AIMA Australia Forum 2018 Key Take Aways

Castle Hall was proud to sponsor, for the second consecutive year, the Operations and Regulation stream of the Annual AIMA Australia forum, held in Sydney. The event was a great success, with more than 400 industry participants attending a serious of individual and panel discussions.

Head of Australia at Castle Hall, Alex Wise, moderated a panel entitled Transparency & Due Diligence; Tsunami Readiness alongside senior attendees from NSW Treasury Corporation (T-Corp), Ernst & Young and Australian research and consulting firm Lonsec.

The panel focused on expanding operational due diligence reviews and other governance checks - such as financial and compliance audits - away from the legacy “point in time” diligence report towards an ongoing process, where asset manager oversight takes place as part of a real time governance workflow.

Some key talking points from the panel were:

• TCorp, one of Australia’s industry thought leaders on ODD, spoke about their evolution of ongoing DD and the ability of the ODD team move existing managers to “watch” or “redeem” should DD issues arise through active monitoring. Diligence is no longer just about an initial gatekeeper role at the point that an external manager is added to a portfolio.
• EY referred to improved technology and transparency allowing better controls testing as part of the GAAP audit process.
• Investment research firm Lonsec reiterated their approach to position level transparency as a pre-requisite to coverage. Lonsec also discussed quant requirements to deal with the data deluge.

APRA (the Australian pension and banking regulator) has taken a clear position that Australian pensions and super funds must conduct ODD monitoring to be compliant with regulations. TCorp supported APRA’s position and spoke about a move to intra year diligence internal to their organization, with even daily monitoring frameworks now in place for some data points.

From Castle Hall’s perspective, the panel reflected the current ODD debate regarding ongoing monitoring. Castle Hall’s views on diligence monitoring best practice have been discussed in our Due Diligence 3.0 White paper and more recently in our white paper on creating a Due Diligence Policy.

In our view, diligence monitoring should consider the full range of data available with respect to each manager in a portfolio. Monitoring sources include public domain information (e.g. media reports and regulatory filings) as well as private data provided by the asset manager (from regular manager letters - through to position level data.)

Overall, the panel agreed that Super Funds, as fiduciaries, are now expected to have a consistent vendor management process for investment managers. Instead of the traditional “one off” due diligence report produced at a point in time, fiduciaries will increasingly conform due diligence procedures to other, sophisticated compliance workflows – such as AML. Equally, models such as supply chain risk management in the corporate world can inform due diligence best practices: a corporate entity must oversee the vendors in their supply chain on a proactive, regular and consistent basis. This model is very similar to the work now expected of a Super when overseeing their external money managers.

The panel also touched on the question of whether ODD reports should be generated by a Super fund internally (or commissioned by the Super from an independent ODD provider), or be provided through a “manager pays” model, where the investment manager selects an ODD provider to write a diligence report on their own firm. Whilst Castle Hall is an avid proponent of moving the governance and ODD dial forward, it is clear that inconsistencies can arise between investor and manager sourced ODD reports, and that reports sourced from different managers may not be directly comparable in terms of content and risk calibration. Manager Pays ODD also typically refutes any contractual relationship between the ODD provider who prepared the manager’s report and the investor, in order to avoid potential liability. In an increasingly litigious environment of class action lawsuits, Australian superannuation funds should be wary of these inconsistencies and the legal issues that may be created.

The panel concluded by agreeing that circumstances at management firms can change quickly. Barometers of those changes need to be consistently tracked to plot stormy weather - or even Tsunami’s ahead.