The use of outsourced trading could be the “future state” for everything from massive sovereign wealth funds down to investment minnows, but lingering concerns about loss of control and connectivity are an obstacle to further uptake.
Historically, the unglamorous asset servicing businesses of the big international banks have largely stood in the shadows. But their reliable cashflows and deep institutional relationships mean that’s all starting to change.
‘Fundamental tension’ in using the Canadian Model down under: Castle Hall
While Australia’s super funds want to embrace the so-called “Canadian model” of chunky allocations to unlisted assets, there’s several features of the local pension system that mean they’ll have to think carefully about just how they’ll do it, according to Chris Addy, CEO of governance, risk and compliance firm Castle Hall Diligence.
The first is portability; in Canada, a member of one pension plan cannot, by default, move their savings to another, keeping money locked up for much longer periods and lessening the need for more frequent valuation of unlisted assets.
“I’m a member of Caisse de dépôt et placement du Québec, because I’m a resident of Quebec, but I can’t say that I don’t like it and would like to switch it to somewhere else,” Addy tells ISN. “If I’m in the Air Canada pension scheme I can’t port it somewhere else. What you have in Australia is fundamentally a need to make sure this stuff is valued correctly, because at any point you can port your super and go somewhere else. It’s a very, very different environment.”
And Canada’s pension funds aren’t supervised by a single regulator. They’re instead subject to a morass of state and federal legislation, or the attentions of the Office of the Superintendent of Financial Institutions, which means there’s “no standardisation across the industry at all” and that what APRA does is “pretty unique”.
“(In Australia), the Canadian model is always the aspirational model – defined by 50 per cent plus in unlisted assets. It’s a lot easier to do that when you don’t have a regulator and each (fund) is individually calibrated on its own reporting lines and oversight as compared to the overall regulatory structure here.”
Still, super funds do look a lot more like their Canadian cousins than they did a decade ago, with more and more of their portfolios given over to infrastructure, private equity and credit, and real estate. But those fundamental differences in the two pension models are becoming more obvious as APRA applies significant pressure to super funds to both conduct more frequent valuations and bring down fees.
“Where you’ve got ongoing transactions, that behooves you to value more frequently and it must also be a much more meaningful valuation because people are transacting the value of their pensions,” Addy says. “If the valuation is too high, a person redeeming gets too much to the detriment of the people staying (and vice versa). There is a fundamental tension there, and it is very difficult to hold illiquid assets in what is, to a degree, an open-ended structure.”
“I personally think at the end of the day we need to have a progressive evolution of valuation; there does need to be more valuation transparency, and it is somewhere between expensive and very expensive to do it properly. There is not a simple answer to a complex question, and there are some very good valuation agents and some agents that are just taking all their data from the asset manager and it is largely a rubber stamp.”
But while that focus on transparency and fees is in members’ best interests, it can also be a sticking point in the private markets deals big superannuation funds are now chasing in Europe and the Americas.
“Australia is almost unique in the transparency and focus that it brings to fees,” Addy says. “And there is a fundamental tension in that alternative investments are not low fee options; they’re complex, and while there is pressure from superannuation funds to seek better fee structures there are plenty of global investors, sovereign wealth funds, be they in the Middle-East, be they in North America that are not fee sensitive and only believe in net returns.”
“In a bubble period… there is always a continuum between GP and LP power. In a period of GP power, where there is an oversupply of capital, (fee sensitivity) is a very strong impediment. If you can raise $500 million from a Middle-Eastern SWF that’s asking no questions versus $500 million from a large Australian super fund that has a long list of questions and requirements and wants lower fees. In a period where there’s more managers chasing capital, then clearly at that point in time there is going to be more ability to negotiate on fees.
