Super funds warming up to derivatives

Australian superannuation funds are embracing derivatives for various investment functions, according to a new Milliman survey.

The survey showed roughly four in five funds (79 per cent) used derivatives “always” or “often” for risk management and hedging while other popular uses included fund manager transition management and portfolio rebalancing.

Milliman head of fund advisory services, Michael Armitage said: “Milliman’s survey results show the Australian industry has a mature and healthy approach to derivative usage”.

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“Most super funds are using derivatives not only for risk management, but for dynamic asset allocation, physical security replacement, and to enhance yield.”

The ‘Milliman 2017 Australian Derivative Survey’ showed 55 per cent of funds “always” used derivatives for risk management and hedging, while 24 per cent “often” used it for that purpose.

“However, as an ageing population is faced with increasing exposure to sequencing risk and demand for more retirement-focused products, funds will increasingly turn to more explicit portfolio protection strategies using derivatives to manage more complex retirement dynamics,” Armitage said.   

Almost half (48 per cent) “sometimes” or “often” used it for fund manager transition management.  

Armitage added he was pleased to see funds were not using derivatives to take on excessive risk, with 85 per cent of funds saying they “never” used derivatives to leverage exposure.  

The most popular method to employ derivatives was through an overlay structure (65 per cent), followed by an external manager mandate (47 per cent), and as a core component of asset allocation (26 per cent).




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