Delivering enhanced financial performance for clients

The Victorian Funds Management Corporation is at the forefront of the "manage the manager" style of funds management. With total funds approaching $20 billion, it has rapidly become a powerful force in the industry.

The Victorian Funds Management Corporation is at the forefront of the "manage the manager" style of funds management. With total funds approaching $20 billion, it has rapidly become a powerful force in the industry. VFMC continues to expand its client base and investment management capabilities, delivering significant benefits to clients (participating State investment funds) in terms of improved portfolio risk management, superior fund returns and lower implementation costs. VFMC chief executive officer Stephen Taylor says: "VFMC's success in enhancing our clients' performance stems from an ability to leverage our buying power and specialist skills to our clients' advantage. We are uniquely positioned to drive down fee curves for clients." Starting operations in 1994, VFMC has little precedent as a government-sponsored provider of value-added investment implementation services. While still a relatively new concept, investment implementation has received growing recognition industry wide, as consultants, fund managers and master trusts develop services in this area.

VFMC assembles the diverse components of a portfolio's risk profile and provides clients with ongoing portfolio risk management and administration. It selects specialist fund managers who will deliver the total portfolio risk and return outcomes expected by the client. By aggregating client mandates, VFMC can provide diversification at a lower cost, access lower fund managers' fees and rebate the savings to clients. With the increased scale afforded by new clients - the Government Superannuation Office ($4.5 billion) and the State of Victoria Budget Sector Long Term Investments ($1 billion) - VFMC began to exploit the full range of its capabilities in 1999-2000. The significant portfolio restructuring following major clients' reviews of their investment strategies has also enabled VFMC to lay the groundwork for the achievement of its key performance indicators.

Adding value to client's returns VFMC's clients establish their own asset allocations and determine their preferred levels of active management within each asset class. While some clients opt for passive or index strategies, others request that VFMC take an active role in seeking to add value above recognised performance targets. During 1999-2000: * VFMC successfully added value to the accounts of both large and small clients. By pooling smaller accounts into VFMC trusts, VFMC provided smaller clients with access to diversified manager portfolios at lower costs; and * Improved risk management, higher quality returns and lower costs for the same degree of active management were achieved for two major clients following a revision of the manager structure for the Australian Fixed Interest and Australian Equities sectors.

Reducing investment administration costs VFMC is a cost-effective solution provider for clients with fees determined on a cost recovery basis. Also, by outsourcing to VFMC, clients can eliminate the need to retain their own cost centres for investment manager selection, performance monitoring or custodial functions. VFMC is able to leverage both its size and multi-client relationships to reduce the direct costs of managing funds and also the transaction costs associated with trading within investment markets. During 1999-2000, VFMC: * Achieved savings of approximately $6 million in fund manager fees for clients, with the largest benefit coming from international equities mandates; and * Reduced the costs of trading investment portfolios for clients by around $4.4 million by facilitating off-market exchanges of clients' securities where buy/sell matches occurred.

Effective risk management While VFMC's clients accept responsibility for the market risk associated with their own investment strategies, VFMC ensures that client investment portfolios are managed to optimise risk at the asset class level. Enhancement of its quantitative techniques has enabled more intensive risk modelling of fund manager portfolios and the lowering of portfolio risk without lowering likely investment returns. VFMC provides clients with first-class portfolio accounting, compliance and risk control systems, fully consistent with Government Prudential requirements. It also produces an individually tailored comprehensive reporting service for clients. While much has been achieved, Taylor notes that there are still many challenges ahead: "The many benefits realised to date for VFMC's clients have encouraged growing numbers of public sector funds to turn to our services. We intend to build on our trusted adviser status with major clients, to continue to extend our client base within the Victorian Public Sector, thereby enhancing our economies of scale and delivering additional cost benefits to clients."

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.