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SuperDiligence

Due Diligence for the Superannuation Industry.

Castle Hall in Australia

Castle Hall has been active in Australia for almost ten years. SuperDiligence is our service model tailored to the Australian market, responding to APRA's due diligence expectations as well as the more recent "manager pays" due diligence initiative launched by AIST. APRA's regulatory framework around operational due diligence has been outlined across various publications, including SPS530, SPS220 and CPS231. The 2014 Insight publication and more recent 2018 update also provide helpful colour as to APRA's view of the importance of ODD. 

The Due Diligence Challenge for Supers

Castle Hall welcomes the AIST initiative, and - similar to a well prepared GS007 - a manager commissioned report can streamline the due diligence process by capturing standing information and presenting a narrative of operational controls prepared by industry specialists. A centralized due diligence approach also brings valuable benefits to super members through cost reduction and the creation of economies of scale in the ODD process.

Equally, Supers face several issues as they begin to receive manager commissioned due diligence reports:

  • Some investment managers will refuse to bear the cost of engaging a third party due diligence provider. This is especially the case for managers outside Australia, where the "manager pays" due diligence model has generally not been adopted. As a result, Supers are unable to generate completeness within their due diligence workflow through the manager pays model.
  • Reports prepared by different ODD providers commissioned by asset managers are in different formats, prepared with different levels of detail and assessment criteria.
  • Reports provided by investment managers are prepared at different points in time and updated on different frequencies.
  • External ODD vendors typically seek to disclaim all liability when producing manager financed ODD reports. Supers hence have no legal recourse and cannot legally rely upon the externally produced ODD report.

More fundamentally, we believe that there is a conflict of interest when the investment manager can select the ODD provider under a "manager pays" model. As such, Castle Hall - consistent with our global service model - does not offer services to investment managers and does not provide manager commissioned due diligence reports in Australia.

Castle Hall's Super Solution

In response to this changing landscape, Castle Hall has adapted our OpsMonitor service to meet the specific needs of Australian allocators. OpsMonitor enables Supers to demonstrate consistent, up to date due diligence oversight of every external manager relationship, whether domestic or international, and independent of whether the manager in question has made a "manager pays" due diligence report available. OpsMonitor also ensures that Supers can demonstrate that their view of operational risk is determined based on their own risk appetite and organizational goals.

DUE DILIGENCE POLICY

Castle Hall initiates each SuperDiligence engagement by working with each Super to create a plan specific Due Diligence Policy.

OPSMONITOR

Consistent evaluation of key operational risks - at a point in time and over time.

OPSREVIEW

Onsite due diligence and comprehensive due diligence reporting for higher risk managers.

Due Diligence Policy

An effective diligence policy – like a valuation policy or compliance manual – considers scope, methodology, authority, reporting lines and process, both at a point in time and over time. 

Critically, the Diligence Policy considers the specific governance structure, risk appetite and oversight framework of each  Super. Not all Supers have the same investment policy, risk tolerance or organizational goals: as such, a "manager pays" due diligence report may identify an operational issue deemed acceptable for one Super, but unacceptable for another. 

A Due Diligence Policy will establish the level of due diligence to be undertaken at each stage of the investment process - screen, onboard and monitor - considering the inherent risk of the asset class and fund structure; the manager specific risk; and the materiality of the investment.

Castle Hall works with our clients to develop a risk matrix, stratifying managers, funds and accounts into high / medium / low risk categories.

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OpsMonitor

SuperDiligence begins with OpsMonitor coverage on all third party managers in a portfolio. This foundation procedure enables Australian investors to conduct operational risk monitoring with respect to all funds and accounts managed by third party managers located in both Australia and international jurisdictions, in compliance with APRA regulations.

On initiation of coverage, Castle Hall prepares an initial due diligence reference manual for each manager and fund, considering more than 100 risk factors. Key manager representations are verified (e.g. service provider relationships, track record, and regulatory affiliations). Castle Hall also reviews any manager supplied due diligence information such as a GS 007 report and / or a manager pays due diligence report provided by a third party vendor. 

On any ongoing basis, Castle Hall implements a range of monitoring procedures, including daily media monitoring, manager letter reviews, quarterly update questionnaires and annual analysis of audited financial statements.

OpsMonitor allows Castle Hall's Super clients to demonstrate a consistent, evidenced and auditable due diligence workflow across all external manager relationships.

OpsReview

Castle Hall’s OpsReview procedures (onsite due diligence) provide unconflicted and best practice due diligence coverage for higher risk asset classes (e.g. hedge funds, PE vehicles), material allocations and / or for asset managers and their related investment funds which are considered to have higher levels of operational risk. OpsReview also allows Supers to dig deeper should a manager pays diligence report be deemed to be insufficient to enable the RSE to adequately evaluate operational risk relating to a third party asset manager.

OpsReview procedures may be conducted on a standalone basis to evaluate potential new funds to be onboarded to a portfolio or integrated within an ongoing due diligence monitoring program. For existing positions, OpsReview procedures are performed as a supplement to an OpsMonitor engagement.

OpsReview – onsite due diligence – can be performed locally on domestic Australian managers, or on investment managers based in the U.S., U.K. or any other international jurisdiction.

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Learn More About SuperDiligence

Contact us to learn more about how Castle Hall can help enhance your due diligence program, for both domestic and international managers.

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