fiona Reynolds … ‘have to be smarter and leaner’ per cent) still believe compulsory superannuation is a good way to save for retirement and one in two (52 per cent) think their super fund provider is doing a good job in the current economic downturn. While 61 per cent of Australian workers expect their superannuation returns to be worse than last financial year, less than a third would consider switching funds if their fund reports a negative return this year. Almost one in five (17 per cent) have moved or considered moving their Ian Robertson … ‘big research and lobbying agenda’ super to a more conservative super fund with the same provider over that time frame, while 11 per cent have moved or considered moving to a more conservative super fund with a different super provider. “There appears to be a good understanding among consumers that super funds are not immune from the global financial crisis and that funds are likely to report negative returns for a second year running,” said Fiona Reynolds, chief executive of AIST. “Importantly, this hasn’t led to Greg Cantor … new staff representative director panic among investors, most of whom appear confident with their super fund’s ability to ride out the storm.” More than half (52 per cent) of respondents were less confident, compared to 12 months ago, that they will have enough super for their retirement, and 37 per cent now think they will need to work past retirement age. The survey was conducted among 784 full and part-time workers aged 18 to 64, including 710 with super.
investment & technology Super. Building Confidence 23-25 March 2009 Gold Coast Convention and Exhibition Centre In the year of collateral: how to reduce counterparty risk One of the many repercussions of the financial crisis is that super funds and other institutional investors are focusing on areas of their operations that they previously took for granted. Take collateral, for instance. When even major institutions can suffer from cash problems and counterparty risk takes on a new meaning the level and type of collateral used for various transactions are now seen as more important. According to Neil Wright, “this is the year of collateral”. Wright is senior vice president and derivative product and strategy manager for State Street, based in Boston. He says that even though the next set of figures will probably show a slowing, or even fall, in the use of derivatives in the past few months, there is also a building of pent-up demand. “We will continue to see long-term growth in the use of derivatives around the world,” Wright says. “For investors, traders and asset managers alike, derivatives represent an increasingly important component of any investment strategy. But they also present significant challenges that call for focused expert management and technology investment.” Because of increasing awareness of counterparty risk most over-thecounter (OTC) derivatives transactions are collateralised. According to the International Swaps and Derivatives Association (ISDA) an estimated US$2.1 trillion of collateral was pledged across 149,000 agreements at the end of 2007. This consisted primarily of cash and government securities. Funds managers, hedge funds and institutional investors were counterparties to about 58 per cent of all collateralised transactions. The financial crisis has prompted a new focus on counterparty credit risk. Wright says: “The recent events in the market have certainly highlighted areas that need to be addressed and counterparty credit exposure is clearly Neil Wright … ‘derivatives will continue to grow, and present challenges’ one of the major areas in which steps can be taken to improve the process. “Having sufficient collateral in place and central counterparty clearing are the two main areas of focus for the market going forward.” Some have suggested intra-day margin calls on OTC derivatives as another risk control measure, however, Wright says that a couple of issues need to be addressed in this regard as well. “Intra-day margining is a trend that was started by the dealer community prior to the current financial turmoil and is not a specific response to the crisis. There seem to me to be two issues that need to be resolved before intra-day margining can become a practical measure: we need to be confident of the ability of the parties to 09-GMG0159-4-CMSFnewsletterBannerArt:210mm x 37mm 3/19/09 11:57 AM Page 1 respond; and we need to work out how the actual movement of collateral would be implemented because delivery is not instantaneous.” He says the fundamental question surrounding collateral for derivatives has not changed. This is: Is enough collateral being held to cover the exposure Some of the institutions which failed last year did not have adequate collateral in place, so more attention is being paid to the level of collateral and also its liquidity. Wright says there is also a trend for independent third parties to hold the collateral. “There is an obvious opportunity for custodian banks, such as State Street, to fulfil the role of independent collateral manager,” he says. Another common suggestion to better control risk is greater transparency. Wright agrees that the crisis will fuel this trend. However, he says that transparency, in itself, is not a prime driver in reducing risk. “The key is to ensure that all the risks are identified and managed. As recent events have demonstrated, all risks – including market, counterparty credit and operational risks – are of equal importance.” State Street has built a new technology platform, the OTC Hub, which is available to Australian investors to allow full servicing of their derivatives usage over the full life cycle of the transactions. The platform allows flexibility for different levels of service. “Some clients want a valuation service, some want collateral handling only and some want a full middle and back-office service,” Wright says. He believes that the huge derivatives market, which dwarfs all others, will recommence its growth trajectory quickly due to the pent-up demand. In the five years to 2007, it grew at annual rate of 32 per cent, according to the Bank of International Settlements, to reach US$600 trillion in outstanding notionals. But it is not only the volumes but also the stream of innovative and complex products that pose challenges for the post-trade processing and servicing of derivatives. According to Chris Field, State Street’s Australian head of sales and marketing, service providers need to have an expanding human expertise, a good level of co-operation across the dealer and funds manager communities as well as innovative technology to meet the challenges. “Assessing and managing all the areas of risk require a deep commitment to all three approaches,” he says. THE CHANGING INVESTMENT CLIMATE CAN ALTER YOUR INVESTMENT COURSE. MAKE SURE YOU HAVE A GOOD COMPASS. Our transition management team will work to identify the most efficient asset transfers to preserve the value of your portfolio. For more information, visit www.statestreet.com. 09-GMG01590309