In-sourcing cash management

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In 2010, the Australian Meat Industry Superannuation Trust (AMIST) brought its cash management in-house from previously investing in a pooled cash management trust. This is a trend that Russell Mason, a Deloitte superannuation partner, is seeing increasingly in Australia, where a rising number of large industry superannuation funds is bringing this aspect of investment in-house, as well as some mid-sized and smaller funds.

Instead of using an investment manager, funds can save themselves up to 25 basis points, or A$250,000 ($259,000) on A$100m, which equates to the cost of a senior employee and is not a full time job to undertake. Plus by placing the money short term with major banks, the funds maintain their liquidity, Mason says.

In addition, some members in recent years have complained about the underperformance of their superannuation fund and questioned why they were getting relatively low returns compared with the interest they could get by depositing their money in the local bank.

Performance was the single biggest factor behind bringing AMIST’s cash management in-house, according to CEO John Livanas. “It certainly gave us a much bigger bang for our buck. At the same time it allowed us to manage our risks much more transparently.”

With the Australian cash market biased towards individual term deposits rather than cash management trusts, AMIST’s secure product, which is effectively just cash, became one of the top performing products in Australia.

Indeed, AMIST planned for the move very carefully in which it reviewed its risk management processes. At the same time, a new chief investment officer came on board who was very experienced in this area, according to Livanas.

“We went down to the extent of which banks we can invest in, what is our greatest exposure to each of the banks, what is our greatest exposure to each of the instruments, what is our cash flow management process likely to be and how do we match the likely cash requirements.”

However, Livanas admits that bringing cash management in-house definitely requires additional internal resources. AMIST beefed up its compliance team. Previously it was a simple matter of picking up the phone and requesting money to be moved from one cash management trust to the other, now it requires a much more disciplined and coherent approach, he explains.

Still, Livanas doesn’t think very small funds would be in a position to do so. He adds it would probably be easier for an industry fund, rather than a retail fund, to insource its cash management due to the difference in their nature and organisational structures.

NGS Super has partially brought its cash management in-house, in that it manages its term deposit portfolio internally, while approximately 45% of its cash is still managed externally through a treasury fund.

According to Ben Squires, manager for investments and finance at NGS Super, the fund is simply taking advantage of the higher rates the major banks offer than the rates in a bank bill portfolio. NGS Super has a panel of banks it deals with directly and a number of terms across which it can invest. The fund then constructs a term deposit portfolio similar to what an individual can do walking into a bank.

Again, Squires admits that managing cash in-house takes up internal resources to manage and therefore might be challenging for small funds. However, he says its simplistic nature and the benefit NGS Super gains in terms of the increase in yield far outweigh the time it takes to manage it internally.

Not having an intermediary to deal with also slightly reduces the risk involved, Squires adds. “Cash is one of the simplest things to bring in-house. If you want a pure cash investment then you’d be silly not to take advantage of the rates you’re getting with term deposits. It’s been a huge benefit to our members.”

At the same time, its bank bills provide NGS Super daily liquidity, whereas there are penalties for breaking a term deposit in terms of lost interest that has accrued through its period. Hence the rationale for keeping a proportion of its cash in both.

The process to partially move the fund’s cash management in-house in early 2010 involved putting a submission to its internal investment committee, working with its custodian to set up the accounts and establishing relationships with the banks, but was not difficult, according to Squires.

Sunsuper is another superannuation fund that manages its term deposits internally and has some cash managed externally, CIO David Hartley says. “Banks can offer long term deposits somewhat different to what they can do on the wholesale bank bill market. The issue that comes up is: how much and what do you (bring) in-house? With term deposits, I don’t think there’s any particular issue; you’re not trading in securities, there are no derivative contracts.”

“Where it starts to become more interesting or difficult to justify is if you’re doing more active management of instruments internally because then you have to have a proper trading system in place.”

Mason predicts as superannuation funds increase their internal resources the trend towards insourcing of investment management will continue to include the likes of indexed equities and other passive investments. Hartley says this is something Sunsuper looks at from time to time as opportunities to achieve a better net result for its members.

“If we can convince ourselves that bringing other assets (in-house) or doing things differently is going to be in the best interests of members then we’ll consider doing them. And as Australian funds get bigger and bigger, unless the investment managers recognise the increasing scale those funds have in the fees they charge, they are effectively forcing those funds into a situation where they have to insource on the economics.”

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