Why implementation matters more than you think
11 September 2019
MLC has been managing investments for Australians for over 30 years1 and, while MLC’s investment process is well known for its market-leading scenarios approach, another important differentiator is its cost-effective and risk-managed implementation process.
In straightforward terms, implementation involves the movement and daily management of investment assets. This is how MLC buys and sells the assets and rebalances its portfolios. On a deeper level, transition management is the project management and execution of comprehensive adjustments to a portfolio in a manner that’s both efficient and risk-managed.
Specialist implementation skills are needed when portfolios are restructured and managers are changed, or when large clients move into an MLC investment fund. While it doesn’t sound sexy, with the most experienced buy-side implementation team in Australia, this is a key differentiator which really sets MLC apart from its competitors.
“One part of implementation is that our multi-asset funds will be rebalanced daily within target ranges.” explains Greg Swinton a transition specialist at MLC. Rebalancing is a key process of any well-managed multi-asset portfolio, and means that asset class allocations within our portfolios don’t drift away from their targets so investors know how and where their money is invested. This process has been proven to add value.
Rebalancing has the potential to incur additional transaction costs, although for a portfolio with sufficient scale the bulk of the movement can be managed using flows into and out of the portfolios.
“We look at each multi-asset fund on a daily basis, and we compare actual vs target allocations. If we need to act we can redeem from overweight sectors and apply into the most underweight sectors.” Greg says.
A good example would involve MySuper products. We would not expect to regularly sell assets to rebalance such portfolios due to member inflows, which might offer a welcome opportunity to top-up any underweight sectors. “This is an important process, which some SMSFs may neglect. They may set themselves up as a 60/40 fund but before they know it they’ve drifted to 70/30, especially when share markets are rising strongly. They then encounter costs when they move to adjust; there are spreads to get in and out and they’ll realise capital gains and losses in the process. In contrast, our team brings the account back to the targeted balance, which is monitored on a daily basis.”
With sufficient scale, natural flows can be used to manage day-to-day portfolio rebalancing, but what about larger, one-off transitions, such as during a manager change? This is where transition managers come into play.
Managing risks and costs with a transition manager
Timeliness, maintaining the asset class exposure and cost efficiency are key when shifting assets in a portfolio. Transition managers have a highly specialised skill-set that is a key factor in maintaining market exposure to help minimise portfolio interruptions during the change process.
“It’s a niche skill-set that has evolved out of the portfolio trading expertise of brokers, and it’s grown to become a specialised industry offering in its own right.” Adem Ametson, Head of MLC’s Transitions Team, says. “Transition managers execute trades and control risk at a competitive brokerage rate, and have invested heavily in specialist trade monitoring, risk management and transition reporting software.”
Essentially, transition managers are able to keep costs low because they’re not responsible for making decisions, nor are they asked to do any research. It’s pure execution. Their deep insights, specialised technology and access to market liquidity across global networks enable them to maintain market exposure and control risk. They recognise sector, regional and currency cues, as well as abstract market nuances.
The result is that there are no black-outs, out-of-market opportunity risks or nail-biting transaction delays as the portfolio transitions through an adjustment. Exposure is carefully managed and constantly maintained.
Sharing the gains and allocating tax fairly
For a client, the hope is always that the value of their investment is increasing. While this inevitably brings with it tax implications, the MLC team work hard to ensure all clients in a fund are allocated their fair share of the tax burden, even if they leave the fund before the end of the tax year.
New legislation (under the attribution managed investment trust (AMIT) regime) has made this process easier as it allows a fund that has exceptionally high redemptions, for example, to allocate tax implications to individual redeeming unit holders within the fund. Taxable capital gains can be separately allocated to those who triggered them.
This client focus extends to in specie shares that are accepted into a fund as well.
“When we have a large institutional client coming on board, we want to protect them but, just as importantly, we want to protect the asset pool that’s already there. For this reason, we will only take on stock that is for the benefit of the pool as a whole, rather than any legacy stock that an individual client would like to deliver.” Greg says.
With the benefit of scale, MLC is able to run a mandate structure underneath its funds, meaning it’s not tied to buying an investment manager’s funds. This offers greater freedom, flexibility and control when buying and selling assets. Plus, it’s all subject to tax and cash flow analysis that put our clients first.
“We have mandates, the managers are managing stock on our behalf, and we can pull stock from managers when need be, as opposed to us buying into, or selling out of, their unit trust.” Greg says.
The MLC implementation team are one of the most experienced and highly regarded in the industry. The way they manage implementation is just one of the many advantages of choosing MLC.
“What makes a successful transition comes down to planning and communication.” Adem says. “We have a robust process, as well as checklists and procedures that have evolved over two decades. Our staff have a lot of experience in this. Greg and I have both been with the team for 15+ years, solely doing asset transitions.” The result is we are focussed on delivering optimal outcomes for MLC clients.
Transition management may be seen by many as a technical ‘back-of-house’ process, but at MLC it’s viewed as a vital linkage in the funds management chain. Managing transitions well reduces the costs of our funds, costs that aren’t particularised in a PDS but reducing them contributes to increased returns. It is another proof-point which reinforces the benefit of investing with one of Australia’s largest and most trusted wealth managers, MLC.
1. 'MLC' refers to MLC Investments Limited. MLC has appointed MLC Asset Management Services Limited, the NAB Group’s retail multi-asset management business, to advise on and manage the investments of its funds.
This information is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705), a member of the group of companies comprised National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) (NAB), its related companies, associated entities and any officer, employee, agent, adviser or contractor therefore (NAB Group). Any references to “we” include members of the NAB Group. An investment in any investment, product or service referred to in this publication does not represent a deposit or liability of, and is not guaranteed by, NAB or any other member of the NAB Group. This document has been prepared for licensed financial advisers only. This document must not be distributed to “retail clients” (as defined in the Corporations Act 2001 (Cth)) or any other persons. This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs. You should obtain a Product Disclosure Statement (PDS) relating to any financial product mentioned in this communication issued by MLC Investments Limited, and consider it before making any decision about whether to acquire or continue to hold the product. A copy of the PDS is available upon request by phoning the MLC call centre on 132 652 or on our website at mlc.com.au. Opinions constitute our judgement at the time of issue and are subject to change. We believe that the information contained in this publication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made at the time of compilation. However, no warranty is made as to their accuracy or reliability (which may change without notice) or other information contained in this publication. Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.