Investment Magazine September18_Issue 153

INTELLIGENCE FOR INSTITUTIONAL INVESTORS

ISSUE 153

SEPTEMBER 2018

PREACHING prowess Equip Super chair ANDREW FAIRLEY explains why skills-based trustee selection matters

CIO PROFILE

LIFE INSURANCE

POLICY

ROYAL COMMISSION

HOSTPLUS’S SAM SICILIA

THE BIG PROBLEMS WITH THE

BEEFING UP ASIC’S

IT WAS THE SUPER SECTOR’S

ON THE FUND’S STELLAR

GOVERNMENT’S

POWERS AND RESOURCES

TURN TO HAVE ITS DIRTY

PERFORMANCE

PLANNED OVERHAUL

MAKES GOOD SENSE

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THIS ISSUE \

CONTENTS SEPTEMBER 2018

COVER STORY

06 BOARD APPROVAL Equip Super’s Andrew Fairley says the fund’s skills-based trustee selection is the way forward for the sector.

INFOCUS

10 RISK PREMIA FOR LESS Strategist K2 Advisors is offering a point of difference on risk premia by prioritising costeffective ways to harvest them.

FEATURES

18 O’DWYER’S DILEMMA

The Hayne inquiry uncovered an underlying problem in superannuation: what to tell the clients and, just as importantly, what not to tell them.

COLUMNS

13 BEEF UP ASIC More than $70 million in additional firepower for the corporate watchdog is a step in the right direction, given the scandals that have emerged.

21 CUSTODY MATTERS Colonial First State is using machine learning to predict who among its customers is most at risk for actions that might hurt their retirement savings.

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AIST ASI 2018 PREVIEW

30

Northern Trust’s Jim McDonald on how populism is helping the US; University of Melbourne economist Stephen Kinsella on the perils of static wage growth.

CIO PROFILE

“You can’t have hubris and you can’t get smug and say, ‘We’re the number one fund, we’re unbeatable.’

We have no such language here. The markets have a way of humbling everybody, so the investment results here are celebrated for 2.5 minutes.”

SAM SICILIA | CIO | HOSTPLUS

ROYAL COMMISSION

In one of her last interviews before August’s leadership spill, then-minister for financial services Kelly O’Dwyer stood by the government’s track record for consumer advocacy.

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LIFESKILLS Support for the Protecting Your Superannuation Package Bill may have implications for the retirement incomes of all Australians.

COMPLIANCE The life insurance in super code and the arrival of AFCA will improve insurance offerings for fund members, but trustees have to wrap their heads around it.

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\ FROM THE EDITOR

EDITORIAL EDITOR

Alice Uribe

ALICE URIBE / alice.uribe@conexusfinancial.com.au

DIRECTOR OF INSTITUTIONAL CONTENT

Amanda White HEAD OF DESIGN

Kelly Patterson

A LETTER from the editor

F

ART DIRECTOR

Suzanne Elworthy SUB-EDITOR

Haki P. Crisden PHOTOGRAPHER

Matt Fatches matt@mattfatches.com.au

CHANGE IS HARD BUT LIBERATING

CHIEF EXECUTIVE

Colin Tate

ADVERTISING

OR THOSE WORKING in the $2.6 trillion superannuation sector, the need for change was laid bare over two weeks of explosive, and exhausting, heavy scrutiny at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in August.

Industry watchers were anticipating the inner workings of not-for-profit super being raked over but Commissioner Kenneth Hayne, along with his band of esteemed counsels assisting, including Michael ‘Babyface’ Hodge, seemed much more intent on exploring a litany of bad practice emanating from the retail sector.

In his opening remarks, Hodge said – now infamously – that super fund trustees had been “left alone in the dark” with members’ money and “surrounded by temptation”.

By the conclusion of the fifth round of hearings, he was wondering if legal changes would be needed to protect “vulnerable and disengaged” super fund members.

For an industry already grappling with the spotlight from the Productivity Commission’s landmark review into super, which highlighted industry funds’ outperformance when compared with the retail sector, the Hayne royal commission was yet another prompt to consider some pressing issues.

As Hodge outlined, if commissions are prohibited and stronger laws against misconduct are passed, funds may need to look at what structures give rise to inherent problems.

SEPTEMBER 2018

Andrew Main, in a wrap of the royal commission on page 26 of this issue, writes that there is an underlying problem in super in Australia – clients have been getting too much of the wrong information, which is preventing them from making educated decisions about their financial futures.

Also in this issue, we look at some key super system identities who are working hard to do well by their members.

In my first assignment since taking over as editor in August, I was fortunate to speak to longserving Hostplus CIO Sam Sicilia about not only the factors behind the fund’s stellar performance, but also why he believes there is no room for celebration in the face of success.

In our regular Chair’s Seat feature, Equip Super independent chair Andrew Fairley tells Amanda White he passionately believes the way forward for the sector is for funds to have skills-based boards.

One of Fairley’s life mottos is “don’t compete, be unique”. I like that, so while change is hard and doing things differently can sometimes be a hard path, the ultimate end-point of ensuring all Australians retire comfortably makes it worth it.

Speaking of evolution, I’d like to take this chance to say thank you to Amanda White, head of institutional content at Conexus Financial, who kept Investment Magazine ticking along smoothly over the last few months. I’m looking forward to charting the changes in our sector with you all.

BUSINESS DEVELOPMENT MANAGER

Sean Finn

sean.finn@conexusfinancial.com.au (02) 9227 5715, 0434 787 235 BUSINESS DEVELOPMENT MANAGER

Karlee Samuels

karlee.samuels@conexusfinancial.com.au (02) 9227 5721, 0420 561 947 BUSINESS DEVELOPMENT MANAGER

Sean Scallan

sean.scallan@conexusfinancial.com.au (02) 9227 5719, 0422 843 155 SUBSCRIPTIONS

Caitlin Leitch

caitlin.leitch@conexusfinancial.com.au (02) 9227 5718 CLIENT RELATIONSHIP MANAGER (EVENTS)

Bree Napier

bree.napier@conexusfinancial.com.au (02) 9227 5705, 0451 946 311

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ADVISORY BOARD MEMBERS Debbie Alliston, head of multi-asset portfolio management, AMP Capital | Richard Brandweiner, chief executive, Pendal | Peter Curtis, head of investment operations, AustralianSuper | Joanna Davison, chief executive, FEAL | Michael Dundon, chief executive, VicSuper | Kristian Fok, chief investment officer, Cbus Super | Robert Goodlad, chief executive, CIMA Society of Australia | David Haynes, executive manager, policy and research, Australian Institute of Superannuation Trustees | Geoff Lloyd, chief executive, Perpetual | Graeme Mather, head of distribution, product and marketing, Schroders | Mary Murphy, chief digital officer, First State Super | Paul Newfield, senior investment consultant, Willis Towers Watson | Nicole Smith, chair, MLC Superannuation Trustees | Anne Ward, chair, Colonial First State and Qantas Super | Nigel WilkinSmith, director portfolio strategy, Future Fund

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\ CHAIR' S SE AT

Board

A P P R O VA L

The independent chair of Equip Super, ANDREW FAIRLEY, believes the fund’s skills-based trustee selection is the way forward for the sector.

By Amanda White + Photos Mark Dadswell

SEPTEMBER 2018

investmentmagazine.com.au

CHAIR' S SE AT \

Q: LET’S START WITH THE ROYAL COMMISSION INTO MISCONDUCT IN THE BANKING, SUPERANNUATION AND FINANCIAL SERVICES INDUSTRY, BECAUSE IT IS SO TOP OF MIND FOR EVERYONE. IN YOUR VIEW, WHAT IS THE SINGLE MOST IMPORTANT FINDING THAT CAN COME OUT OF THE INQUIRY IN TERMS OF CHANGING THE BEHAVIOURS OF THE SECTOR TO BE MORE ALIGNED WITH MEMBER OUTCOMES? A: What’s come through in the royal commission is the lack of regard that a number of organisations have for the member – the people they are serving. They don’t seem to have an innate understanding of their obligations. There is an obligation at law, and there are statutory obligations, to act in the best interests of members, and that means the best financial interests. I hope the royal commission shines a light on the practices that are unacceptable, and the regulator takes this seriously and acts, rather than saying ‘tsk tsk’ from the sidelines.

I’m also very upset by the fact members of our funds and others are concerned with the headlines that are tainting us all with the same brush. The real issue is that so much of this is about trust, which is the root of the whole system. Members give us their money with a confident expectation that we will behave and deliver them the best possible outcome. This has struck at the heart of trust.

Miscreant organisations need to mend their ways.

Q: SYSTEMICALLY, WHAT DO YOU THINK HAS GONE WRONG IN THE SUPER SECTOR? A: It’s about the use of power attached to large pools of assets.

Management expert Peter Drucker outlined the dangers of success in his book The Unseen Revolution: How pension fund socialism came to America. In that book, he wrote that the real danger is that large pools of assets could be hijacked by four groups: business, organised labour, government, and the financial services industry.

I think the financial services industry in Australia has tried to highjack this huge pool of superannuation money and so has organised labour. Business and government need to step up [on behalf of members] and say we’re just as important as the other two groups.

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SEPTEMBER 2018

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\ CHAIR' S SE AT

Q: WHAT WAS THE REASON FOR THE BREAKDOWN OF YOUR MOOTED MERGER WITH ENERGY SUPER, AND WHAT HAS THE BOARD LEARNT FROM THAT? A: The Equip Super board has no regard for where [prospective board members] come from – whether employer, employee, union representative or independent. Each prospective trustee has to go through the same rigorous process to become a board member. The reason the Energy Super merger didn’t proceed was because the trustees of Energy Super were not prepared to follow that process.

The only criteria the Energy Super board thought was appropriate for trustee selection was a measure of ‘fit and proper’, which is a self-selection process.

This is why we have a long tail in this industry. I’m concerned there are a number of trustees and executives who are reticent to discuss mergers because there are no roles for them in the new regime. This is one reason we went to the Australian Prudential Regulation Authority three years ago for an extended public offer licence, so we could be trustees of more than one fund.

There is a prism of self-interest. I have had a number of discussions with funds where it is evident to me that unless they can place trustees or executives, they won’t have the conversation. This is what made the Rio Tinto merger so easy.

We took one director and five staff and it was a win/win for both funds’ members. Since the merger, we have reduced our management expense ratio from 92 basis points to 88 and had $12 million of savings in the first year.

There would be significant benefits to be derived from a national energy fund, which was our big-picture vision for the merger with Energy Super, but it didn’t even get to the first stage because their trustee board was not prepared to buy into the skills assessment process we had. It might have meant that some of their trustees wouldn’t have been appointed.

In 2014, the Equip board conducted a skills assessment using a skills matrix developed in consultation with Heidrick & Struggles. This assessed what skills were needed to manage a $7 billion superannuation fund – which the fund was at the time – and what skills we had. Then we could ascertain we had a gap. Following on from that, we knew what we wanted. And there have been times in the past we didn’t have the skills we needed.

The skills you absolutely need on a superannuation board are strategy, investment, actuarial, audit, risk and finance, HR and management, legal and governance, and disruption.

SEPTEMBER 2018

Q: YOU ARE ALSO CHAIR OF THE FOUNDATION FOR ALCOHOL RESEARCH AND EDUCATION. YOU HAVE SEEN THE ALCOHOL INDUSTRY INFLUENCE PUBLIC PERCEPTIONS IN WAYS THAT FAVOUR ITS SECTIONAL INDUSTRY INTERESTS, RATHER THAN THE PUBLIC GOOD. DO YOU SEE ANY PARALLELS WITH THIS BEHAVIOUR IN THE SUPERANNUATION INDUSTRY AND WHAT CAN BE DONE TO CHANGE THAT? A: The Australian Institute of Superannuation Trustees (AIST) publicly posits and advocates the view that equal representation is the preferred and obvious model to have in industry superannuation funds in Australia.

Our experience at Equip is we take the view that one-third independent directors is a great benefit and ensures we can backfill for the skills we need. Our appointment process allows us to know we always have skills we need.

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CHAIR' S SE AT \

The governance code AIST has drafted rests on the assumption that equal representation is the best model.

We don’t accept that.

Q: AT EQUIP, WHAT IS THE MOST IMPORTANT CONVERSATION YOU ARE HAVING AROUND THE BOARD TABLE THIS YEAR?

Q: YOU HAVE SPOKEN BEFORE ABOUT THE MANTRA OF HARVARD MARKETING PROFESSOR TED LOVETT, WHICH IS, “DON’T COMPETE, BE UNIQUE.” CAN YOU TALK ABOUT THAT IN THE CONTEXT OF EQUIP SUPER?

A: We’ve had some reflections before our board meeting about the egregiousness of what’s come out of the royal commission and how differently people consider their responsibilities.

But around the board table, we are talking about investments. Some components of that, like medium-term asset allocation, are constantly being addressed. ESG is something we’ve spent a lot of time on and we’ll continue to do so.

Disruption is also a major issue and we want to harness the benefits of that.

We now have a disruption expert on our board. We are constantly reviewing costs and whether we can do what we are doing better, [along with examining] how we are going to achieve our end goal, which is a minimum of $35 billion by 2025.

It is appropriate in that context to look for mergers and we have learnt a lot. We won’t tread the old ground, and we know our organisational values and what we are looking for, which is to create a fund that will be outstanding.

A: My belief is that you have to position yourself to minimise the competition for the sector where your seeds will prosper.

We recognise that while we are an industry fund, we are a small ‘I’ industry fund. None of our stakeholders can parachute people onto our board.

We have an electoral process and skills filter, including an assessment of ‘fit and proper’ and an independent assessment of investment skill and risk and compliance.

We have now moved to a point where we are more likely to get the right people.

We have changed our electoral model for members so individuals have to nominate into the particular skill required. We were recently recruiting for positions of investment skill and technology/disruption/strategy skill and got 20 applications for each; and remember, these are all members. Those applications then went to Heidrick & Struggles, which came back to us with a shortlist of three.

Our board sub-committee then assessed them and made a recommendation to the board. Having our skills matrix means we can conduct this process into prosperity.

Our skills-based board is one of our unique propositions.

We also pride ourselves on our low cost of operations (88 basis points), consistent investment performance, and our consistency and quality of decision-making.

Q: YOU HAVE OPENLY SHARED YOUR PROFESSIONAL VISION, WHICH IS “TO BE RESPECTED AS A THOUGHT LEADER AND CHANGE AGENT IN MY FIELDS OF OPERATION”.

HOW HAS IT SHAPED YOU, AND GUIDED YOU, IN THE CONTEXT OF YOUR ROLE AS CHAIR OF EQUIP? A: In everything I’ve done, whether that has been in my work in travel and tourism, in superannuation or as a lawyer, I have always been looking after the assets of other people.

In eco-tourism, I was committed to the quadruple bottom line: make financial sense, look after the environment, benefit the local people and celebrate the culture. If you live by those principles, you are a fiduciary and a steward of their culture, jobs and livelihood. There is no difference in the circumstances of a super fund. I am a fiduciary.

I want to be judged on how well I’ve looked after other people’s money, not how much money I’ve made. If you know what’s right, and what ethics, values and integrity look like, then you know you’ve done the right thing and you haven’t charged for something you haven’t delivered.

investmentmagazine.com.au

Q: WHAT IS YOUR MOST IMPORTANT PIECE OF ADVICE ON HOW TO CHAIR A CONSTRUCTIVE BOARD MEETING? A: I think you need to look at how you can draw the best out of all the board members.

I allow the conversation to flow within the time allowed but if someone hasn’t contributed, I always ask them to express their view.

There is no place to hide on our board, you’ll have to have a view. That’s the way you engage and get the best out of the skills you have.

We also spend time at the beginning of each meeting on one important strategic discussion. We do that when we are fresh and can come to a view and have clear direction.

I also think it is important to meet for a modest dinner the night before the board meeting. It is important to get to know one another so we know where we’re coming from. Collegiality comes from knowing each other’s backgrounds.

SEPTEMBER 2018

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\ SPONSORED CONTENT

YO U SAY

‘RISK PREMIA’ I SAY

‘ALTERNATIVE BETA’

K2 Advisors is offering a point of difference in risk premia by focusing on cost-effective ways to harvest them, rather than complex plays for alpha.

By Meredith Booth

RISK PREMIA HUNTERS target absolute returns for their clients through long and short positions across a variety of factors and asset classes.

Risk premia can be harvested from exposure to many factors, including momentum, carry or value, across a number of asset classes. Specialists say they are plentiful, transparent and persistent.

K2 Advisors head of risk premia, Paul Fraynt, has been identifying, modelling and “backtesting” risk premia strategies for clients for the better part of a decade.

The New York-based adviser with a background in quantitative science and risk management calls it a commonsense approach to making portfolios robust; there is a broad choice of risk premia sources to identify and exploit, which exist due to structural and behavioural phenomena in markets.

“My objective is to build strategies that will remain attractive for a considerable period of time, and, preferably, indefinitely,” Fraynt says, adding that many premia sources were identified in the ’70s, ’80s and ’90s.

Fraynt says investors reasonably worry about many things, such as

SEPTEMBER 2018

overcrowding, timing, benchmarking, management fees, incorporating the latest research and specific portfolio construction methods, but the most important part for risk premia seekers is finding persistent and independent sources of returns and harvesting them effectively at the lowest cost possible.

WORKING THE CYCLE “What makes this space so attractive is that it allows investors to step away from complexities associated with predicting the direction of the market,” Fraynt says.

Such strategies appeal to conservative clients with long-term horizons, such as fiduciary pensions in the US and superannuation funds in Australia.

Fraynt says his systematic strategies are alternative beta, and calls predicting the direction of such strategies an area best left to hedge funds.

“Timing should be left to those who specialise in delivering alpha – the hedge funds and the like, investment managers who appropriately charge higher fees,” Fraynt says.

“One of the biggest advantages of a systematic approach to risk premia is building portfolios of strategies that will work over the entire economic cycle, in spite of the market noise. Risk premia

strategies offer uncorrelated positive expected returns over the entire economic cycle. As a result, we can spend our time on researching and building strategies, rather than dedicating time and focus to predicting the direction of the market.

“To us, risk premia is a beta product.

It’s alternative beta, but still beta. In other words, sources of returns, and typical ways to harvest them, are well known.

And since they are well-known, there’s no alpha remaining. The difference [in expected returns will] have to come from finding the most efficient way to harvest such premia.”

Preparing a strategy once a risk premium has been identified can take months, Fraynt says.

“There are many ideas out there,” he says. “They are published in research

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SP ONSORED CONTENT \

journals, presented at conferences and discussed among practitioners. It doesn’t take much to find them, but it does take considerable time to build models and test algorithms in order to find the most efficient way to execute them.

MINIMISE COSTS One idea K2 Advisors is taking advantage of is roll yields in commodity markets.

“Would $170 billion invested in long commodity futures create a congestion premium when the entire amount needs to be rolled over a five-day period? And would returns generated from expecting such congestion be independent from sources of returns driving traditional benchmarks like equities or bonds? We think the answer is obvious,” Fraynt says.

Even after the cost of trading, risk premia should produce attractive excess returns over the entirety of the economic cycle.

“By definition, performance generated by each individual source of premium is subject to considerable and unwelcome noise,” Fraynt says. “Putting together unrelated sources of premia in a portfolio may meaningfully improve risk/return profile.”

What sets K2 Advisors apart from some competitors is its emphasis on the less glamorous, but practical, approach of minimising costs.

investmentmagazine.com.au

“After all, any decrease in costs, whether by finding a less expensive venue for executing trades or by minimising the trading frequency needed to extract a premium, improves future returns,” Fraynt says. “Meanwhile, reducing costs of rebalancing even by a fraction of a single basis point may have meaningful positive impact on the portfolio returns. Because risk premia strategies may rebalance as frequently as monthly, and some even weekly, savings add up quickly.”

DIVERSIFIED APPROACH First State Super portfolio manager Zoe McHugh uses a variety of external managers that provide risk premia products as a diversifier to a range of offerings for accumulation and pension members.

The fund oversees $90 billion in super savings and puts risk premia strategies under the watch of its liquid alternative specialists.

McHugh says First Super looks for the most diversified approach that it can, using an array of external managers. “(We’re) looking for managers that have different skills sets and investment strategies. Multi-asset managers across a broad range of asset classes,” McHugh says.

“My experience is these managers will do well at different times. That’s why we don’t rely on a particular skill set. We have diverse strategies.”

The fund uses these managers in two ways, to help protect pensionphase members against downturns and to diversify returns for members in accumulation phase.

“There’s a desire to protect against equity market drawdown,” McHugh says. “One will have higher beta to the market than the other. In the accumulation phase, in total portfolio, we have a systematic asset allocation that has a large cap and risk allocation to equity markets.”

Risk premia have been used in First State Super’s portfolios in the last five years, since its 2011 merger with Health Super was bedded down and its investment team evolved.

The fund was not using these strategies just because they were growing in popularity with Australia’s super sector.

“I’ve never felt that this is something we’ve had to do for peer relativity,” McHugh says. “This is a strategy we would expect to do well when equity markets are falling

and extremely well when there’s an equity crisis. It’s not going to do as favourably at other times. We’re protecting the downside, limiting the left tail. That’s what’s important for pension fund members.”The fund broadly aims to achieve a CPI-plus return and an objective return but the range of premia that external managers bring to the table will differ.

Systematic managers will harvest carry, momentum and value, while dynamic managers are more discretionary, using options to take advantage of volatility, McHugh says.

She expects risk premia managers to harvest across a range of markets and sectors, including bonds, equities, commodities, listed infrastructure and currency. These diversifying strategies are even more important in times of low interest rates, she says.

“The reason I say that is, with a reduction of bond and equity market returns, given how much this market (capitalisation) has rallied, future return expectations look lower. This increases the importance of diversified returns,” McHugh says. “It’s about diversification and being able to access alpha and risk premia.

“The managers we hire and relationships we have with them are to extract externalities if we think they’re valuable.

It’s also liquid, which is of value because when markets change, we have the ability to change our strategy quickly.”

HOLY GRAIL – WITH CAVEATS Travis Schoenleber, managing director of global investment firm Cambridge Associates, hires risk premia specialists to diversify and protect against risk in its equity-based portfolios.

“Where we have had success is trying to capture these premia, earn returns and reduce equity risk,” Schoenleber says.

“We use it primarily as a diversification to equity...There is a lot [of] evidence for premia being consistent in equities and less sound and persistent in commodities and currencies.”

He says risk premia are pitched as the “holy grail”, providing excess returns with lower fees.

“We have a caveat on how they’re put together,” he says. “There are very good products and bad products and it’s important for investors to understand the mechanics.”

SEPTEMBER 2018

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COLUMN \

POLICY

BEEFING UP ASIC MAKES SENSE More than $70 MILLION in additional firepower for the corporate watchdog is a step in the right direction, given the scandals that have emerged.

ANDREW MAIN CORRESPONDENT

THE PRODUCTIVITY COMMISSION was doing so well, basking in the reflected glory of its recent report into superannuation, but now there’s talk of whether putting ASIC inspectors inside our big banks is a good idea.

The notion came from Prime Minister Scott Morrison (then Treasurer) embracing the report. He said in August that he liked the idea of putting a “principal integrity officer” into each of the big five financial institutions, in the same way that chief pilots operate in airlines.

That proposal made up part of an announcement detailing $70.1 million worth of extra firepower for regulator ASIC, including $8 million over two years to put in those supervisors.

As then-Financial Services Minister Kelly O’Dwyer put it in a press release, ASIC will be “embedding dedicated staff within these institutions to monitor governance and compliance actions”.

investmentmagazine.com.au

The idea has some logic, given the cornucopia of dodginess that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has been unearthing, but its effectiveness will depend on whom, and how many, they put in place.

said a couple of weeks ago in addressing the Financial Services Council’s annual summit in Melbourne, all assessment of corporate behaviour in large organisations sooner or later comes down to culture.

It’s good to see ASIC getting financially reinforced, particularly given that the commission’s war chest was

You’d want to see some real clout in the proposed “principal integrity officer”

How often have we heard the request that regulators should have more Eliot Ness ‘Untouchable’-type investigators?

There simply aren’t enough grizzled, fearless types to go around but, more relevantly, anyone who gets put into a bank in that role is going to be massively outnumbered, grizzled or not. You’d need half a dozen per insto, at least.

It’s an instructive exercise to stand outside any of the big banks’ headquarters a bit after 5pm as staff stream out, and work out what effect a smaller number of inspectors could manage.

As former HIH royal commissioner Neville Owen

cut by $26 million in this year’s Federal Budget.

Most of the proposals are sensible, particularly the biggest one, which is $26.2 million of extra funding for litigation.

I had to sit through the notorious ASIC v Rich case over the collapse of OneTel, which was thrown out after four years by Justice Bob Austin in 2009. He found a raft of reasons why ASIC had failed to prove its case but part of it was because the regulator had taken a shortcut in using the same independent expert in two different circumstances, thus creating a conflict.

The episode must have blunted the regulator’s appetite

for courtroom wrestling. It had a preference for avoiding court actions wherever possible after that. Many well-resourced litigants must have allowed themselves a smile when they realised ASIC might be even a bit gun shy about initiating proceedings.

The other proposed uses of the $70.1 million all sound pretty sensible, too: spending $6.8 million to create a corporate governance taskforce for proactive and targeted reviews of failings in large listed companies, for instance.

Then, to quote the minister, there will be $6.6 million “to implement the government’s reforms to whistleblower protection laws, so ASIC can better receive, assess, triage and address whistleblower disclosures about misconduct”.

It’s a worry when a government passes a law and then gives the regulator the resources to enforce it, rather than doing it all at the same time, but it’s progress of a sort.

Whistleblowing will remain a perilous exercise until proved otherwise.

There’s also money to promote Australia as a world leader in regulatory technology, something we have been in the past, due to innovations in sharemarket surveillance.

The throwaway line at the end was that some of the remaining $16.5 million would be spent “ensuring compliance by licensees and financial advisers with the Future of Financial Advice laws”.

In that instance, I sense a stable door going clunk, but the measure should at least make it easier to keep the next horse where it’s meant to be.

Overall, then, these measures are a step in the right direction but you’d want to see some real clout in the “principal integrity officer” scheme as proposed.

SEPTEMBER 2018

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\ CIO PROFILE

NO TIME TO

celebrate

Long-serving Hostplus CIO SAM SICILIA puts the fund’s stellar performance down to decades-old manager relationships and holding onto investments for the long term.

By Alice Uribe + Photos Mark Dadswell

INDUSTRY SUPERANNUATION FUND Hostplus has every reason to celebrate.

Not only did it turn 30 this year and hit $35 billion in funds under management, it also topped two of the most influential league tables in Australia’s retirement savings sector.

But Sam Sicilia, who became the fund’s first and only chief investment officer just over 10 years ago, says there is little time for self-congratulation. He tells Investment Magazine that managing the pension pots of 1.1 million Australians is something the fund isn’t “flippant about”.

“It’s a nice position to be in but let me be clear – you can stuff it up,” Sicilia says.

“Every investment decision has to be made appropriately, because it can cause adverse returns if it’s not done properly.

“You can’t have hubris and you can’t get smug and say, ‘We’re the number one fund, we’re unbeatable.’ We have no such

SEPTEMBER 2018

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CIO PROFILE \

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SEPTEMBER 2018

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\ CIO PROFILE

TOP 20 PERFORMING BALANCED FUNDS FOR YEAR TO 30 JUNE 2018

SR50 Balanced Index – Top 30

Rolling 1 Year (%)

Rolling 1 Year Rank

Hostplus – Balanced

12.5

1

AustSafe Super – MySuper (Balanced)

11.4

2

AustralianSuper – Balanced

11.1

3

Cbus Super – Growth (Cbus MySuper)

11.0

4

Club Plus Super – MySuper

10.8

5

Equip MyFuture – Balanced Growth

10.7

6

Sunsuper for Life – Balanced

10.7

7

HESTA – Core Pool

10.6

8

NGS Super – Diversified (MySuper)

10.5

9

UniSuper Accum (1) – Balanced

10.5

10

Mercy Super – MySuper Balanced

10.4

11

Intrust Core Super – MySuper

10.4

12

The Hostplus board meets seven times a year, with discussions about investments generally taking up the morning session.

While all of the fund’s money is managed externally, Sicilia heads up a six-person investment team encompassing strategy, equities and governance, property, private equity, and debt and alternatives.

The fund now has a 50 per cent investment in listed equities, including Australian and international shares and emerging markets, plus a 40 per cent allocation to unlisted assets and 10 per cent in alternative liquid defensives.

“We have a zero allocation to fixed interest and a zero allocation to cash,” Sicilia says.

He adds that “our growing allocation to alternatives is to ensure we remain flexible and adaptive, given we have such a high allocation to unlisted assets”.

Vision SS – Balanced Growth

10.4

13

QANTAS Super Gateway – Growth

10.2

14

First State Super – Growth

10.2

15

Media Super – Balanced

10.1

16

CareSuper – Balanced

10.1

17

SECRET TO SUCCESS

Australian Catholic Super – Growth

10.1

18

Asgard Employee Super – SMA Balanced

9.9

19

LGIAsuper Accum – Diversified Growth*

9.8

20

Many industry watchers attribute Hostplus’ success to its ability to invest in unlisted infrastructure and its increasing addition of venture capital (VC) to the mix.

Infrastructure sits in Hostplus’s unlisted bucket, with an allocation of 12 per cent,

Returns are net of investment fees, tax and implicit asset-based administration fees.

While performance data is shown to one decimal place, rankings are based on more precise, unrounded information within the SuperRatings database. * Indicates interim returns SOURCE: SuperRatings

language here. The markets have a way of humbling everybody, so the investment results here are celebrated for 2.5 minutes.”

SuperRatings data released in July showed that Hostplus’s balanced option – where 90 per cent of its members have their savings – was the best-performing in superannuation for 2017-18, returning 12.5 per cent. Another key ratings company, Chant West, also had Hostplus in first place. Both Chant West and SuperRatings put the median return for balanced options at about 9.2 per cent.

In the long term, Hostplus is also a standout performer; SuperRatings has it atop league tables over three, five, seven and 15 years.

At the end of July this year, the board of Hostplus affirmed its annual strategic asset allocation (SAA), making no “significant changes”, says Sicilia, whose prior roles include director of investment consulting at Russell Investments.

SEPTEMBER 2018

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CIO PROFILE \

alongside property with a 13 per cent allocation, private equity with 7 per cent, and credit, which also garners a 7 per cent allocation.

“For us, having that strong cash flow, [about $7 billion worth of inflows a year], disposable cash if you like, means we can take advantage of not just opportunities that arise, but each opportunity that arises,” Sicilia says. “If I were the CIO of another fund, where the outflows were around the same as the inflows, I would be having a very different conversation with you.”

Hostplus made small allocations to infrastructure in 2000 and VC in 2001, becoming an early adopter of the strategy while still a fund worth less than $2 billion.

It initially invested via collective vehicles such as IFM Investors. Fast-forward to 2018 and Hostplus has grown to become the biggest VC investor in the country.

It has stakes in myriad big-name projects, including airports in Adelaide, Alice Springs, Brisbane, Darwin, Melbourne, Perth and Tennant Creek, and seaports all along the East Coast.

Additionally, it has stakes in toll roads, railway stations, renewable energy

assets, gas, electricity generation and transmission lines around the world.

“Infrastructure assets are large and chunky, so none of us can afford the concentration risk of buying a single asset and being the operator of a single asset,” Sicilia says.

The vast majority of the fund’s 1.1 million members work in the hospitality, tourism, recreation and sport industries. Their average age is 34, which allows Hostplus the luxury of investing in highly illiquid assets.

“They are not retiring anytime soon, so there is a long investment horizon,” Sicilia says. “The fund itself never gets older. Why? Because the hospitality industry is always a young person’s game.

“There is a net benefit to members [of VC investment] but there is another important reason. If we can build a VC ecosystem in this country, it keeps jobs, businesses and intellectual property here in Australia, rather than forcing it offshore, so the jobs stay here and we build an industry in this country, which is critical if we are going to be a part of a technological future.”

Sicilia says infrastructure and VC investments are “critically important to the fund”.

“The assets themselves are very longterm assets,” he says. “They have growth characteristics but, in particular, they also have defensive characteristics. They generate income, which is defensive, and capital gains, which is growth.

When equity markets are volatile, our unlisted assets – such as real estate and infrastructure – provide downside protection. That is critical.

“If you say, ‘How come everybody doesn’t do that?’ Well, you need to tolerate illiquidity. I’m pretty happy with the characteristics.”

The markets have a way of humbling everybody, so the investment results here are celebrated for 2.5 minutes

investmentmagazine.com.au

LONG-TERM REL ATIONSHIPS Diversification and holding onto investments and managers for the long term are other key components of Hostplus’s strategy.

“Diversification matters a lot – and not just at the asset-class level, but at the manager level as well,” Sicilia says.

All of Hostplus’s assets are managed externally, by 64 managers, across 162 mandates, and it has used JANA as its asset consultant since 2002.

“The way I could describe Hostplus and the investment beliefs of the board is that we are not a hire-and-fire investor,” Sicilia says. “The fund was $7.4 billion when I started, and I think I can count the number of managers we have terminated on one finger.”

As of August 2018, Hostplus has relationships that span more than 10 years with 30 managers. Names include Bridgewater on an alternatives mandate, Baillie Gifford for international shares and Greencape Capital for Australian equities.

Sicilia says the fund doesn’t choose managers based on performance, telling Investment Magazine “market timing is a loser’s game”.

Instead, Hostplus places emphasis on the skills of portfolio managers, so the departure of a star manager or a change in strategy are the most common reasons it would terminate a mandate.

“If you buy a manager on performance, which we never do, then clearly when performance is weak, you want to terminate them…[that describes] the people who hire and fire managers all the time,” Sicilia says. “We never buy on brand or label or promises...it’s often skill.

You know, the old ‘people, performance, process’...I reckon it’s 95 per cent people, and you can split the other 5 per cent any way you want.”

This conviction set Hostplus in good stead during the GFC, when other funds faltered.

“People say to us, ‘During the GFC, you must have taken action and moved things around.’ It was quite the opposite, we did nothing,” Sicilia says. “We made no changes to our SAA, because we have the financial cash flow and means to see through all of that volatility. In fact, when equity markets dropped, we purchased equities at a cheaper price”.

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\ PROFILE

O’DW YER’S DILEMMA

By Matthew Smith

In one of her last interviews before August’s shock leadership spill, then-Minister for Financial Services Kelly O’Dwyer stood by the government’s track record for consumer advocacy in the face of banking misconduct.

THE LIBERAL PARTY long argued that a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry would serve only to weaken the country’s banking system, something then-Minister for Financial Services Kelly O’Dwyer supported.

The most recent round of royal commission hearings focused on superannuation – and were brutal. But in one of her last interviews on the financial services portfolio, O’Dwyer rejected suggestions that the government hadn’t done enough to protect superannuation members from wrongdoing within the financial services system.

Yet, the longer the Hayne royal commission rolls on, the more it feels like additional oversight and policing at this time could amount to little more than window dressing for a system that may itself be a bit bent out of shape.

This point is not lost on O’Dwyer, who’s not about to “rush to failure” as she puts it, by supporting more regulation beyond what’s already in the pipeline before the royal commission has made its recommendations.

THE SQUEEZE “I think governments need to be very responsible in the way they add regulation and legislation in this space,” O’Dwyer says, during a sit-down interview with Investment Magazine’s sister publication Professional Planner at her centralMelbourne parliamentary offices. “The royal commission provides us with the opportunity to look at the industry in a holistic way. I’m going to wait for the

SEPTEMBER 2018

managing conflicts of interest at the trustee level put some framework around where much of the industry is already heading, although O’Dwyer says she’s been surprised at the amount of resistance the industry is putting up against formalising these new measures.

“I find it extraordinary that the industry would seek increased transparency and accountability from companies they invest in but would not want the very highest levels of accountability in what is a mandated and compulsory system they operate in,” she says.

Including the superannuation sector in the terms of reference for the royal commission was “entirely the right thing”, O’Dwyer asserts.

NUANCED ON CONFLICTS

Including the superannuation sector in the terms of reference for the royal commission was “entirely the right thing”

findings before we announce what we’re going to do.”

But the government also needs to be seen to be taking a stand against wrongdoing for the sake of the retirement and discretionary savings of all Australians.

“The [draft] Productivity Commission report is pretty compelling around the potential for Australians to be ripped off within the superannuation system,” O’Dwyer says.

The 3 per cent cap on super fees O’Dwyer has championed, for example, is aimed squarely at smaller account balances and multiple accounts that financial services companies are draining.

Further, new rules relating to transparency, accountability and

When it comes to making a judgement call on business models and potential conflicts of interest within wealth management outside of superannuation, however, O’Dwyer is a bit more circumspect; for example, she offers a balanced perspective on vertically integrated wealth management businesses when pressed.

“There are benefits for consumers in terms of costs,” O’Dwyer says. “There are also problems in terms of related parties; if you don’t have proper conflict management, there could be issues.”

She quickly points out that banks aren’t the only ones that pursue the vertical integration model and that super funds should also be thinking about conflicts arising from product and advice.

“You have to weigh what’s in the best interests of members, so having really strong corporate governance requirements, strong laws and penalties for doing the wrong thing, and a regulator with powers to intervene, act and protect members’ money, are essential.”

Whether behaviour of the financial services sector becomes a decisive election issue for a government that, in many people’s eyes, was a passive recipient, rather than a champion, of an explosive royal commission, remains to be seen.

investmentmagazine.com.au

XXX \

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SEPTEMBER 2018

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\ SP ONSORED CONTENT THIS REPORT IS sponsored by J.P. Morgan

The promise and challenge of big data Institutional investors are embracing the promise of big data. But how will they meet the challenge?

Tim Helyar, Head of Fund Services Product, Australia and New Zealand, J.P. Morgan discusses.

TIM HELYAR HEAD OF FUND SERVICES PRODUCT | J.P. MORGAN

DATA PROVIDES THE ability for asset owners to analyse and power longterm investment returns. It can inform our understanding of specific assets, asset classes, and markets in ways only dreamed of just a few short years ago.

But this promise is also matched by an enormous challenge: how to quickly and accurately bring multiple data sources together into one system or a useable platform. If one element fails, asset owners’ strategic asset allocation processes and internal asset management decisions can be undermined.

The key is attaching additional attributes to securities reference data, which underpins analytics. The amount and quality is crucial. It can encompass information such as industry classifications, asset class characteristics,

tax liabilities, implications associated with country of domicile, and certain risk exposure measures.

This information comes from disparate sources in different formats, across difference asset classes and geography.

Labels used by providers, such as ‘country of domicile’ can differ between providers. Not all data arrives at the same time and not all suppliers have licensing arrangements that allow simple co-mingling of data into one centralised data repository.

If we can overcome these obstacles, the rewards will be enormous.

Large asset owners bringing asset management in-house need an incredible amount of new data to strengthen their reporting requirements and accountability across trading, risk and rebalancing platforms. A single version of truth is replacing numerous manual and ad-hoc data solutions such as Excel, which inherently can’t handle such complexity. Data is now a strategic asset but this power can only be unlocked under the right circumstances.

The end result is that an investment professionals’ time can be freed up to concentrate on making better investment decisions rather than managing a

growing data burden. This is crucial if internalised asset management is to deliver results. It naturally lowers costs as institutional investors grow larger, but only if investment returns remain at least as strong as those provided by external managers. The right data and analysis gives internal asset managers the best chance to deliver.

This data can also help these organisations to meet reporting regulations, which are increasing yearon-year. It is already flowing through to member communications and reporting, which is creating closer ties with members through improved engagement.

The rising importance of data is changing the role of custodians. They have always had great quality controls over the data needed to produce super funds’ asset valuations – it’s natural that they are now extending those same frameworks to include other data, used for broader value add processes.

There are no simple, turnkey data solutions given each asset owner’s unique needs. This is why many funds are now partnering with custodians, as well as market data and other providers, to develop their own unique centralised data stores. Leveraging these relationships allows them to avoid duplicating many information gathering processes.

These type of efficiencies are crucial as the super system continues to grow: they can cut costs and boost returns and insights for members. Building quality systems that can collate multiple data sources together in a timely fashion will help asset owners deliver on their ultimate promise to members: a better retirement income.

Tim Helyar will be joining the Data, Technology and Investment session at AIST’s ASI Conference on Wednesday, September 5.

The products and services described in this document are offered by JPMorgan Chase Bank, N.A. or its affiliates subject to applicable laws and regulations and service terms. Not all products and services are available in all locations. Eligibility for particular products and services will be determined by JPMorgan Chase Bank, N.A and/or its affiliates. © 2018 JPMorgan Chase & Co. All rights reserved.

SEPTEMBER 2018

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CUSTODY MAT TERS \

GET TO KNOW YOUR CUSTOMER COMMONWEALTH BANK’s wealth management arm is using machine learning to predict who among its members is most at risk for actions that might harm their retirement savings.

By Rachel Alembakis

SUPERANNUATION FUNDS FORMING research relationships with outside entities isn’t new but Colonial First State’s five-year partnership with the University of Technology Sydney (UTS) is not only yielding new technologies and applications of data to better understand behaviours and outcomes for customers, it is developing new talent for the investment management industry.

“As analytics has become increasingly important as a strategic imperative for businesses, it has become evident that we needed to build out our analytics maturity, to move beyond just diagnostic ‘what happened and why’ to a level of analytics where we are leveraging all of the data available to us in sophisticated data mining and machinelearning approaches,” says James Brownlow, national manager, analytics and business intelligence, at the Commonwealth Bank, which owns wealth manager CFS. This idea sparked the partnership between CFS and UTS, which has a specialty in data science, that Brownlow says is designed to “enhance our internal analytics capability, support [financial] advisers, and gain an improved understanding of our customers and our business.

investmentmagazine.com.au

Collaborating with a university offered a win-win approach and a longer-term engagement with more innovative, academic research-based outcomes, compared with the traditional vendor relationship with consultants.”

CFS began the five-year partnership with UTS in 2016, with the project using the wealth management group’s

improved understanding of our customers and advisers.”

Brownlow cites UTS’ commitment to community involvement and collaboration with industry.

“The collaboration has opened up a new talent acquisition channel to both attract and retain top-calibre analytics talent,” he adds.

Three full-time CFS employees are now participating in the UTS Industry Doctorate Program,

We can predict customers most at risk from these behaviours, or most likely to exhibit them, and work with customers to mitigate them in-house data to analyse customer and adviser behaviours.

“Primarily, our activity to date has been focused on the research, rather than its application,” Brownlow says.

“That said, we have been able to apply our enhanced analytics capability in a number of areas of the CFS business, including marketing, distribution, product, and client operations.

Moving forward, we intend to differentiate our product development and our service delivery based upon an

Brownlow says. Each employee is undertaking PhD research of analytics, with theses based on superannuation challenges such as financial literacy, advice participation and superannuation engagement.

The collaboration also operates bespoke training, internship, contract research

programs and keystone research, such as the recently awarded three-year Australian Research Council Linkage Project that will focus on applying big-data approaches to CFS information, to better understand the behaviour of superannuation investors related to longevity risk.

“Extant academic research is scarce, and what exists is primarily qualitative and driven by small-scale surveys or interviews, with more simple traditional statistical analyses,” Brownlow explains.

“Our research will be the first application of sophisticated data analytics and machinelearning techniques to understand customer behaviour and outcomes.”

The benefit of using predictive modelling and machine learning is that they can aid CFS in observing behaviours and patterns that are “not easily discerned”, Brownlow says.

“Such behaviours and patterns can be disadvantageous for customers and their future retirement funding – [its] adequacy or longevity,” he notes. “Once we have identified these things, we can predict customers most at risk from these behaviours, or most likely to exhibit them, and we can work with customers and their advisers to circumvent or mitigate such behaviours.

“Practically, that may mean we have a better understanding of poor reactions at critical decision-making moments in a customer’s superannuation lifecycle,” Brownlow says.

CUSTODY MAT TERS IN A SSO CIATION WITH

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FEAL & PIMCO Institute Scholarship 2019 FEAL is currently inviting applications for the FEAL & PIMCO Institute Scholarship. The scholarship opportunity is designed to help fund executives enhance their skills and knowledge, inspire new ideas, deliver keen insight and support their on-going professional development.

Made possible with the support of PIMCO, this scholarship provides a unique opportunity for participants to attend the exclusive PIMCO Institute, learn from leading academics and network with colleagues from around the globe. The three-day seminar emphasises content consistent with advanced academic study and incorporates a dynamic, team-based portfolio simulation exercise.

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Critical Issues in Asset Allocation Emerging Markets: Issues and Opportunities Understanding Factor-Based Risk Metrics Managing Inflation Exposure Role of Alternatives and Absolute Return Investing State of the Housing Market

For more information contact FEAL on (02) 9261 5155 or visit:

www.feal.asn.au

LIFESKILLS \

BIG PROBLEMS WITH INSURANCE CHANGES Support for the Protecting Your Superannuation Package Bill 2018 may have implications for the retirement incomes of ALL AUSTRALIANS.

JOHN BERRILL PRINCIPAL | BERRILL & WATSON

WITH ALL THE white-hot noise from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, it’s not hard to see why the release of the Senate report on the Protecting Your Superannuation Package Bill 2018 slipped under the radar.

Yet support for the bill, with its sweeping changes to insurance in super, may have implications for the retirement incomes of all Australians and the availability of valuable insurance for millions of fund members.

The legislation would change default insurance arrangements in super, moving insurance to opt-in for members under 25, those with accounts with no super contributions for 13 months and small accounts under $6000.

It also caps administration fees, bans most exit fees and includes new measures for consolidation of inactive small accounts into active

investmentmagazine.com.au

accounts by the Commissioner of Taxation.

The start date for the new measure is July 1, 2019, with no transition period.

The Senate Economics Legislation Committee, headed by Liberal Senator Jane Hume, was referred the bill for inquiry and report.

The committee received more than 30 submissions and took oral evidence in Sydney before publishing a report in August.

created by the 2019 start date.

The removal of young members and those with inactive and small accounts from default insurance would increase premiums for remaining members by 26 per cent, KPMG has calculated.

Treasury put the increase at a more modest 7-10 per cent and the Senate report asserted that any increases reflected cross-subsidies, particularly for young members, which should be removed.

However, this confuses legitimate questions about poor targeting of death cover

With all funds facing the same start date, there will inevitably be a serious lack of competitive rigour in the process The majority of the committee recommended that the bill be passed with no amendments. However, the Labor members published additional comments that noted significant concerns.

Perhaps the two biggest issues identified were the potential for premium increases and harsher underwriting for some members – considering the changes in demographics and critical mass of the risk pool – and the potential problems with costs, underwriting and premiums

for young members with crosssubsidies that are inherent in any insurance product.

Many submissions raised particular questions about removing default cover for members with active accounts under $6000. The peril identified, including in the Senate report, was that small accounts could be eroded and ultimately lapse because of insurance premiums. However, this would occur only with inactive accounts and not new accounts with ongoing superannuation contributions.

Excluding new active members over 25 years old from insurance cover until their accounts reach $6000 would exclude them from valuable insurance cover for upwards of two years, during which time they run the same risk of disability but without cover to protect their retirement incomes. This would particularly effect indigenous Australians, new migrants, casual workers and women returning from maternity leave, who often have small accounts.

The majority of the report suggests that those who lose insurance cover would still have access to other support from the Disability Support Pension (DSP) or Workers Compensation and could opt into cover. However, this betrays an ignorance of the harsh DSP eligibility requirements, makes assumptions about automatic opt-in cover, and confuses income replacement benefits with superannuation retirement benefits.

Superannuation funds would be scrambling to negotiate new group contracts with insurers who would have no choice but to design contracts (with no equivalent claims history) conservatively. If a fund received an unsatisfactory quote, it would not have time to go to the market to obtain a better deal for its members.

With all funds facing the same start date, there would inevitably be a serious lack of competitive rigour. Further, with a limited number of fund administrators available to facilitate and implement the necessary administrative and disclosure regimes, funds would undoubtedly be paying a premium for these services.

For the sake of all Australians, it’s crucial that all stakeholders work together to resolve the outstanding issues.

SEPTEMBER 2018

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\ AIST

GLOBAL ECONOMIC EXPANSION will continue at a modest pace as political populism evolves to benefit the US and create challenges for Europe, Northern Trust Asset Management says.

Northern Trust’s US-based chief investment strategist, Jim McDonald, will update the market on the firm’s five-year outlook in September. He says “stuckflation” – entrenched low interest rates and inflation – will continue for the next five years. However, he adds, the “global positioning” away from multilateral systems such as the International Monetary Fund and NATO is evolving.

McDonald says populist politics in the US, Europe and elsewhere has produced “stronger individual leaders”, which has been positive for the world’s largest economy.

“Right now, the US will come out of this in good shape,” McDonald says, ahead of his appearance at the AIST Superannuation Investors Conference in Cairns in September.

“The one area where there’s been a little bit of evolution [from Northern Trust’s fiveyear outlook last year] is that it has become more apparent that Europe has somewhat wasted its recovery period without reform.

“It makes it more difficult to deal with in the next downturn.”

Meanwhile, the Trump administration had been pro-growth, deregulation and

tax reform, which McDonald says is positive for the US economy.

“One of the key themes that we’ve been talking to the investors about is there has been a significant focus on the US president – an over-focus,” McDonald says. “The negatives – and there has been a lot more smoke than fire – are NAFTA and the US pulling out of the TPP [Trans-Pacific Partnership].

“That’s not a great thing for the US, unfortunately, over the long term. That was an example where the retreat from globalism was negative but it’s still somewhat early.”

Meanwhile, trade tariff talk between China and the US has produced some casualties but it’s better for investors to “watch what they do, not what they tweet”, McDonald says.

Recently, US company Qualcomm walked away from a $US44 billion deal to buy Dutch semiconductor maker NXP after failing to secure Chinese regulatory approval. McDonald acknowledges the deal as a high-profile victim of the US/China trade spat. He says the interdependence of the China and US economies is great and that mutual

Banking systems are more robust. Right now, we don’t see the ingredients for a recession

destruction is assured if the trade dispute gathers momentum but he deems this unlikely.

Looking ahead, McDonald says any global economic downturn that occurs will be “relatively shallow”.

“Banking systems are significantly more robust,” he says. “Right now, we don’t see the ingredients for a recession but there is mild growth myopia.

“As far as a correction in the markets, you tend to have a bear market every three to four years. This is just part of the overall investment cycle. You will definitely have a correction but we’re not expecting one in the next 12 months. We are tactically pro-risk in the US and emerging markets.”

Emerging market growth is strong and will be part of Northern Trust’s investment focus because those markets have been “punished by the rising US dollar”, he says.

POPULISM WORKING for US ECONOMY: NORTHERN TRUST

JIM MCDONALD WILL PROVIDE A FIVE-YEAR MARKET OUTLOOK AND HIS VIEW ON TACTICAL OPPORTUNITIES AT THE AUSTRALIAN INSTITUTE OF SUPERANNUATION TRUSTEES SUPER INVESTMENT CONFERENCE, TO BE HELD IN CAIRNS, SEPTEMBER 5-7.

Trump’s tactics have the US economic outlook looking good and ‘stuckflation’ will continue, investment strategist says.

By Meredith Booth

SEPTEMBER 2018

investmentmagazine.com.au

AIST \

STATIC WAGES should RANKLE SECTOR: ECONOMIST The industry has a common cause with unions to lift workers’ pay for a healthier economy, Stephen Kinsella says.

By Meredith Booth

STATIC WAGE GROWTH should be a major concern for Australia’s superannuation industry, which has a common cause with unions to reverse the trend, visiting economist at the University of Melbourne Stephen Kinsella says.

The Irish-born academic says the $2.6 trillion sector needs to jointly lobby, have a policy program and put cash behind an effort to encourage wage growth.

Average wage growth was 2.75 per cent last financial year, the second lowest ebb since the Australian Bureau of Statistics began the wage price index in 1997. This comes at a time of growing underemployment, rising household debt and falling union membership.

“Australia’s economy, and potentially the problem with wage growth, is [where] the super industry and the unions have a common cause and, in many respects, they should be supporting each other,” Kinsella says. “If people don’t have wages, they don’t pay super and that’s that. If you look at the fall in Australian union coverage, it’s far more marked than anywhere else in the OECD.” More than 5 million Australian workers are members of 16 industry super funds, including the nation’s largest, AustralianSuper, health worker-based HESTA and construction industry fund Cbus Super. The 16 funds have a combined $400 billion in funds under management.

Kinsella says the super industry has money, while unions do not and, although he is not advocating that Australia become a “socialist paradise”, workers have experienced hidden austerity, such as increased housing inaffordability. This is reflected in the labour share of the economy shrinking from 62 per cent to 49 per cent since 1960.

“For a business that has generated surplus, and not given some to wage rises, those workers supplement their income with debt and that leaves them fragile to interest rate changes,” Kinsella says.

Added to this is a rise in people working in the gig economy – that is, contract workers who do not come under the superannuation guarantee.

“The Oxford Internet Institute says Australia [has a large proportion of gig-economy workers in its workforce], which is an interesting problem because in the gig economy, workers tend to only pay taxes and not have a pension associated with that work,” Kinsella explains.

He says part of the solution rests with the superannuation industry.

“The super industry has the funds and the resources to be able to prosecute a long-term research agenda,” he explains.

Industry Super Australia chief economist Stephen Anthony says a new accord between employers, workers and government is what’s required to clear blockages in the economy, with a productivity trade-off to come with wages growth.

But the approach would be different, as the system has decentralised since the industrial relations reforms of the 1980s.

“Probably there’s another grand bargain to be struck that requires a collegial approach…We’ve all had enough of driving sideways,” Anthony says.

DR STEPHEN KINSELL A , A VISITING RESEARCH FELLOW AT THE UNIVERSIT Y OF MELBOURNE SCHOOL OF GOVERNMENT, WILL GIVE HIS VIEW OF AUSTRALIA’S ECONOMY AT THE AUSTRALIAN INSTITUTE OF SUPERANNUATION TRUSTEES SUPER INVESTMENT CONFERENCE, TO BE HELD IN CAIRNS, SEPTEMBER 5-7.

investmentmagazine.com.au

SEPTEMBER 2018

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\ ROYAL COMMISSION

SUPER SECTOR’S

BAD CASE of TMI There is an underlying problem in superannuation in Australia and that is information: what to tell the clients and, just as importantly, what not to tell them.

By Andrew Main

IT’S PERHAPS A stretch to include Steve Bannon, the former adviser to President Trump, in an article about how Australian financial institutions should keep their clients fully informed and reimbursed where necessary, but the local institutions appear to have been following his guidance.

I’m talking about the storm of words they put out for the supposed benefit of superannuation product holders, and the lack of clear, itemised explanations those words give clients about the fees they are paying.

On one occasion, Bannon advised his then-friend Trump to “flood the zone with sh*t”, in reference to how Trump should fight off and derail the Robert Mueller inquiry into Russian interference with the 2016 US presidential election.

Now we had days of senior National Australia Bank executives or super trustees squirming at the Hayne royal commission in August over why it has taken them so long to refund clients fees they should never have been charged.

That’s as it should be. It looks awful

SEPTEMBER 2018

because it is awful that NAB took almost a year between 2016 and 2017 to work out how to reimburse about $87 million in unjustified “plan service fees” that had been charged to about 220,000 clients.

It’s clear NAB’s wealth arm was looking for any way it could to justify having levied those charges in the first place.

On the second day of the most recent round hearings in Melbourne, superannuation trustee NULIS Nominees’ Nicole Smith agreed that the process should have been faster, but disagreed with counsel assisting Michael Hodge that management of the administrator was “hopelessly conflicted”.

“I believe they are in a conflicted position, I don’t agree that it’s hopelessly conflicted,” she said.

Perhaps I should modify the Bannon remark to “flood the zone with delays” for local purposes, which isn’t quite so arresting, but I believe there is a parallel.

There is an underlying problem in superannuation in Australia – clients have been getting too much of the wrong information.

To some extent, I blame Joe Hockey’s Financial Services Reform Act 2001, which concluded over 600 pages that the most transparent approach to explanation was to tell the clients everything.

The road to hell is paved with good intentions, and that one was an eight-lane freeway.

We all know that only a tiny percentage of people read long documents, even if they are explaining how your superannuation is going. It’s a painful reality.

A further complication has been that every attempt to simplify superannuation has had the unfortunate side effect of reducing savers’ sense of engagement.

That’s a harder one to fix but a clear explanation of charges and fees is more likely to be read than any long document.

Part of the problem is that you could argue those long documents (thanks, Joe) are really designed not to be read.

In the worst cases, such as the notorious Dover Financial we were hearing about at the commission back in April, principal Terry McMaster admitted that a “client

investmentmagazine.com.au

ROYAL COMMISSION \

REGULATORS’ TURN TO BE GRILLED

By Ben Hurley

protection” policy was designed to protect his advisers from their clients, rather than vice versa. It was then that he fainted.

So, what to do? It should not be beyond the wit of our regulators to oversee a comprehensible system whereby financial product clients are told what they are being charged, and why. It’s not complicated.

And if clients have the right to opt out of any of those charges, they should be told, in letters of fire. NAB/MLC was caught out on that one this week, revealing that clients had the right to stop paying a fee without any adverse consequences but the clients weren’t told. That’s just sneaky.

A final point. While it’s understandable that there has been a sharp focus on fees, justified and unjustified, let’s just remember that it’s net returns that matter in the long run. I see no problem with net returns appearing close to the List of Charges.

Given that trust in our financial institutions is running at an all-time low because of these bits of sneaky behaviour, now’s the time to act.

investmentmagazine.com.au

THE DEPUTY CHAIR of the corporate watchdog ASIC, Peter Kell, said there is a “very high likelihood of proceedings commencing in the very near future” over the fee-for-no-service scandal involving the big four banks and AMP. The total amount of remediation involved would be more than $1 billion, he told the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry on its final day of hearings into the $2.6 trillion superannuation sector on August 17.

He also gave his view about grandfathered commissions in general, saying Parliament had, under the pretext of a “transition issue”, put in place an “extremely expansive provision, both in terms of the circumstances in which grandfathering can continue and the time period over which it may continue”, which was “not in the interests of consumers”.

This provision “enables the continuing payment of commissions that generate conflicts of interest and unnecessary cost widely across the financial system”, Kell said.

He said it “would be highly desirable for it to be fixed at a policy level” in the interests of consumers.

IOOF AND APRA Earlier, the commission heard that the Australian Prudential Regulation Authority declined to take legal action against the board of investment management company IOOF after it flatly refused to meet APRA’s demands that it repay super fund members from its own pockets after raiding the general reserve.

Counsel assisting, Michael Hodge, explored a long and troublesome relationship between APRA and IOOF dating back to 2011, when APRA discovered some concerning behaviour from two years earlier, through a review of board papers.

In 2009, IOOF had incorrectly recorded an amount of money as income rather than an asset, then distributed it to members of its cash management trust. IOOF later clawed that

SEPTEMBER 2018

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back by reducing the distribution being paid from units in the cash management trust, which may have been reasonable for the members paid the additional money but came at the expense of new members who had joined since.

An onsite review by APRA in 2016 found the issue had progressed, and the company had raided the super general reserve to compensate members of the super fund, rather than seeking compensation from the responsible entity (RE) itself.

APRA general manager Stephen Glenfield said: “I would expect whilst you can possibly use the reserve to put the members back to the position they should be in immediately, you would, nonetheless, follow up the [responsible entity] RE for compensation.”

“Except in this case, the RE is the trustee,” Hodge replied.

“Which is the challenge, yes,” Glenfield responded.

Hodge fired back: “It seems actually like it’s not much of a challenge at all, in the sense that if the company is acting properly in accordance with its statutory obligations, it just has to put its hand into its pocket and compensate the members for its mistake.”

In the years that followed, APRA identified a range of problems in correspondence with IOOF and these findings were displayed as evidence at the hearing. They included favouring shareholders over members and that “a legalistic approach to decision-making is often taken [as] a means to shield IOOF from obligations that may be in members’ best interests”.

When APRA expressed the view in a December 2016 letter that IOOF subsidiary Questor should replenish the general reserve using its own funds and threatened to escalate the matter if it didn’t, IOOF chief Chris Kelaher flatly refused, saying the company had passed the ‘pub test’ on members interests.

Legal advice suggested a poor prospect of success for APRA, so it decided not to take legal action. One reason was Questor’s reserve policy permitted the use of the general reserve to compensate members. But at the hearings, this policy was compared with an older version and it had been changed after the compensation incident occurred.

SEPTEMBER 2018

TIME TO ‘REFLECT AND REFORM’: O’DWYER By

Tahn Sharpe

Then-Financial Services Minister Kelly O’Dwyer said stakeholders should treat the Hayne royal commission as an opportunity to “reflect and reform” on the practices and actions that brought it to pass.

Speaking at the Financial Services Council Summit in Melbourne earlier this year, O’Dwyer said the opportunity was “unprecedented”, and challenged the crowd of financial services professionals to use the royal commission as a line in the sand.

“Use it to separate the behaviours that should not have occurred in the first place and the new postcommission era when trust is regained and maintained,” she said.

Putting the onus on the people who run financial services firms, O’Dwyer said the keys to repairing

COST CONSTRAINTS FOR APRA Earlier on the final day, Hodge questioned APRA deputy chair Helen Rowell about why the organisation had taken no superannuation cases to court in the last 10 years.

Between 2003 and 2008, APRA had the right to apply to the court to administratively disqualify someone it thought was not fit and proper for the job, and during that period, APRA disqualified 133 people under that provision.

Since 2008, APRA has applied only once to the court to disqualify someone – a director of the fraudulent Trio Capital group.

Hodge asked if one of the concerns APRA had was the cost involved in legal action.

That is a consideration, Rowell said, as achieving enforceable undertakings was a more efficient and timely way to remove someone from the industry than going through a court proceeding.

Hodge put to Rowell a range of matters that had been uncovered over the previous two weeks.

trust with the public were “effective leadership, good governance and appropriate cultures”.

“These are matters that companies need to tackle head on,” she continued, “and the government will be looking to firms to ensure they take all necessary action and play their part in restoring that trust.

O’Dwyer warned that while the revelations about banking have been shocking, “it will be no different” when the focus falls on super.

“The significance of Australia’s $2.6 trillion superannuation industry for the wellbeing of all Australians cannot be overstated,” she said.

“In a mandatory system, it is absolutely critical that we have the settings right.”

Does APRA regard NULIS – the National Australia Bank trustee that was the subject of a range of fee-for-no-service breaches and may be on the hook for another round of compensation to members – as a wellfunctioning trustee?

“I would say we would have a view that they have operated reasonably soundly in a general sense.”

Hodge asked Rowell about the fees-forno-service conduct that had embroiled the big four banks and AMP. Had APRA considered whether this contravened the Sole Purpose Test that APRA is responsible to hold trustees to?

She said APRA was waiting for ASIC to finish its work in this area making sure members were remediated, and APRA didn’t want to intervene.

“Is there some position that APRA has taken as to when in the future will be an appropriate point to consider this issue?”

Hodge asked, given application of the sole purpose test was APRA’s responsibility.

“Not at this stage, as far as I’m aware,” Rowell replied.

investmentmagazine.com.au

The

4th

A•N•N•U•A•L CONFERENCE

INVESTMENT MAGAZINE

EQUITIES SUMMIT

SEPTEMBER 11, 2018 CROWN TOWERS MELBOURNE, VIC THE ROLE OF FUNDAMENTALS IN EQUITIES The Equities Summit brings asset owners, consultants and investment managers together to hear the latest research and thinking related to international and domestic equities, risk management, alpha generation, and investment implementation.

Held over one day, the event enables institutional investors to engage with industry thought leaders in a collegial environment that promotes shared discussion.

Registration is open to institutional investors, chairs of investment committees and specialist consultants.

REGISTER NOW

equitiessummit.com.au CONTACT Emma Brodie

emma.brodie@conexusfinancial.com.au 02 9227 5708

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COMPLIANCE

PREPARE FOR ‘BRAVE NEW WORLD’ OF INSURANCE The voluntary code and the arrival of the new complaints authority will improve offerings for fund members, but board members need to wrap their heads around it all.

EVA SCHEERLINCK CHIEF EXECUTIVE | AUSTRALIAN INSTITUTE OF SUPERANNUATION TRUSTEES

IT’S NO SECRET that insurance in super is heading for a major overhaul.

Numerous inquiries and reports over the last year or so have highlighted important issues that the industry is working to address.

The release of a report on insurance in super by Australian Securities and Investments Commision (ASIC) is imminent and will doubtless shed further light on issues such as the time it takes to resolve complaints.

For example, ASIC has long expressed disappointment with the fact that the average time taken to resolve insurance complaints is well over the mandated 90-day limit.

By their nature, insurance complaints are complex.

Indeed, many trustee directors regard decisions about insurance as one of the most challenging aspects of their role, particularly given the potential life-changing impact these decisions can have on members or their beneficiaries.

Compounding this is the fact that resolving insurance complaints is not a one-step process. It requires close policy

INDUSTRY EFFORTS The good news is that several industry initiatives to improve both insurance offerings and the handling of complaints are well under way.

The newly developed Insurance in Superannuation Voluntary Code of Practice contains provisions to enhance member protections, lift standards and support better

It is vitally important for funds to understand the changes, and how they will affect their members’ journey through the claims process and likely outcomes analysis, an understanding of a member’s circumstances, potentially notifying beneficiaries and calculating entitlements, and a range of other considerations.

Clearly, the complaints experience for many members is not good enough, and all funds must work harder to get this process right.

SEPTEMBER 2018

complaints handling.

Under the code, the maximum time for resolving complaints will drop from 90 days to 45. Australian Institute of Superannuation Trustees (AIST) members have overwhelmingly supported this code, and we’ve already seen some of our member funds make significant changes to

their insurance offerings where it was felt they would clearly benefit members.

The arrival of the Australian Financial Complaints Authority (AFCA) will also have a real impact. With this dispute resolution body comes a new process that differs from that of the Superannuation Complaints Tribunal.

It is vitally important for funds to understand the changes, and how they will affect their members’ journey through the claims process and likely outcomes.

INTERNAL, EXTERNAL AFCA is settling its rules and processes around external dispute resolution and will be releasing more information soon. Trustees must be ready to wrap their heads around the new framework and develop policies and processes to ensure that complaints are resolved satisfactorily.

There will also be changes to internal dispute resolution.

Once AFCA commences operations, in November, ASIC will consult on and release new internal dispute resolution requirements for trustees.

Given it is the trustees who are ultimately responsible for deciding whether a beneficiary receives a payment in response to insurance claims, all super fund boards must be fully across the new complaints framework and ready to develop new policies and processes to ensure that complaints are resolved satisfactorily.

This is a brave new world for all parties, AFCA included.

It is an opportunity for everybody to work together to improve insurance offerings and ensure all complaints about insurance are handled efficiency and effectively.

investmentmagazine.com.au

IDEAS EXCHANGE SERIES

AIST’s Ideas Exchange Series delivers a high quality line up of specialised one day conferences targeted to decision makers and practitioners in the superannuation industry.

ideas exchange

ideas exchange

ideas exchange

Tuesday 9 October Collins Square, Melbourne

Wednesday 24 October Collins Square, Melbourne

Thursday 25 October Collins Square, Melbourne

Insurance in superannuation has been in the spotlight in 2018. With so much going on, AIST’s Insurance Ideas Exchange is not to be missed. This one-day event will provide you with the latest updates and analysis of all that is taking place within the industry and at the political level.

TOPICS INCLUDE: • Data analytics, chat bots and artificial intelligence – we look at the role of tech for the insurance sector in super.

• Premiums – how does the future look?

• The insurance workforce of the future – understand the skills and capabilities needed to deliver insurance.

• Regulatory update – the latest updates on the key regulatory and policy issues relevant to insurance professionals.

This one-day event is designed specifically to meet the needs of in-house legal counsel and compliance staff as well as super fund trustees working in the profit-to-member superannuation industry.

TOPICS INCLUDE: • Ethics – strategies to embrace artificial intelligence and technology without comprising ethical obligations.

• Professional skills – look at the legal issues that can arise from investment management.

• Practice Management – empower your fund and help projects go smoothly through third party vendors.

• Substantive Law – Regulator update and insights from the Royal Commission.

Against a background of increasing regulatory and media focus on governance and cultural practices in superannuation, this one-day event will provide an opportunity to hear from leading speakers on the hot topics impacting super fund boards.

TOPICS INCLUDE: • Culture and accountability – what can Australian trustees learn from global accountability regimes and case studies?

• Productivity Commission update – discussion on draft recommendations impacting governance.

• Data security – in the wake of the Cambridge Analytica and Facebook scandal, what do trustees need to know about fund data security?

• Information overload – practical tips to get the most out of your board meetings and focus on the issues that matter.

Visit www.aist.asn.au/events to find out more and register today.

IN YOUR MEMBERS’ MOMENT OF NEED, WE’RE HERE In 2017 alone, we paid over $1.3 billion in claims to both Group members and Retail clients. That’s over $5 million every working day.

ADV4063 05/2018

Because we’re here for your members when they need it.

aia.com.au