Super funds need to reconsider investment processes

Superannuation funds that manage their assets internally or want to in the future will have to take into account now more than ever considerations such as governance structures, and managing technology needs thanks to the COVID-19 pandemic, according to Northern Trust.

Northern Trust managing director, country executive – Australasia, Angelo Calvitto, told Super Review that there were a number of trends affecting super funds and the asset servicing industry due to the pandemic.

One of the trends was that funds were considering internalising investment decision making and outsourcing other services.

Calvitto said investors were bringing their core investment activities, such as distribution, portfolio management, research, and risk and compliance, in-house to reduce fees, enhance control, gain efficiencies and drive investment performance. Asset managers were also outsourcing non-core activities such as trading, middle-office, foreign exchange, and data management to specialised providers.

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“This trend continues to be driven by the rise in costs, new technology, search for alpha, global regulatory change and a move toward consolidation. This confluence of trends has led many superannuation funds to take a closer look at their own structures and reconsider their investment processes,” he said.

“For superannuation funds that manage their assets internally or want to do so in the future, there are several considerations to take into account. These range from setting up and implementing governance structures, recruiting the right talent, managing technology needs, and implementing new operational models.”

Large superannuation funds considering consolidation was another trend and regardless of size, the asset manager expected the Australian Prudential Regulation Authority (APRA) to encourage consolidation as super funds managed early release requests and saw member erosion as unemployment rose in certain industries.

“This trend will in turn spark reviews about services such as asset servicing, custody, and external investment managers,” he said.

Calvitto noted that funds would also require more granular and richer data to support investment decision-making.

“Asset owners and investment managers are talking to their asset servicing providers about getting richer and more granular data to support their investment decisions, manage investment risk and calculate investment performance, particularly as the possibility for market volatility is now a feature of the new normal,” he said.

Calvitto pointed to Australian Custodial Services Association (ACSA) data that found transaction volumes spiked to record levels during the first six months of 2020.

“While this volatility has since subsided, the unpredictable nature of the current pandemic requires vigilance as institutional investors may need to quickly rebalance their portfolios to adjust to the changing facts on the ground,” he said.

“As part of this trend, many in the industry are now weighing up decisions about building and maintaining data warehouses, new tools to extract key pieces of information from unstructured data, as well as new solutions that make use of artificial intelligence and machine learning.

“Many superannuation funds now have highly diversified investments beyond traditional Australian equities and fixed income securities and these solutions will be vital in efforts to help ensure they meet investment returns for their members.”

The other three trends Calvitto said were accelerating change were the Hayne Royal Commission continuing to impact businesses, environmental, social, and governance (ESG) and socially responsible investments, and increased digitisation and digitisation of financial services.