Qantas Super’s selection of Parametric Australasia as a “centralized portfolio manager” to consolidate trading of the superannuation fund’s A$3 billion (US$2.6 billion) equity allocation was equal parts serendipity and meeting of minds, executives of the firms said.
About three years ago, Seattle-based Parametric — with 20 years of experience offering tax-managed investment solutions to U.S. retail investors — decided to explore whether that experience would be of interest to Australian institutional investors facing capital gains taxes of up to 15%, said Raewyn Williams, Sydney-based director, research and after-tax solutions, with Parametric Australasia.
With a spate of big regulatory reforms “taking up their bandwidth,” including a July 2013 deadline for introducing low-fee default options, Parametric anticipated it would take a considerable amount of time before it could sign its first, big, tax-managed CPM client, she said.
Instead, Qantas Super committed to work with Parametric from the start of 2012. The CPM service went live in August that year.
Andrew Spence, the A$7 billion fund’s chief investment officer, said for an organization with a fraction of the assets of market heavyweights such as AustralianSuper (at A$78 billion), being an early adopter is a key to capturing “share of heart, not just share of mind, in our partner organizations.”
Mr. Spence said for a very long time — first at a money management firm and now as an asset owner — the idea of hunting around in areas such as foreign exchange trading, tax management or brokerage fees for opportunities to “restack the value chain in a way that works better for our members … (was) floating around the back of my head.”
He called his first encounter with Parametric executives in mid-2011 a meeting of minds. “You suddenly meet somebody where their ethos matches your vision; you find that you’re sympatico — and you start talking about different ideas and what’s achievable,” said Mr. Spence.
Mr. Spence said the partnership that produced Qantas Super’s CPM program was broader than just his fund and Parametric, with custodian J.P. Morgan Investor Services and an external tax adviser all contributing in developing what he termed a more cost-efficient implementation model.
While every firm is quick to say they’ll work with an asset owner as a partner, the teamwork that produced the fund’s CPM solution is “the hardest thing to replicate,” he said.
In a case study of Qantas Super’s two-year experience with CPM, Mr. Spence said the system has delivered annualized “operational alpha” of 38.3 basis points to investment returns, above the 25 basis points he conservatively predicts centralized portfolio management can deliver over the long term.
Mr. Spence predicts the industry also will pay more attention to “non-manager alpha” in years to come.
“This is not a sexy area … which is why a lot of people have shied away from it,” noted Mr. Spence. “But the implementation model just ticks away in the background, and day after day after day we generate net benefits, whatever our managers do,” he said.
The CPM model has other important benefits, said Mr. Spence. Among them, “your ability to basically plug in and out of model portfolios gives you a very flexible implementation platform for incorporating more smart beta, or putting an overlay in, in terms of value, or momentum, or size, or growth or dividends,” he said.
“Yes, it’s saving money and that’s very important, but it also means that we have a very, very efficient investment implementation platform,” he said.
