Professor Deborah Ralston

The Australian Centre for Financial Studies (ACFS) has partnered with the Australian Mathematical and Science Institute (AMSI) with ‘AMSI Intern Program’ to launch an innovative PhD intern program aimed at delivering access to high-end quantitative and analytical expertise to finance firms.

Based on the international success of Mitacs Program in Canada, which places more than 1800 students a year into internships, the innovative AMSI Intern – ACFS Internship Program model connects highly skilled and motivated PhD students (mentored by an academic supervisor) to solve problems within financial institutions. Students are drawn from all disciplines including mathematics and statistics, science, engineering, social and biological sciences, business and economics and introduce a new skills set into the workplace with the specialist knowledge of an academic supervisor.

Speaking about the new partnership with AMSI Intern, Prof Deborah Ralston, Executive Director of ACFS, commented: “This program is a response to the often stated need for highly skilled quantitative graduates to work on short term complex analytical finance problems.  Not only does this model present an extremely cost effective solution to that problem, but the four to five month period of the internship can also reduce the risk of recruitment.”

Professor Geoff Prince, the AMSI Director, said, “I am particularly pleased with this partnership with the ACFS having had a number of my own PhD students work in the finance sector. AMSI Intern will provide a tried and tested way for  finance, banking and insurance companies to get access to high level skills from a variety of backgrounds to deliver innovation and competitive advantage.”

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The four studies, which have been conducted over the last three years by the Paul Woolley Centre, focus specifically on behaviour within fund management firms and how they translate into performance for clients.

Professor Bird says: “The good news is that fund managers do have good stock selection skills, but after selecting their key stocks they tend to diversify their portfolios with stocks that dilute performance.  We often glorify diversification but fund managers should hold stocks that they are confidant about and not be obsessed about building a diversified strategy.”

He quotes Warren Buffett who once said “Diversification is protection against ignorance.”

“In our second study, we looked at how fund managers behave through their corporate lifecycle.  They often start as a small fund, and are aggressive, and hold large positions. But as they get bigger and manage more money, they tend to become less aggressive and tend to protect their positions. They become more like index funds to the possible detriment of their clients. “What our studies clearly show is that fund management successes are often determined by chance, rather than skills.  So the clear message for investors is that they should stay away from large fund mangers and look for managers that believe in concentrated investments.

“Investors should diversify their investments amongst small managers and should know when to change their managers. So rather than holding one big diversified portfolio, they should look at several small, concentrated portfolios.

“Our studies show that value as an investment style does outperform. However, investors need to exercise caution as when value managers try to outperform they take value away from their portfolios.

“So who is a really good fund manager? We haven’t got much evidence to tell us who are the good managers and who are bad, as performance is based on chance. It’s an industry governed by chance. So we need to look at behavioural traits. Evidence strongly supports that managers who behave as though they are above-average, achieve the best performance.”

Professor Bird will be presenting key findings of these four studies in detail on 20 May 2014 at ACFS/FINSIA, Melbourne.

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Professor Deborah Ralston

The Australian corporate bond market has struggled to compete against syndicated term loans, despite a pricing advantage, says Dr Philip Bayley, Principal of ADCM Services.

Addressing an Australian Centre for Financial Studies briefing session yesterday, Bayley said the bond market was the poor cousin to debt syndications even though the average corporate bond credit spread was 58.9 basis points compared with the average syndicated loan spread of 76.1 basis points.

Bayley, whose address was titled “Factors influencing access to and the price of funding in the syndicated loan and corporate bond market and was the theme of his PhD thesis, said: “For companies that have the option of using either market, robustness testing shows the average price difference to be six basis points ($1.5 million a year) in the favour of corporate bonds.

“As a consequence it is other features aside from price that have attracted clients to syndicated debt and not direct pricing. For example, here is a perceived convenience and no need for a credit rating, while the volume of funding available and declining bank net interest margins are found to be statistically significant.

ACFS Executive Director Professor Deborah Ralston said: “This is excellent research that helps provide the evidence base for the dynamics underpinning the emergence of a corporate bond market.”

Bayley’s research, which covers the period from 1996 to 2010 and focuses only on non-financial companies listed on the ASX, illustrates that bond issues largely held their own with syndicated loans up to 2003, but from 2004 to 2010 the latter have dominated the market. Fifty two companies issued 140 bonds in the domestic market and 130 companies took 212 term syndicated loans over the period. All were denominated in Australian dollars.

“Despite these numbers, I am not arguing that the corporate bond market has been stifled by direct competition from the banking sector.

“Instead, it’s the result of competition from the international banks in the syndicated loan market that has driven the Australian banks to be so competitive in this space

“The domestic banks have undertaken more syndicated lending to preserve their corporate relationships – and the bond market has suffered collateral damage as a consequence of this competition.”

Bayley says the domestic banks have resisted the temptation to use syndicated debt as a loss leader.

“My research shows there’s no evidence to show that banks are ‘buying’ syndicated debt deals. Indeed, corporate borrowers without term funding options are at risk of being ‘held-up’ by their bankers, paying considerably more for their term debt funding than those with alternative sources of debt such as corporate bonds.

“Moreover, simply having a credit rating, regardless of whether it is investment grade or not, can considerably reduce a borrowers cost of debt by signalling to the borrower’s bankers that it has term debt funding options.”

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Professor Deborah Ralston

Technological innovation is underpinning a revolution in how financial services are delivered in Australia, says Professor Deborah Ralston, Executive Director of the Australian Centre for Financial Studies (ACFS).

“Today this technology enables wealth managers to deliver financial advice to three million people annually, to oversee the administration of 20 million superannuation member accounts and to manage investments totalling $1.8 trillion on their behalf – and this revolution is still in its infancy,” she says.

“For example, how far away is the integration of advice and investment platforms, how will the regulators respond to this technological revolution, and will access to individual superannuation accounts in APRA-regulated funds lead to a decline in the growth of SMSFs?”

These are just some of several themes about the role of technology in financial services that will be teased out at morning briefing session being sponsored by ACFS and EY on 14 May in Sydney. It is titled “Riding the digital wave: are wealth platforms about to take off or wipe out?”

Speakers include former Labor Superannuation Minister Nick Sherry, EY Partner Jeroen Buwalda, ASIC Senior Executive Leader Ged Fitzpatrick, SuperIQ CEO Andrew Bloore and Colonial First State Executive General Manager, Linda Elkins.

Buwalda says wealth managers are facing unprecedented opportunities and challenges as a result of the increasing uptake and convergence of consumer technologies.

“In an environment where evolving technology makes it easier than ever to engage with customers, providers need to ensure they are making the best use of their platforms – whether collaborating with clients, advisers of platform partners in real time or managing regulatory compliance obligations more effectively,” he says.

Prof Ralston says every day we hear about new innovations in technology and how they are changing the way we live; smart phones, tablets and social media are already ensconced in our daily routines and wearable devices and 3D printing are almost upon us.

“These massive changes obviously beg the question about how wealth platforms are responding to technology innovation to better meet the needs of customers, trustees, administrators and asset managers.”

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