Tuesday, February 3, 2009

Road to reform for pools

Don’t get us wrong. Pools are suited to some (who want a hands off approach to marketing) and can offer low risk exposure to post harvest market upside. But recent events tell us that if someone is managing something on your behalf, you should demand a degree of accountability. If they can’t or won’t you should ask questions.

Neither are we saying pools can’t or won’t outperform... it’s just that at the moment we have little evidence to go on. I joined the market leading super-fund when I started my working life in 1994 and pulled my money out this year – 14yrs later – at a return of 3% per annum. I’m not sure whether this was before or after fees, but either way I would hate to be relying on it for my retirement.

We asked one of the pool managers about what level of hedging one might expect in a pool. He thought each pool would have more than 50% hedged but less than 100% and probably an average of 60-80%. But which one is your pool? Is it closer to 50% or 100% and does it change the way you manage your unpriced wheat?

1. Tell us your strategy
This strikes at the heart of one of our major concerns with pools. While some have made efforts to articulate the pool strategy or management philosophy (Plum Grove have been beating this drum for years), most have not. This might be attributable to the level of industry maturity (and the background of many pool operators – many of which are former monopolists). We are not asking for a blow by blow account, but how about telling us whether you are a defensive manager or if you are aggressive. As an industry, together, we can frame these parameters to improve the customer experience.

2. Release of estimates
How about the industry agrees to some consistency in terms of the release of estimates – maybe weekly/fortnightly on a Friday at 10am EST. This will help ensure the pool managers are fair dinkum about making a real estimate and not just looking over their shoulder at what everyone else is doing. And make it as easy as possible to obtain this info.

3. Calculation of estimates and costs
Unlike some others, we have never been in favour of inviting ASIC to regulate grain pools. ASIC regulation of pools would add another layer of cost (they would most likely force pool managers to issue a prospectus); dissuade participants and provide little effective protection. I reckon the industry would get a much better bang for its buck by self regulation. As an industry we can force this change by supporting pool managers who offer greater transparency about how they calculate returns and estimate costs.

4. Make it easier
Another bugbear we have with pools is that it is very difficult for the average punter to tell how effective a pool investment was. Plus, by the time the pool is done and dusted, no-one can really be bothered to analyse it. Sure, changes in the headline number might give some idea, but a rise in the headline number can be eroded by changes in costs. Our suggested solution; supply a statement of pool return and cost estimates on entry and on winding up of the pool. And maybe a mid-term update to assist the grower in deciding whether to back the pool manager again with wheat from the upcoming harvest. This will allow participants to compare actual returns and costs against the original estimates.

5. Get the auditors in
While the audit industry will be busier than Beirut bricklayers in next few years, making pool audit reports publicly available might be a way to instill more confidence in the pool management industry. The industry should select an audit firm and develop them into industry specialists. The auditors could benchmark managers against industry best practice and help improve industry-wide practices.

6. How big are you?
One of the observed characteristics of the funds management industry is that the bigger the fund, generally the harder it is to outperform. These principles apply to grain pools. The funds management industry discloses funds under management – why don’t we do the same?

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