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August 22, 2011

Russell sounds warning bell on fund mergers

• New Russell paper highlights downside impacts and complex challenges of industry fund merger process
• Russell encourages industry funds to consider mutually beneficial partnerships as an alternative option

SYDNEY, August 22, 2011 - In a new paper launched today, Future Proofing for Industry Funds, global financial services firm Russell Investments said industry funds' merging to achieve scale and cost efficiencies was not always in the best interest of members. The paper comes following a record period of industry fund mergers as trustees respond to growing cost and performance pressures amid ongoing regulatory reform.

Russell's Managing Director of Industry and Government Funds Michael Clarke argues while some mergers can deliver economies of scale, industry funds should carefully consider whether a merger is the right course of action for its members.

"As complexity grows with ongoing reform, many funds are grappling with how they can best achieve cost efficiencies while enhancing investment returns and member services. We're not saying mergers are never appropriate, but rather funds should be aware alternatives exist that have the potential to deliver better member outcomes," he said.

Some of the challenges of the merger process raised by the Russell paper range from ensuring member equity in addressing differing exposures to liquid and illiquid assets between the merging funds, handling varying member balances and managing questionable transparency and accountability principles.

"It's puzzling the merger process does not follow the same rigorous principles of transparency, disclosure and stakeholder engagement as those found in public company mergers. Members are not given a detailed analysis of expected costs so don't have the means to hold trustees accountable for managing costs and achieving the forecast benefits over the medium term," Mr Clarke said.

Creating mutually beneficial partnerships

The emergence of vendors able to expertly provide outsourced super services means a broader depth of resources is within reach and Russell is encouraging funds to consider tailored outsourcing partnerships as an alternative. By selectively combining the individual strengths of the fund and the outsource provider, member interests are maximised and access to resources is strengthened.

"These relationships can relieve governance pressures, reduce risk and increase access to markets and research," Mr Clarke added.

Future proofing tools

The new paper follows the launch of Russell's future proofing service in May this year which is already receiving positive interest from funds and trustees. The service offers dedicated advice and solutions to assist industry and government funds in retaining members while still maintaining their customer value proposition against a backdrop of regulatory change.

"Future proofing is as much about efficient business management recognising the real objectives and positioning of the fund as it is about achieving optimal investment outcomes. With this superior toolbox, trustees will be able to assess how to respond to regulatory change, understand the consequences of growing scale in assets and members, better evaluate the benefits and costs of merger proposals, develop partnership sourcing strategies and identify what cost strategy they should be pursuing," Mr Clarke said.