Super funds need to gain deeper insights into the performance of their investment options as members demand more transparency, writes JP Morgan’s Stuart Hoy.
Super funds are increasingly offering a broader variety of investment options to help with member retention, and members are becoming more aware of the role of transparency in the management of their portfolios.
The sector has increasingly offered a broader range of investment options – tailored mixes of asset classes or investment styles across a spectrum of risk/return profiles – to members in response to a number of competitive and market pressures, including stemming the flow of members to self-managed super.
As members are offered more choice and chase greater returns, they are also seeking visibility into what is driving performance.
Some super funds are choosing to make the key investment decisions in-house rather than outsourcing to external asset consultants, which means they require fast and accurate answers to questions that have become increasingly difficult to answer.
Overlaying these demands is the regulatory agenda, including Stronger Super, which has increased the obligations on super fund trustees in relation to management of operational risk and investments and, therefore, trustees’ need for timely information.
Super funds need to be able to demonstrate they understand and can control the data requirements that come with these demands, which may no longer be met by traditionally siloed data and manually generated custom reports. This is also true of the external consultants that the super funds may work with.
The details matter
In an environment that has become more complicated for super funds, services that help with the more effective and efficient management of investment options solutions have evolved to provide an integrated solution to not only show the big picture but also the smallest details.
Although specifics vary, services in this space can be thought of as the suite of solutions that, used in conjunction with each other, provide the data that can be highly impactful in this new environment and can be customised for any investment option that is offered to members.
As institutional investors shift their thinking from solely managing money at the manager level to also looking at investment options for members, solutions are needed to allow institutional investors to drill down into each investment option.
This provides the level of transparency and data essential for in-house portfolio managers, asset allocators and investment operations personnel, external consultants and now members.
An integrated investment option management service will reconcile data to the pricing of units within the super fund. Analytical data should be available the next business day, if not within a few hours after the unit price is struck.
Processes should be repeatable and highly automated. Information needs to be delivered on a consistent basis across all investment options that are offered.
Showing the impact of asset allocation and manager selection decisions is also an important consideration.
Tracking contributors to and detractors from performance for each of the various investment options, and quantifying concentrations of risk and overall exposures (including to particular counterparties), adds to the detailed performance insights now considered a necessity.
The provision of investment options adds to the complexity of operating a super fund and also the risks. The number of questions that executives and trustees of super funds have to consider increases substantially. By providing overviews of each of the investment options that are made available to fund members, investment option management solutions can reduce the overall operational and reputational risks of the super fund.
The detailed decomposition and analysis of returns means that the benefits (and the potential risks) of each investment option can be explained more fully to members. In addition, the super fund’s executives and trustees can be sure that inadvertent breaches of investment restrictions within the various investment options are unlikely to occur.
This level of transparency also makes it easier for a super fund’s executives to control risks. Concentrations of exposures to particular assets and counterparties within each investment option, which may be unintentional, can be identified clearly.
These services also provide opportunities for external consultants and asset managers partnering with super funds. Because these solutions deliver comprehensive details about investment options, it is possible that the investment options will be delivered as white label solutions to and through super funds.
Funds that have opted to not in-source investment management functions in order to provide investment options to their members should be major beneficiaries of this.
These advantages are substantial. The cost and effort of increasing transparency brings reward. With transparency in relation to investment options, it is far easier for super funds to engage with members.
As members become more aware – and exercise their power to choose – transparency around each investment option will become more critical.
Stuart Hoy is vice president, product manager, custody and fund services, JP Morgan Australia and New Zealand.
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