Raewyn Williams

Centralised Portfolio Management (CPM) can play a pivotal role in the mass consolidation of the superannuation industry that will define its future for the next 10 years, says global implementation manager Parametric Portfolio, an affiliate of Eaton Vance (NYSE: EV).

“With the APRA-regulated superannuation funds on the cusp of horizontal integration, it is vital that merging funds deliver investment solutions that better match the needs and preferences of fund members at the right cost,” says Raewyn Williams, Parametric’s Head of Research, Australia & New Zealand.

“Funds that fail to do this could find their ‘scale dividends’ will be meagre, members could face more limited, ill-fitting options that simply pass on market returns, and culture dilution and, at worst, ‘mission drift’ could substitute superannuation funds as the neo-bank conglomerates of the future.”

A CPM strategy takes the “best ideas” of each superannuation fund’s individual fund managers and manages them in a single live portfolio that removes tax and trading inefficiencies. Its application to the fund merger process is detailed in Parametric’s latest research report, From hurdler to hero: Using super fund mergers to deliver key investment wins.

Williams says using a specialist change management and implementation structure (CPM) can help navigate the challenging, high-stakes investment rationalisation process to deliver a new, cleverly designed equity portfolio. “What might have been impossible (at best, unwieldy) in a traditional equity structure can been done with surprising ease and agility using CPM.”

She says the benefits are many and varied, which include:

• Stripping out redundancy, uncompensated risk and other inefficiencies that would otherwise survive the merger;
• Being able to pivot to meet key strategic objectives; for example, to reflect lower fees, better ESG characteristics or a lower (or higher) risk appetite;
• Preserving portfolio value through the investment rationalisation process via intentional management of taxes and transaction costs;
• Implementing the investment-related deliverables of the fund merger in a timely fashion, consistent with the broader fund merger timetable; and
• Being able to target the investment-related ‘wins’ from the merger as a contribution to the merger’s broader success.

“The beneficiaries of these wins are fund members; but there is also, arguably, a more commercial win – a competitive advantage these super funds will enjoy as the merger is executed over other funds who bypass a CPM equity structure.

“In our view using CPM will allow them to move to the implementation phase of the investment rationalisation project with a detailed understanding of the expected portfolio holdings, risks, fees, tax positions, ESG and other sensitive attributes of the newly designed, rationalised portfolio.”

Williams says the bigger the potential investment changes, the more the value of a CPM structure and best-of-breed implementation come to the fore.

“We may never see more dramatic, sweeping investment portfolio changes than in the context of the fund mergers that could halve the number of APRA-regulated superannuation funds over the next decade.

“Funds must position themselves well in advance to execute well on merger activity when it happens. This becomes compelling for larger funds that expect to be a party to fund mergers over and over again.

“Funds that take the lead in this process will be excited by the opportunity their merger plans present: to tackle the investment rationalisation required with a heroism that delivers key investment wins to the newly merged entity and its members and helps to underscore the merger’s success,” says Williams.

Read the report: From hurdler to hero: Using super fund mergers to deliver key investment wins.

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