Focus on implementation can boost returns: QIC

Superannuation funds should focus on the implementation efficiencies that can be achieved though currency overlays, derivatives and frequent rebalancing, according to big institutional manager QIC.

There is a tendency among superannuation funds to outsource their foreign currency funding to their custodian, according to QIC capital markets managing director Troy Rieck.

"Funds have no visibility over how their custodian is handling that trade. They're also sending a very poor signal, in a governance sense, to the custodian: 'I don't really care how you do this - just do it'," he said.

When a super fund looks to purchase an asset in a foreign country, Rieck said, a good approach is to use a currency overlay manager, who can put a hedging strategy into place at the same time. By using this method, superannuation funds can avoid the custodian's buy/sell spread, as well as the risk of large currency movements, he added.

The selective use of derivatives can also make the operations of superannuation funds more efficient, Rieck said.

"The general superannuation industry suffers from a terrible problem: there's so much money coming in through the door that they don't know what to do with it," he said.

"I don't understand why any superannuation fund in the country would ever be in a position where they'd have to sell equities and trigger capital gains tax if they have positive cashflows of the size they talk about," he added.

The prudent use of derivatives can allow superannuation funds to reduce their exposures to certain sectors without having to sell down the underlying assets, Rieck said.

With current high levels of volatility in markets, superannuation funds can also benefit by frequently rebalancing their portfolios, according to Rieck.

"Frequent rebalancing in a volatile market works really well for funds - it can actually increase returns by as much as 25-30 basis points for a typical balanced fund," Rieck said.

"We're big believers in adding value with certainty. In a fee-pressured world, we think super funds will care a lot more about efficiency questions," he said.