Without robust operational infrastructure, Superannuation Funds are at risk of holding back fund performance and returns.
By Victoria Harverson, Senior Business Development Executive
Mine Super’s CIO, Seamus Collins, was quoted ahead of February’s Investment Operations conference saying that “superannuation funds cannot just rely on investment strategy to beat the market, they also need to up their spend on investment operations.”
This is an interesting viewpoint because traditionally Superannuation funds have been focused on generating investment returns via manager performance. Fund managers need to make the right decisions at the right time. But we all know how hard that is to do consistently over time, even for the best managers.
Collins’ comment will hit a nerve with some Supers who have experienced poor operational processes leading to higher costs and acting as a drag on returns. In effect, inefficiencies in the post-trade environment put the fund manager in a position where they have to get more investment decisions right to deliver the same performance.
This is also known as ‘implementation leakage’ and can occur in a number of areas within a firm’s operations.
Causes of implementation leakage
- Poor quality data hinders automated processing and requires manual intervention
- Reconciliation requires significant manual effort to collate and transform data for clearing and settlement processes
- Obtaining and passing trade data to custodians is time consuming, resulting in delays and higher levels of risk
In an uncertain and volatile market, the value of continued investment in operations is clear: efficiencies can contribute to higher returns but also help to cushion funds when the fund strategy is not performing well.
The industry is increasingly recognising that an effective and efficient back office can underpin consistent fund performance.
The publication by APRA of the MySuper Product Heatmap provides assessments of the performance of every MySuper superannuation product. This means that competing Supers will be able to benchmark their performance against their peers and address any underperformance.
Over time there will naturally be a convergence in performance which often translates into less product differentiation and a lower appetite for risk and innovation. But effective operational implementation has the potential to be a real differentiator and a source of competitive advantage.
Peter Curtis, AustralianSuper’s Group Executive for Finance and Operations, recently talked up the importance of “working closely with custodians to get access to the underlying data quickly so it can be integrated into other applications.”
But getting access to the data is one thing; transforming it into the format required is an entirely different challenge. Data is typically messy and comes from a variety of sources which need to be combined before it can be used for any clearing and settlement processes.
Creating operational efficiency
One of the key areas where the cloud-based Duco data integrity platform can make a difference for Supers is to automatically ingest and transform data for reconciliations. This will help Supers to eliminate a significant amount of manual effort and thus mitigate a key source of operational risk.
Major gains in efficiency can be achieved by shortening the cycle from identifying and ingesting data sources, reconciling that data and then investigating and resolving any breaks. This can only be a good thing for both Supers and custodians as it will allow settlement to take place more quickly.
Research from KPMG points towards future consolidation in the Superannuation market with increased M&A activity. When this happens, there will be further need for consolidation of systems, a process typically constrained by the challenges of ensuring accurate data is available in the format required.
This is another area where Duco’s data integrity capabilities can enable multiple sources to be combined, transformed and made available to middle and front office systems managing settlement, clearing, risk and compliance.
We’re all in this together
With operating costs continuing to increase, Supers are under greater pressure to review business models and operating processes. Part of this review should be an assessment of current technology platforms to establish whether they can support a lean and efficient operating model.
Firms should set out to ensure operational processes are aligned with the goal of achieving greater efficiency. Gone are the days where the front office is solely responsible for fund performance.
Instead, it’s increasingly the case that all areas have a role to play in achieving consistent returns – and best operational practices for superannuation firms must also drive strategy, product and service development.
For more information on how Duco can improve data integrity processes for Superannuation Funds, please download our factsheet.