The performance of a MySuper product could be improved by using derivative overlays aimed at increasing the efficiency of currency management and asset allocation.
Although such strategies are relatively expensive, they are not calculated as part of the management expense ratio (MER), making them suitable for the low-cost focus of the proposed default fund.
"The transaction costs are captured in the returns, but not reported as part of the MER," QIC Capital Markets managing director Troy Rieck said.
"The MER, which is the cost focus in the fund under the MySuper umbrella, focuses on management fees and you will see some press of the groups that are greatly concerned, which funnily enough are often the groups that charge the highest fees: private equity, hedge funds, some infrastructure providers.
"Guys like us, we think the bang for buck question is the right one to be asking."
Although MySuper places great emphasis on the cost framework around default options, it does not dictate investment strategies, giving managers the flexibility to implement relatively sophisticated strategies to improve efficiencies.
"One of the good things about the MySuper legislation is that it is not prescriptive about the details," Rieck said.
"It sets a really good prudential framework for regulation and Australia is one of those that very much believes in prudential regulation as opposed to the US-style black letter law, which means that fiduciaries and trustees have a lot of flexibility in how they meet their obligations.
"MySuper doesn't direct on the hows and whys of investments. It sets an overarching framework for how these things should be measured, but it doesn't tell people what to invest in and how to invest in them and when to change those exposures."
He also said the focus on costs was not a unique feature of MySuper.
"There is a great deal of fee pressure in the community and that was even the case before MySuper was a real thing for superannuation funds. [Super funds] were very concerned about the value proposition," he said.
Although Australian funds are generally well versed in fee negotiations, they leave some room for improvement when it comes to how they manage foreign exchange exposures.
For example, funds that used currency hedges could improve their efficiency through an overlay, Rieck said.
"With currency hedges, when a hedge matures that generates a lot of income. That income is immediately taxable. Maybe there are better ways to structure those currency hedges," he said.
He said funds often hailed the tax benefits associated with investing in Australian equities through the use of franking credits, but managers should also look at how they could generate better tax outcomes in their fixed income and international equities holdings.
"Everyone talks about Australian equities, but what about the other 75 per cent?" he said.
"Being very careful in how you structure the ownership of your offshore assets can be a big tax-effective strategy."
Cash in the portfolio was also generally underused by super funds and a better use of cash could be a very effective tool in managing tax strategies, he said.
He said he hoped the introduction of MySuper would drive a greater awareness of overlay strategies and lead to greater efficiencies in portfolios.
"We are not afraid of MySuper; we welcome it," he said.
