The Royal Commission has once again thrown efficiency into the spotlight. Yet when it comes to member returns some superannuation funds may literally be leaving cash on the table.
Cash has been described as the asset class that was left behind and yet optimising cash deposits is the low hanging fruit that can make an incremental difference to overall performance.
In Australia cash management is largely taken care of by custodians and the big four banks. Increasingly however Australian investment managers are looking overseas to deploy their members' capital. After all Australia accounts for just 2% of the investable universe as far as equities are concerned.
According to ASFA over 30 percent of portfolios today are invested in overseas asset classes compared to just 20 percent 15 years ago. Such has been the success of the superannuation industry in asset gathering that can only increase. The $2.6 billion the industry has in assets under management is already 40 percent larger than the market capitalisation of the ASX. Deloitte forecasts that total superannuation assets in Australia will increase to $9.5 trillion by 2035.
That capital will need to be put to use to meet future obligations.
Cash as a strategic asset
In Australia cash management can be as simple as a short-term overnight deposit in Australian dollars. It can be done internally by treasury and cash management teams, or externally by custodians, or through money market funds that will do the work for you.
Investing offshore reduces concentration risk on the domestic market but it also brings complexity.
It can mean dealing with multiple currencies, asset classes, financial instruments and crucially regulatory jurisdictions. For example those financial institutions transacting with European counterparties may find themselves needing to comply with MiFID II regulations and reporting requirements. EU is not alone in this. Closer to home ASIC Regulatory Guide 97 provides a renewed focus on fees and transparency.
So how do you manage greater overseas exposure? One way is to become more active through dynamic hedging strategies, rather than adhering to static set hedge ratios.
Increasingly funds are employing active management to overseas cash as they have done in their domestic operations.
Yet at any point in time super funds may be sitting on millions of dollars in cash in multiple non-Australian dollar accounts. This is cash that is effectively yielding little to no rate of return.
That cash can be put to work, but to do so the perception of cash management in non-Australian dollar needs to shift, from necessary evil to opportunity.
By sweeping non-Australian dollar accounts and pooling cash held in one currency funds can invest in overnight cash and money markets, optimizing returns for investors.
Unlike the Australian market, where instruments such as 11am cash, are widely understood, investing overseas in multiple currencies, jurisdictions and asset classes, can appear a bit like spinning plates.
Yet it cannot be avoided. Increasing exposure to global assets means managing more foreign currency, and sticking plaster solutions will only suffice for so long.
That's why more successful superannuation funds are increasingly investing in their non-Australian dollar cash management. The right technology can help, both in terms of optimizing and managing cash and liquidity.
It can enable you to access liquidity and pricing to meet best execution obligations, compare and access offshore money market funds and provide a full audit trail of investment activity - removing impediments to a more active approach.
Importantly the right infrastructure can enable funds to analyse their exposures, ensure their investment policy and obligations are achieved and provide instant visibility on underlying assets.
As superfunds become more global in their allocations the obligations on them in terms of reporting, and performance, are likely to be more rather than less taxing. We are beginning to see increased focus on the necessary tools and skillsets to manage those obligations.