Prioritizing cash management at scale, Active Super found “operational alpha”

Active Super, a well-established Australian superannuation fund managing over AUD12 billion in retirement savings, recently looked for opportunities to improve its operations to enhance members’ retirement income. As Stuart Hill, Head of Investment Operations, explained, like all superannuation funds, Active Super, as an industry leader, is always likely to have large pools of cash available for regulatory and liquidity reasons.

Active Super discovered that an AUD liquidity strategy—with same-day access, seamless redemption and diversified counterparty risk—could optimize its surplus cash and help streamline its back office infrastructure, making its idle cash work harder to boost members’ returns. The Covid-19 pandemic and the resulting severe market volatility has resulted in this strategy being even more optimal as superannuation funds are seeing greater demands than ever before, in particular pertaining to member switching and early redemption requests.

The company: Taking a fresh look at operations

Hill’s team had operational complexity and disparate ‘pockets’ of cash to contend with. As a conduit between the ‘front office’ portfolio managers and the custodian, the investment operations team executes investors’ instructions, but wears other hats, as well. It calculates daily net asset value for each member (accounting for new contributions, members who switch investment options, exits, fees, dividends, etc.); projects cash flows and handles currency hedging and securities lending.

The challenge: Achieving better risk-adjusted returns while meeting other needs

From where he sat—where cash management meets liquidity requirements—Hill could see that “lazy cash” was just sitting idly in custody, securities lending, regulatory cash, portfolios and elsewhere. An important consideration was that any solution abide by the Australian Prudential Regulatory Authority (APRA) definition of a cash equivalent product or structure. These characteristics include low volatility and low risk, ensuring liquidity and minimizing the probability of losses. Active Super’s investment operations wanted a more active and practical cash management solution that would also strengthen and streamline its complex infrastructure through efficiency in information flow, settlement processes and execution. Investing cash in money market funds could improve risk-adjusted returns on surplus cash. But could Active Super generate this so-called “operational alpha” without compromising liquidity, adding risk or creating new operational hassles.

The solution: Balancing return, liquidity and operational ease

Reviewing various solutions available in the market, Active Super decided to adopt the J.P. Morgan AUD Liquidity Strategy. It provided what Active Super was looking for: a balance among enhanced returns, preservation of capital, suitable levels of daily liquidity and ease to set up and operate. The solution also came from an experienced global asset manager with a proven track record of navigating many market cycles, one that would reduce risk through credit analysis, mitigate interest rate sensitivity, and handle daily investment decision making, whilst complying with APRA’s definitions of cash. The AUD Liquidity Strategy’s online trading platform, MORGAN MONEY, a multi-currency, open architecture trading and risk management system, also offered a real-time view into current balances that Hill found highly intuitive. Active Super would also receive around-the-clock client service.

The search for a solution came shortly before the Covid-19 pandemic hit Australia, adding an important additional challenge: Regulators ruled that members of supers who were facing financial hardship must be allowed an early drawdown from their retirement savings of up to AUD10,000. Supers, including Active Super, suddenly needed massive additional liquidity, while severe bouts of market volatility were creating liquidity crunches globally.

The benefits

The new cash investment management solution had met all of Active Super’s needs:

• Adequate daily liquidity. A cash equivalent with same-day access was requirement number one.

• A low-risk, reasonable risk-adjusted return, with security. Active Super looks for a better return expectation than their benchmark, and the solution provides the opportunity for a better return on the idle cash.

• Efficiency and simplicity: The solution was straightforward to set up and operate, requiring no extra headcount. This helps Active Super achieve a streamlined, more tech-driven, strategic execution rather than many moving parts; plus Active Super does not have to make all the decisions about specific cash investments.

Conclusion

The solution came at the right time, Hill said: “The liquidity challenges that superannuation funds are facing due to the Covid-19 crisis should bring to the top of mind for people in investment operations that how they manage their members’ cash is extremely important.”

Local Government Super (LGS) was rebranded as Active Super, effecitve 1 July 2021.

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