Superannuation funds and other institutional investors face new operational and risk management challenges as they look to increase exposure to alternative asset investments, according to speakers taking part in a JP Morgan panel discussion.
"We've noticed that [Australian institutional investors] are moving away to private equity and falling into more defensive asset classes like infrastructure or property because of the market environment, and that there are more things that those asset classes can contribute [to a portfolio]," Mercer senior investment specialist for alternatives Dragana Timotijevic said.
However, the investments tend to be complex, are often unlisted and illiquid, making them more complicated to price, harder to access and dispose of, and more challenging to monitor in terms of their risk/return outlook.
JP Morgan World Wide Securities head of sales in Australia and New Zealand Nick Paparo said "superannuation funds face a unique set of operational and risk management challenges".
Challenges comprised growing cost pressures due to the risk/return equation of alternative assets, the trend to bring traditional and alternative asset management functions in-house, and the impact of MySuper, which might lead to super funds separating asset pools to exclude non-traditional assets from default options, Paparo said.
Proposed Australian Prudential Regulation Authority requirements for greater transparency of underlying super fund investments will also place additional administrative pressure on funds.
In addition, new Basel III capital requirements, which will be phased in from January 2013, will impact on how funds consider their counterparty allocations and underlying investment strategies.
"I do think there is a lot of food for thought out there, particularly for superannuation funds in Australia, about how they are going to achieve what they need to achieve with MySuper," Paparo said.
Timotijevic explained that while it would be more difficult to invest in alternative funds such as infrastructure under the MySuper changes, the new requirements also allowed funds to offer their members life-cycle strategies under which they could accommodate those types of investments.
Alternative investments include assets such as global real estate, private equity, infrastructure, hedge funds, syndicated loans and over-the-counter derivatives.
