The O'Brien Column: International monitor specialists will guard the super guardians

Friday 30th August 2002

Unrelated announcements this week about the managed funds business were indications of its significance in the financial system.

The government named six "guardians" for its superannuation fund and Australian bank and financial services operator Westpac Banking Corporation bought the Australian business of BT Financial Group.

Guardians of the New Zealand superannuation fund will be responsible for appointing and overseeing the appointment of fund managers, deciding on the allocation of funds to them and setting investment guidelines, such as the division of investments between New Zealand and overseas securities and asset class proportions.

It is usual for people or organisations selecting fund managers to engage independent specialist advisers for assistance in deciding asset allocations and the appointment of individual fund managers, particularly if managers are based overseas.

Any New Zealand organisation would be foolish if it failed to take advice from international specialists about overseas-based managers and companies that monitor the latter's performance against recognised benchmarks.

Checking performance against benchmarks might seem a simple process but it is essentially an audit operation.

We all know about the complexities of auditing from international publicity given to unsavoury occurrences in the US.

The "auditors" of fund managers ensure securities exist, or have been sold, when managers say so.

They check managers' claimed performance against actual outcomes and make appropriate adjustments between the reported and the actual to account for discrepancies arising from different time zones in particular markets.

Their function is far from simple. The same comment applies to those who advise organisations like the New Zealand Superannuation Fund.

There are hundreds of fund managers in the US alone, a large number of monitors/auditors (usually trust-type companies) there and elsewhere and many advisers eager to get business.

Our superannuation fund guardians' initial decision will be who to engage as advisers.

They collectively have sufficient knowledge of investment to assess the main players, although they could take advice on the matter, which sounds peculiar but would be appropriate.

The next stage is selection of international or local managers from a short list emanating from the advisers and monitors on the same basis.

That takes time and the exercise of prudence, the latter imposing a legal obligation at the standards of what skilled people in the particular industry should apply.

The guardian will (or should, if they are prudent in the other sense) obtain indemnities from the government if things came unstuck.

Only idiots would expose themselves to massive liabilities that could arise if they were found in breach of fiduciary responsibilities (another technical concept) without indemnities from their "employer."

As a cynical aside, "we the people" are unable to get indemnities from our "employees," defined as Finance Minister Michael Cullen and his fellow ministers, operating in the Executive Council as "The Crown."

It was intriguing to see the "ordinary" guardians, as opposed to chairman and deputy chairman, will be paid $17,000 a year.

Some of them, known to many of us, are not flattered with the comment they could have undersold themselves.

Assuming the guardians met once a month for 11 months a year for two hours, did preparation work for four hours each month, added between-meeting work and we could get to a possibly conservative 115 hours a year.

Readers of The National Business Review would accept (as opposed to people who do not know about these things) that a minimum $150 an hour, given the fund's growth size and guardians' responsibilities, is equally conservative.

That comes to another conservative $17,250 a year.

Perhaps the guardians accepted a discount for public service commitments and the aura of status.

At least one guardian could need to adjust a potential problem I faced in actuality for 14 years as a member of a similar state-based investment operation.

Investment analyst and fund director Brian Gaynor writes columns for the New Zealand Herald and did similar work in the past for The National Business Review.

Potential conflicts of interest are easy to resolve when one is totally involved in the private sector or unpublished in the public.

The issue is deeper when both private and public sector involvement is on the media record.

Given my knowledge of Mr Gaynor, he will doubtless reconcile the potential problem, as will other guardians with investment interests.

The Westpac/BT deal created an Australasian powerhouse in the regional funds management industry. It was ironical the deal was announced on the day the government confirmed the guardians' appointments. We will see who performs best.

Shoeshine

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