J.P. Morgan first to launch Tri-Party securities lending in Australia

Mon, 29 Nov 2010 22:40:39 +0000

J.P. Morgan has successfully completed Australia’s first Tri-Party Securities Lending transaction acting as a third-party collateral agent for a securities lending transaction between UBS and State Street Bank and Trust. The unique transaction allows UBS to provide securities as collateral instead of cash to borrow Australian securities from State Street Bank and Trust with a third party safekeeping and monitoring the collateral until the transaction is complete. The landmark transaction follows J.P. Morgan’s completion of Australia’s first Tri- Party Repo transaction in September 2009.

In a Tri-Securities lending arrangement, the lender is able to take a blended portfolio of securities as collateral in a highly automated and risk mitigated environment. The innovative structure allows loans to be fully collateralised to lender specification and then held for safekeeping by the collateral agent. Daily reports are provided on the market value and the adequacy of the collateral against previously agreed limits, providing greater security than traditional bilateral agreements.

“We are thrilled to be involved in another industry first,” said Jane Perry, Chief Executive Officer for Treasury & Securities Services Australia and New Zealand. “J.P. Morgan’s Tri-Party Securities Collateral Management service provides the market with an innovative, sophisticated platform built for Australian and New Zealand institutional requirements,” she said.

J.P. Morgan’s Tri-Party Securities Collateral Management service offers clients a sophisticated suite of tools to effectively manage exposures of most forms of secured lending, such as securities lending, repo and foreign exchange swaps, as well as other financial instrument exposures. The offering also provides distinct benefits by using local legal agreements, local service management expertise and on-the-ground support during the transaction.

Ms Perry said: “Tri-Party transactions across all forms of secured lending are common in North America, Europe and Asia and we believe our offering will assist Australian firms in efficiently collateralising exposures in line with overseas practice. We have taken our global expertise and world class collateral management platform and made it accessible for local institutional investors.

“Our unique technology combines sophisticated collateral testing and concentration controls with a proprietary algorithm that determines the optimal use of diverse collateral pools across a range of counterparty exposures. The result is that the needs of both sides of a transaction can be met within one secure, risk-managed process,” she said.

Organisations with large balance sheet exposures to securities and short supply of liquid cash are now able to use their securities more effectively through the Tri-Party structure. By using a third party as the collateral agent, Tri-Securities Lending can supplement the more traditional cashbased securities lending market.

“Where companies have long assets the ability to use securities through an independent collateral agent can ensure balance sheet assets are being used in a more effective manner,” said Greg Keyser Managing Director for Equity Finance at UBS Australia, “We believe Tri-party will entice many new domestic entrants into the secured finance market.”

“Receiving securities as collateral instead of cash is an important element of securities lending, and working with an independent third party to manage the collateral helps give us as a lending agent confidence that collateral and other risks are being managed appropriately,” said Francesco Squillacioti, Regional Director Asia Pacific for Securities Finance at State Street Bank and Trust.

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Lonsec releases its 2010 Australian Property Securities Funds Sector Review

Wed, 14 Jul 2010 05:35:21 +0000

Lonsec’s 2010 review of the Australian Property Securities sector included 19 funds, of which only one attained Lonsec’s top rating, Highly Recommended. This was the Vanguard Property Securities Index Fund.

Three funds were added to the sector – the Aviva Investors Listed Property Fund, the Legg Mason Property Securities Fund, and the Macquarie Master Property Securities Fund.

Thembi Matabiswana, Investment Analyst with Lonsec commented, “Each of these new funds attained a Recommended rating, reflective of the quality of the investment teams and robust investment processes.”

Key themes to emerge from this sector review

The tables have turned – positive returns

The Australian Property Securities (A-REITs) sector has seen a steady improvement since the heavy falls experienced during the global financial crisis.

“Since March 2009, there has been a re-rating of the sector and while safe haven A-REITs had been the best performers during the depths of the financial crisis, there was a distinct change in the latter half of last year, with a number of smaller highly geared stocks bouncing back strongly,” observed Matabiswana.

The A-REITs sector has delivered a total return of 37.8% over the 12 months to 31 May 2010 (as measured by the S&P/ASX 300 A-REIT Accumulation Index).

“While all managers posted positive returns, there was quite a spread in the range of performance; those managers with broader mandates allowing allocation to smaller stocks were the beneficiaries. Over a three year period (ending 31 may 2010) however, those Property Securities Funds more defensively positioned performed better,” said Matabiswana.

A stock picker’s game

During the last three years, the A-REITs sector has experienced an unprecedented level of volatility.

“The sector has polarised since Lonsec’s last review, with over a 100% performance difference between the top and bottom performing stocks in the 12 months to 30 June 2010,” noted Matabiswana.

“Interestingly, Westfield Group – which accounts for more than 30% of the index – was one of the worst performing stocks over the period. However, mandate restrictions mean that fund managers continued to hold Westfield in their portfolios.”

Funds under management – blessing or curse?

During 2009, the A-REIT sector raised significant levels of capital to repair highly leveraged balance sheets.

“A spate of capital raisings saw managers tactically structure portfolios to take advantage of mis-pricings and arbitrage opportunities,” said Matabiswana.

“Managers with larger funds under management (FUM) were in better standing during capital raisings as their larger FUM meant they were first in line to get stock.”

Despite this, the nimbleness of smaller managers meant they could move in and out of the less liquid stocks. These smaller funds have significantly outperformed their larger counterparts, demonstrating that the nimbleness of small FUM was a bigger advantage than preferential access to capital raisings at a discount.

Loss of talent

Over the past two years there has been quite a loss of talent from those managers making up Lonsec’s peer group in this sector.

“Senior analysts and portfolio managers are steadily leaving the sector in search of prospects elsewhere,” said Matabiswana.

“In most cases, those leaving aren’t replaced – rather, the role is filled internally. While there are many positives in appointing internally, the biggest detractor is the loss of valuable experience in the A-REIT sector.”

IMPORTANT NOTICE: The following relate to this document published by Lonsec Limited ABN 56 061 751 102 (“Lonsec”) and should be read before making any investment decision about the product(s).
Disclosure at the date of publication: Lonsec receive a fee from the fund manager for rating the product(s) using comprehensive and objective criteria. Lonsec’s fee is not linked to the rating outcome. Lonsec does not hold the product(s) referred to in this document. Lonsec’s representatives and/or their associates may hold the product(s) referred to in this document, but detail of these holdings are not known to the Analyst(s).
Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. If our General Advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each financial product before making any decision about whether to acquire a product.
Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, employees and agents disclaim all liability for any error or inaccuracy in, or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

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