INTELLIGENCE FOR INSTITUTIONAL INVESTORS
+
ISSUE 156
DEC 2018 – JAN 2019
2018
Investment Magazine
CIO SENTIMENT SURVEY
Break from
THE PAST
Future Fund CIO Raphael Arndt on ditching old assumptions and embracing a broader view on building portfolios
CHRIS BOWEN
CHAIR’S SEAT
AIST
ACSI
THE SHADOW
LEGALSUPER’S KIRSTEN
DISMISSING INDUSTRY
INVESTORS LOUDLY
TREASURER ON HOW
MANDER DISCUSSES
FUNDS’ OUTPERFORMANCE
EXPRESSED THEIR
SUPER WILL CHANGE
MAINTAINING A
IS LIKE DENYING CLIMATE
DISCONTENT THIS
AFTER HAYNE
COMMON PURPOSE
CHANGE
AGM SEASON
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THIS ISSUE \
CONTENTS DECEMBER 2018 – JANUARY 2019
COVER STORY
06 PORTFOLIO OF THE FUTURE The Future Fund’s Raphael Arndt no longer trusts the assumptions of the past.
FEATURES
10 READY FOR WHAT’S GOING DOWN It’s important to be opportunistic, not just defensive, in a downturn.
12 CIO SENTIMENT SURVEY A barometer of CIO sentiment on markets, insourcing, fees and asset allocation.
16 FUSION LAB IFM Investors’ research harnesses the power of teams across the business.
18
21 CUSTODY MATTERS ASX is promising more than just settlement upgrades in its replacement for CHESS.
22 THE INVESTING MIND Forces that influence decisionmaking include everything from evolutionary imperatives to deep-sea wildlife.
26 CHAIR’S SEAT Legalsuper chair Kirsten Mander reflects on her first year in the job as she prepares to tackle a challenging 2019.
OPINION
31 LIFESKILLS Providing meaningful cover while avoiding excessive risk is a tough balancing act.
32 STEWARDSHIP Investors’ voting during AGM season showed their engagement and influence.
MAN IN WAITING
“Not even we expected the scale and the speed, and the effect, of the [royal commission] findings... It surprised even me and I thought it was justified.” CHRIS BOWEN | SHADOW TREASURER
34 POLICY New report makes industry funds’ outperformance undeniable.
03
04
\ FROM THE EDITOR
EDITORIAL EDITOR
Alice Uribe
ALICE URIBE / alice.uribe@conexusfinancial.com.au
DIRECTOR OF INSTITUTIONAL CONTENT
Amanda White
ACTING HEAD OF DESIGN
Suzanne Elworthy
A LETTER from the editor
W
SUB-EDITOR
Haki P. Crisden PHOTOGRAPHER
Matt Fatches
matt@mattfatches.com.au CHIEF EXECUTIVE
SENTIMENTS OF A ROUGH SEASON
Colin Tate
ADVERTISING
HEN THE HOLIDAY season rolls around, the financial services sector usually breathes a sigh of relief. Things wind down. It’s a time for participants to have a brief respite from the day-to-day and take some time out to reflect. But this year is different, there is a sense of unfinished business. Perhaps Assistant Treasurer Stuart Robert put it best when he told a Financial Services Council breakfast in October there would be no imminent period of rest for the $2.7 trillion superannuation industry. He warned that much of the sector might instead be working even harder, given the holiday period may well be bookended by the much-anticipated final Productivity Commission report on the superannuation sector, tipped to be coming in December, and Commissioner Kenneth Hayne’s final report due in February. There is potential for real change on the horizon. It wouldn’t be an underestimation to say that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry hearings that kicked off in March have left an industry that holds the retirement futures of millions of Australians in its hands in a state of shock. I write this as the final round of the royal commission hearings, focused on the bosses of some our largest financial institutions, wraps up, leaving much still to digest. Industry funds were ready to go on
the defensive but it turns out retail funds are bearing the brunt of the criticism. Against this backdrop, it seems apt that our final issue for the year focuses on sentiment. Our seventh-annual CIO Sentiment Survey reveals investment bosses working at some of the country’s largest asset owners retain a sense of optimism in the face of market uncertainty and are pursuing more infrastructure investments than ever before. Read the full story on page 12. Also in this issue, on page 18, is an exclusive interview with shadow treasurer Chris Bowen. His views on policy and regulation carry real weight at this fractured time in the super sector’s history. While Bowen was careful not to guess at Hayne’s recommendations, he was steadfast in his opinion that any reforms must take into account the needs of all Australians. Finally for this issue, I interviewed Raphael Arndt, the CIO of Australia’s $175 billion sovereign wealth fund, the Future Fund. He told me that the way things have been done in the past may not work as we continue into an uncertain future. Arndt urged investment managers to reconsider how they build portfolios. This is some sage advice as the industry prepares for a busy 2019 and some uncharted territory it must navigate. On behalf of Investment Magazine, I want to say thank you for your support this year and I wish you a safe and happy holiday period.
DECEMBER 2018 – JANUARY 2019
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 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, MLC | Graeme Mather, head of distribution, product and marketing, Schroders | Paul Newfield, senior investment consultant, Willis Towers Watson | Anne Ward, chair, Colonial First State and Qantas Super | Nigel Wilkin-Smith, director portfolio strategy, Future Fund
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\ CIO PROFILE
By Alice Uribe + Photos Nicole Cleary
PORTFOLIO
future of the
Raphael Arndt sees a time on the not-too-distant horizon when the assumptions that have shaped investment strategy will no longer hold true. As CIO of Australia’s Future Fund, he’s working on a more comprehensive INVESTMENT PROCESS for this challenging new world.
DECEMBER 2018 – JANUARY 2019
investmentmagazine.com.au
CIO PROFILE \
R
APHAEL ARNDT, THE CIO OF the Future Fund, has what he calls a “bugbear”. He says the future of the “top-down, centrally controlled” model for building portfolios is under threat and favours a more nimble approach that empowers the entire investment team. Arndt, who has been CIO at Australia’s $175 billion sovereign wealth fund since 2014 and was previously its head of infrastructure and timberland, says that while Australian and international institutional investors have been “tremendously successful,” this won’t be maintained without change. “There’s a good level of knowledge and research that has supported how funds have built portfolios but my personal belief is that a lot of the assumptions of that research are going to be less valuable in the future,” he tells Investment Magazine. “I think we need to start thinking more broadly about how we build portfolios and investment teams and empower those people to make decisions, but do it in a way that we don’t build silos and we still keep control over the structure of the portfolio.” Arndt’s focus is on the Future Fund’s “joined up” investment process, which brings together top-down macro views and bottom-up sector opportunities to construct the overall portfolio. The fund was a leading proponent of a total portfolio approach (TPA) when it established its portfolio in 2007. It does not operate with a fixed strategic asset allocation and avoids silos across asset classes.
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DECEMBER 2018 – JANUARY 2019
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08
\ CIO PROFILE
Willis Towers Watson senior investment consultant Tim Unger told a recent investment conference in Sydney that TPA means there is a “continuous and dynamic focus on achieving the fund’s investment goal”, as opposed to strategic asset allocation, which has a “looser connection to the fund’s investment goals”. The Future Fund was established in 2006 with the lofty task of strengthening the government’s long-term financial position. It now has a total funds under management of $175 billion and five special purpose asset funds: the Future Fund, Disability Care Australia Fund, the Medical Research Future Fund and two nation-building funds. In August, the largest of the five, the $146 billion Future Fund, posted a return of 9.3 per cent for the 2017-18 financial year, outpacing its 6.1 per cent target. The 12-year-old fund also exceeded its 6.6 per cent benchmark target over 10 years, delivering returns of 8.7 per cent a year over the decade. Future Fund chair Peter Costello said at the time that “the short-term outlook is for a continuing period of sustained synchronised growth. But over the medium to longer term, a number of risks remain and continue to evolve.” As a result, the country’s sovereign wealth fund has “slightly increased” its level of risk. “Balancing our perspective on the more positive near-term outlook with the longer-term risks that remain,” Costello said. He added that inflationary pressures might be imminent in the US and with global interest rates normalising, there might be downward pressure on asset prices.
PAT TERNS CHANGING Arndt, who was previously an investment director with Hastings Funds Management, says many investors who still construct their portfolios based on a capital asset pricing model or mean-variance analysis – which takes the performance of assets or asset classesover history and assumes it will continue – do not take into account this changing global outlook defined by heightened or changing risks. He describes this as “a poor way to build a portfolio”. “When I look at the world today, I see a very different outlook,” Arndt says.
The patterns of economic behaviour are changing, so when I look forward I don’t see a lot of reason to think I should be confident that the way an asset will behave in the future will be the same as in the past
“I see population growth declining and, in fact, in much of the developed world, it’s already peaked. Post the financial crisis, there has been a very big deleveraging cycle, which will probably be multi-decade. We haven’t really felt that in Australia yet but it will come, because of the amount of debt in the system. “The patterns of economic behaviour are changing, so when I look forward I don’t see a lot of reason to think I should be confident that the way an asset will behave in the future will be the same as in the past.” Despite this, Arndt says there have been only some “fairly simple” changes to the Future Fund’s investment approach since he joined in early 2008. “We were evolving our investment process when the financial crisis occurred,” he recalls. “So we were able to observe and learn from both the successes and the mistakes of other long-term investors around the world in forming our own approach.”
DECEMBER 2018 – JANUARY 2019
As at June 30, 6.7 per cent (about $9.8 billion) of the Future Fund was invested in Australian equities, with a 25.5 per cent allocation to global equities (in both developed and emerging markets). Over the June quarter, the fund increased its allocation to private equity by $2.5 billion, taking the total portfolio weighting for this asset class from 12.8 per cent to 14.1 per cent, on the back of the stronger US dollar.
NEW INVESTMENT TEAM Future Fund officials think of its $175 billion total FUM as a “single portfolio”. “We call it one team, one purpose,” Arndt says. “It’s dead simple, but actually not very many funds do it because it’s quite hard to do. You need to incentivise your people at the whole-portfolio level.” In March this year, the Future Fund made some key changes to its investment team, which it stated would strengthen the fund as it went into its second decade.
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CIO PROFILE \
Arndt took on the twin responsibilities of CIO and chief investment strategist, along with leadership of the asset class teams. Former chief investment strategist Stephen Gilmore departed the fund in April. At the same time, former head of infrastructure and timberland Wendy Norris took up the new role of deputy CIO for private markets, while former head of debt and alternatives David George took up a second new role of deputy CIO for public markets. Arndt says the changes were in response to an operating environment that was “getting more complex” as the fund got bigger. “It makes sense to bring the whole investment team into one group,” he says. “It’s reduced my...direct reports but, more importantly, where we’re going...we need to make sure the knowledge we have anywhere in the organisation is known to all of the fund.” Two additional new roles were created: head of portfolio strategy (which Arndt is acting in) and chief technology officer, which the Future Fund is in the process of filling.
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AHEAD OF DISRUPTION “Once we appoint that person [head of portfolio strategy], my focus will be on strategic things...culture, investment process...getting even better at being joined up and sharing our resources,” Arndt explains. “We’re doing a lot of work on diversity of view and cognitive decision-making. We’ll change some of our processes around how our committees make decisions, to make sure it’s not the person that speaks the loudest or has the highest conviction who gets it.” Getting ahead of the disruption that is predicted to come courtesy of technological change is another area Arndt is passionate about, and one that the investment team restructure was also designed to address. He says the rate of adoption of technology is both an “opportunity and a threat”, adding that the Future Fund is spending a “not insignificant amount” of its operating budget on technology to ensure it “keeps up with or gets ahead of this wave”.
“We’ve been thinking about technological disruption for many years,” he says. “I think we’re lucky at the Future Fund because we’ve got a large venturecapital program [well over US$2 billion ($2.75 billion), and hedge fund program. Through both of these programs, we work with fund managers around the world that are really at the cutting edge of applying technology to investment decisionmaking. “We can see what’s out there already... and what might be coming. We literally have fund managers who spend a billion dollars a year on investment technology, and we can see what it’s capable of doing for them.” Arndt says the Future Fund is about three-quarters of the way through a plan to move its $45 billion equities program (across the Future Fund and Medical Research Future Fund) to a “more passive or factor- and rules-based approach that can be done through one large mandate, rather than a series of small ones”. The fund has used new technological tools to consider whether this approach is working. Arndt says: “It’s early days, but it’s going well. Under the historic approach, we’ve made a slight positive return after fees relative to the index as a whole. But it was certainly also true that many of our active positions were cancelling each other out. “Therefore, our risk taking in that portfolio was not efficient, from a whole portfolio point of view, even though our team was selecting relatively good managers.” For the last two years, the Future Fund has been introducing the same approach to its global equities holdings, transitioning out of the longer-only, active-equity managers for the main. “What makes sense for the Future Fund [in exiting those positions] won’t necessarily make sense for every other sort of investor in the community,” Arndt says. “What I would say, and I have said this to long-only equities managers... you need to be able to understand where you’re adding value. I think technology is going to be rolled out to the world in a matter of years, not much longer than that, so these managers need to make sure they are truly adding value through their skills and charging for that skill and not other things”.
DECEMBER 2018 – JANUARY 2019
09
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\ SP ONSORED CONTENT
“MAY YOU LIVE in interesting times” is a well-known curse that seems apt for the financial context foreseen for 2019. After a long period of low volatility, many events are set to take their toll. Macroeconomic effects from the winding back of US and European monetary policy, and geopolitical impacts including US President Donald Trump’s tariffs, Brexit, and China’s slowing economy will cause ripple effects on markets, experts say. The end of quantitative easing in the US and the Fed’s new cycle of interest rate hikes is the equivalent of “quite a big rock being thrown into the pond, and the ripples will be big”, says Philip Lawlor, managing director, global markets research, at FTSE Russell. This year, investment sentiment has rotated from heightened risk appetite (considering the opportunities) to heightened risk aversion (focusing on potential risks). “When we start looking into 2019, there are clear questions that need to be addressed,” Lawlor says. “Have we already seen the peak of the economic cycle, and what does this imply for the corporate earnings revenues and valuation cycle? Now is the time to consider the second-order consequences of the tightening of US conditions. Everyone needs to be very systematic in how they appraise that.” Chris Trevillyan, director of investment strategy at Frontier Advisors, also cites the
impact of the US Federal Reserve reducing its balance sheet and raising interest rates but notes that markets are pricing in only two or three more rate rises.
INFLECTION POINT “Frontier believes we are at a key inflection point where either the traditional drivers (i.e. labour capacity) will exert upward pressure on inflation or a new paradigm of technology, and its impact on labour markets, will mean inflation remains low and central banks will not be compelled to tighten significantly,” Trevillyan says. “The European Central Bank has been tapering its QE program. It is still injecting liquidity into the market and monetary conditions remain highly accommodative but this tightening has been coincident with slowing growth in 2018. It has advised it will halt QE at the end of 2018.” As a result, superannuation funds will have to focus on their strengths and react to changing conditions accordingly, said Michael Winchester, head of investment strategy at First State Super. “We came out of a period with fairly low volatility and fairly strong returns for growth assets,” Winchester says. “Going forward, we don’t think that can continue. We think volatility will return to normal levels, and the returns for growth assets will no doubt be lower. It’s not news here but being diversified is really important.” Superannuation funds are longer-term
THIS REPORT IS sponsored by FTSE RUSSELL
Ready for WHAT’S GOING
DOWN
Volatility and downturns lie ahead, nearly all analysts agree. As a defensive stance becomes more common, superannuation funds also need to leverage their long-term horizons to CASH IN ON OPPORTUNITIES. DECEMBER 2018 – JANUARY 2019
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investors and should focus on that horizon, Winchester says. “I don’t think we really have a big edge in short-term trading, so we really should not second-guess short-term trading, but focus on the longer term,” he says. “We need to understand the risk appetite, reduce exposure at the margins where the long-term prospects aren’t really compensating you for the risk.”
EYES ON THE GROWTH RATE FTSE Russell’s Lawlor notes that, using a two-year moving average, the US nominal GDP has grown at 4-4.5 per cent a year over the last few years, contrasting with an average closer to 6-6.5 per cent a year in the 10 years prior to the GFC. With US consensus real GDP and inflation pointing towards lower nominal growth in 2019, it looks as though Trump’s tax cuts have not succeeded in delivering a higher, sustainable growth trajectory. “I think everyone should be looking very diligently at the rate of growth. In our presentations, we link the leading indicators to the excess that equity can return over bonds,” Lawlor says. “Equities have massively outperformed bonds over the past few years. If the rate of change declines, the excess returns of equities over bonds will follow suit.” He also points out the apparent dichotomy in the US, where economic indicators are “doing very well” but the US dollar bond yield curve is “flattening dramatically”. Trevillyan points out that earnings growth in equities has been strong, particularly in the technology sector.
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“There appears to be a secular change in industry dynamics from technology – market leaders are obtaining increasing market share, growth is less capital intensive and labour is receiving a diminishing share of output,” Trevillyan says. “Margins are at historically high levels and, in the US, earnings are now above long-term trends, including the correction of the GFC. Equity valuations globally are not overly expensive and after the October correction, some sectors appear undervalued (e.g. emerging markets).” He notes that US equities are the “most expensive”, but earnings growth has been strong, while credit spreads are near historically low levels and prices continue on an upward trend for property and infrastructure assets. He says US economic and earnings growth have been supported by President Donald Trump’s fiscal policy, and, “although this will start to fade”, it will continue to be supportive in 2019. The slowing Chinese economy is a key uncertainty – resulting moves by Chinese authorities to stimulate the economy have yet to show impact on economic activity, Trevillyan says. So what should the response be from institutional investors? The “knee-jerk reaction” in 2018 to increased market volatility was to get defensive, Lawlor says. “If you look at global sectors, that rotation began in April, and it became quite a pronounced rotation,” he explains. “Even though the US was powering ahead, still, the underlying view was getting quite conservative from about April. When you get the real turbulence, you go to healthcare, telecoms and the utilities, and we saw all that happening.” If the US technology sector has peaked, the market will search for new leadership. Lawlor points to the financial sector as one of interest. “What we need to see is a steepening yield curve,” he says. “If the Fed raises rates and the yield curve steepens, financials will do well. This has an impact on the high valuations of the tech stocks, and that’s why we have to be very focused on what the yield curve does.” There might be potential for more tactical trading in sectors as well, Trevillyan says. “Potentially, it’s being more tactical to move in and out of markets as opportunities present,” he says. “With the volatility in October, equities were down almost 10 per
cent in such a short amount of time. Ideally, you would have been selling down before and considering buying in on the dips, as the markets have rebounded quite strongly in the past week or so.” Investors could also consider selling high-yield bonds and, in property portfolios, selling lower-quality assets. “For many of our clients, super funds are in the enviable position of having strong cash inflows,” Trevillyan says. “What it can mean is allocating more capital towards the core lower-risk end of the spectrum. There’s also the alternative of option overlays, and it is about putting in place strategies that hopefully perform in a downturn and provide protection in the portfolio; foreign currency has also historically done that.”
BE READY TO POUNCE If major markets have peaked and the downturn is coming, it could be advantageous for funds to keep liquidity, to be opportunistic as assets reprice. “Given the stage of the cycle we’re at, you also want to make sure you have some dry powder,” Winchester says. “At some point in the next few years, we’ll have a recession in the US at least, and that’s typically not great for markets anywhere. You don’t want to reach that stage of the cycle and not have the ability to take advantage of opportunities as they arise, because at some point, we think we’re going to have the opportunity to deploy capital, to achieve really attractive returns.” Winchester also notes that the strategies for portfolios differ, depending on whether they’re for members in the accumulation stage or the decumulation stage. “We manage money for people in the accumulation stage and also people in the retirement stage, and we manage money differently because clients have different risk profiles,” he says. “A retiree is going to need to draw from their capital to fund their lifestyle on an ongoing basis. For accumulation portfolios, we tend to be more focused on the long-term opportunities. For the retirees, we’d need to think about shorter-term risks and that colours the approach to asset allocation. We’re about at strategic levels for growth asset exposure for the accumulation portfolios but for the retirement portfolios we’re a little bit underweight because we want to make sure we manage risk appropriately.”
DECEMBER 2018 – JANUARY 2019
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\ 2018 INVESTMENT MAGA ZINE CIO SENTIMENT SURVE Y
CONFIDENCE AMID VOLATILITY By Alice Uribe + Data Kim Tieu
The responses to the 2018 Investment Magazine CIO Sentiment Survey reflect changes funds have made during the late-cycle economy to prepare for the expected downturn. Key decision-makers have leveraged their longterm horizons, negotiated on fees and lowered expectations, allowing them to stay calm in the face of the coming storm. DEMOGRAPHICS
25
THESE FUNDS REPRESENT
FUNDS PARTICIPATED
BILLION AUM
DECEMBER 2018 – JANUARY 2019
AUSTRALIA’S LARGEST ASSET owners’ ongoing appetite for infrastructure investments, keenness for passive products and optimism in the face of market uncertainty are key findings of the 2018 Investment Magazine CIO Sentiment Survey. For respondents to the seventh-annual survey, infrastructure and other real assets were the most popular asset classes for allocation of more capital, with 43.5 per cent of respondents saying they intended to up investment in those areas in 2019. Whereas, in 2017, 47 per cent of respondents said they planned to allocate a greater proportion of their fund’s assets to hedge funds or other liquid alternatives, in 2018 only 34.8 per cent of respondents said they planned to do so, dropping the asset class to second most popular for allocation of more capital. On the flipside, domestic equities was the asset class where most respondents said they would allocate less capital, with 39.1 per cent saying they planned to reduce investment in that area. This year’s CIO Sentiment Survey was conducted online over three weeks in October. It was open to investment chiefs and other senior investment professionals from the 100 largest institutional asset owners in Australia and New Zealand. The investment bosses who completed the survey were overwhelmingly from local, not-for-profit funds. The 25 funds represented in the results control a collective funds under management of $556.15 billion.
NATION BUILDING Australia’s largest super funds are longterm infrastructure lovers. Industry Super Australia states that, in 2018, industry funds held direct equity investments
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2018 INVESTMENT MAGA ZINE CIO SENTIMENT SURVE Y \
in major airport, seaport, utility and community infrastructure valued at about $17 billion. That figure is set to rise. Super funds are well positioned to provide debt for infrastructure projects, given their longterm investment horizons and appetite for what some may see as non-traditional asset classes. The 2018 Investment Magazine CIO Sentiment Survey confirms the trend. “We continue to see strong demand by investors for infrastructure assets globally. This partly reflects low starting allocations for global investors, relative to many Australian superannuation funds,” Frontier Advisors director of consulting Kim Bowater says. “While infrastructure is less attractive as an asset class relative to history – prices are higher and we expect headwinds against returns as interest rates rise – there are positive fundamentals in many sectors and the supply/demand environment remains strong.” Cbus Super CIO Kristian Fok told the Master Builders Australia National Leaders Summit at Parliament House in June 2018 that as much as $260 billion would flow from the super industry into the infrastructure sector by 2025. “When superannuation fund balances were smaller, investment in greenfield projects was not realistic from a capability and cost perspective,” Fok explained. “[But] with the growth of funds under management, many super funds are now building internal teams and expertise. That means greenfield projects are a real consideration.” Just this year, AustralianSuper, as part of a consortium led by toll road giant Transurban, has been successful in its bid for 51 per cent ownership of WestConnex, the largest road infrastructure project under way in Australia. Also, First State Super CIO Damian Graham told Investment Magazine in October that the fund was moving from a “more vanillatype portfolio” to one heavier in unlisted securities. Chant West head of research, Ian Fryer, says the infrastructure love affair reflected in this year’s survey is the continuation of a pattern that has stretched for more than 10 years. “Not-for-profit funds have moved about 10 per cent of their assets from equities and fixed interest to these unlisted assets over time,” Fryer says. “Funds have built out
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ASSET ALLOCATION AND CONSULTANTS
TOP SIX ASSET CLASSES CIOS ARE PLANNING TO ALLOCATE MORE CAPITAL IN THE YEAR AHEAD
43.5%
INFRASTRUCTURE AND OTHER REAL ASSETS
13.0%
34.8%
INTERNATIONAL EQUITY
LIQUID ALTERNATIVES (HEDGE FUNDS)
30.4%
CASH
21.7
21.7%
%
PRIVATE EQUITY/ VENTURE CAPITAL
NON-DOMESTIC FIXED INCOME
25
%
91.3%
PLAN TO MOVE MORE OF THE PORTFOLIO TO PASSIVE OR SMART-BETA STRATEGIES OVER THE NEXT THREE YEARS
USED AN ASSET CONSULTANT
HOW THEY USE INVESTMENT CONSULTANTS
56.5%
FOR INVESTMENT DECISIONS, RETAIN DISCRETION
30.4%
FOR MANAGER RESEARCH, NOT PART OF INVESTMENT DECISION-MAKING
DECEMBER 2018 – JANUARY 2019
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\ 2018 INVESTMENT MAGA ZINE CIO SENTIMENT SURVE Y
their portfolios to take advantage of more diverse sources of returns to make them more resilient to market shocks.”
OPTIMISM REMAINS In line with last year’s survey, respondents remained confident they could meet their investment return objectives. This is despite October being the worst month for global equities since 2012 and the word ‘correction’ being on the tip of many tongues. In fact, survey respondents identified a pullback in equity markets as the biggest portfolio risk for the year to come, just ahead of rising interest rates. We “hope to be wrong about lower, more volatile returns for longer”, one respondent commented. “Equity markets are generally highly priced. Rising bond yields are likely to trigger a devaluation in all assets, especially equities,” another said. Among geopolitical risks, respondents were most concerned about China tensions and US politics. One respondent commented that if China sneezes, Australia gets a cold. An additional respondent was more specific, citing as matters of concern “the populist politics leading to a sustained trade war between the US and China” and “a frozen US congress stymieing further stimulus or a co-ordinated response to the next crisis”. Another respondent was less concerned, however, and said, “Geopolitical risks rarely matter much to markets and are currently relatively benign, despite the focus in the short-term news cycle.” Despite the acknowledged concerns, seven in eight (87.5 per cent) respondents said they were confident of meeting their balanced return targets in 2018; few (8.3 per cent) believed they needed to take on more risk to do so. This reflects more confidence in meeting targets than in recent years. In 2017, about 60 per cent of the respondents were confident of meeting their balanced fund return target. One year earlier, that figure was a mere 30 per cent. Over the last few years, many funds have dropped their targets to reflect more realistic expectations in a difficult market. About 1 in 5, 20.8 per cent, of 2018 respondents said they had lowered their stated return targets on their balanced portfolios in the last year. For the 2017 survey, this figure was almost 40 per cent. (The survey shows that the average
balanced fund return target was CPI + 3.6 per cent.) Frontier Advisors’ Bowater acknowledged there had been a trend towards lowering return targets for default options in recent years. “While lower returns have not yet eventuated, it has made sense for investors to consider if their return expectations are realistic over a five- to 10-year timeframe in the context of the prevailing interest rate environment,” she says. “The survey results suggest this has continued over the past year. They also show a relatively high conviction that these objectives will be reached over the coming year. This will depend on global growth remaining strong over this period.” Last year, Investment Magazine predicted that the multi-year trend of skinnier risk targets would draw to a close, with only 10 per cent of CIOs expecting to lower targets in 2017. In 2018, this trend does appear to have peaked and begun to subside.
A PASSIVE PUSH Last financial year, Australian fund managers’ fees took a hit of more than $80 million after the country’s sovereign wealth fund, the Future Fund, moved more of its portfolio into passive investments. This move by the Future Fund reflects a global trend. Boston Consulting Group’s (BCG’s) Global Asset Management 2018 report found that passive products were the fastest-growing category “by far” in 2017, with a record 25 per cent increase in assets under management. The value of passive assets sat at $16 trillion in 2017. In last year’s survey, CIOs appeared to have somewhat of a muted attitude towards the potential of passive investing but in 2018, 25 per cent of respondents said they planned to move more of their portfolio to passive or smart-beta strategies – which passively track the index but include an active, rules-based component – over the next three years. More than a quarter of respondents said they were using passive or smart beta as a way to reduce costs. It is this growing appetite for smart-beta products that BCG warned should be of major concern to asset managers. “That is because smart beta seeks to replicate active management results at lower cost to investors. Fee levels for smart beta equity funds average about 35 basis
DECEMBER 2018 – JANUARY 2019
points, well below the 50 basis points for active equity products,” BCG’s report stated. A desire to reduce fees has been a consistent theme across the seven-year history of the CIO Sentiment Survey. This year, almost half (47.8 per cent) of respondents said their investment costs had decreased in the last three years. New, lower-fee products were the most frequently cited driver of decreased costs. Is it possible this reflects too great a focus on fees in super? Chant West’s Fryer believes so. “CIOs must focus on how to deliver a strong long-term return to members but they also don’t want to look too expensive,” Fryer says. “There have been some retail funds that have put more in passive and enhanced passive for their MySuper products, and a few industry funds have as well. “But overall, there is still a strong preference for active management and industry funds, in particular, have generated good alpha in asset classes like Australian shares.” Fryer says private equity is probably the most expensive asset class “but good private equity managers have delivered strong returns even after fees are taken out. But funds are hesitant to put much in this asset class, as it blows their fee budget.” The 2018 CIO Sentiment Survey found that private equity was the fourth most popular asset class, along with nondomestic fixed income, to allocate to in the coming year. Respondents also felt they had the balance right on fee structures. Flat fee structures and performance-based fees with smaller management fees were the preferred pricing structures, with the largest share of respondents’ balance of assets.
RESHUFFLING REL ATIONSHIPS The 2018 Investment Magazine CIO Sentiment Survey revealed that relationships with fund managers remain integral, with 3 in 5 respondents (59.1 per cent) saying they considered an asset manager a “strategic partner” and 72.2 per cent saying they had not reduced the number of managers with whom they have relationships. Respondents nearly universally (95.7 per cent) mentioned negotiation as the main
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2018 INVESTMENT MAGA ZINE CIO SENTIMENT SURVE Y \
step to reducing investment costs, with access to key professionals and content delivery mentioned as the most important factors from these partners. Fryer says strategic partnerships with select global managers were also playing a more important role – the survey showed 60 per cent of funds have these relationships. “One reason for these partnerships is access to proprietary research from these managers to supplement inputs from the investment consultant and internal team – why not include some of the world-best managers to help inform the internal team on how they approach a particular asset class?” he asks. “In the unlisted space, these relationships can be used to access transactions that are not available to others, especially in infrastructure and private equity.” Despite this, three in 10 (30.4 per cent) respondents recently insourced, or are planning to insource, more of their investment capabilities, and almost a third used asset consultants for manager research. In 2017, 19.4 per cent of CIOs said they would increase their internal capabilities. Chant West’s Fryer says funds’ relationships with asset consultants are changing. “It is now really only some smaller funds that use asset consultants in the traditional way, where they advise on all areas of strategy and manager research,” he explains. Frontier Advisors’ Bowater comments: “The way we work with clients is tailored to each fund’s circumstances and has evolved as internal team delegations and insourcing have occurred.” Fryer adds that while the CIO is the “key employee” for investment matters, the investment committee and board have overall responsibility for how the fund invests, meaning outcomes to members are not due only to investment team skill. “It is the ability of the investment committee to test and challenge recommendations, when appropriate – to provide the extra level of oversight,” he says. “We are seeing more funds appoint board members and investment committee members with significant investment experience. We believe this is very important, given the large amounts of money managed by super funds.”
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INSOURCING AND MANAGERS COST PRESSURES
STEPS TAKEN TO REDUCE INVESTMENT COSTS
1
95.7
47.8%
%
SAY THEIR INVESTMENT COSTS HAVE DECREASED IN THE LAST THREE YEARS
NEGOTIATING HARDER WITH EXTERNAL MANAGERS
2
26.1%
ALLOCATING MORE TO PASSIVE OR SMART-BETA STRATEGIES
3
13%
INSOURCING MORE INVESTMENT MANAGEMENT
4
8.7%
SHIFTING OUT OF HIGHFEE ASSET CLASSES
5
4.3
34.7%
%
SAY THEIR COSTS HAVE GONE UP
NONE
WHAT IS DRIVING YOUR CHANGE IN COSTS?
39.1%
30.4
%
OTHER
INCREASED USE OF HIGH-FEE PRODUCTS
8.7%
OUTSOURCING OF INVESTMENTS
8.7%
17.4%
INSOURCING OF INVESTMENTS
MANDATES/COST OF ADDITIONAL SERVICES OR ADVICE
17.4%
NEW, LOWERFEE PRODUCTS
ATTITUDES ABOUT MANAGERS
REASON FOR INSOURCING
17.4% CONTROL
72.7%
HAVE NOT REDUCED THE NUMBER OF MANAGERS WITH WHOM THEY HAVE RELATIONSHIPS
59.1
%
CONSIDER AN ASSET MANAGER A STRATEGIC PARTNER
DECEMBER 2018 – JANUARY 2019
13% COST
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\ SPONSORED SP ONSORED CONTENT CONTENT THIS REPORT IS sponsored by IFM
Fusion lab IFM Investors harnesses the power of teams across the business for research that furthers collaboration and tailored strategies. By Rachel Alembakis WITH A NEWLY consolidated listed equities team, IFM Investors has launched a research lab to allow innovative collaboration with clients for bespoke investment solutions. IFM recently announced that Neil Carter and Aidan Puddy would be the new co-heads of the listed equities team, which brings together the former indexed and quantitative equities team with the former active equities team. “We’ve got three equities teams at IFM – the indexed team, the active small caps team and the active large caps team – and they were all established at different points in time,” Puddy explains. “Because we started at different points in time, the teams initially needed to get their businesses up and running. It’s now time to see what the next phase of equities at IFM is and bring the teams under joint leadership.” IFM Investors emphasises that the move to unite all three areas under one listed equities team of 27 investment professionals is a consolidation, which will further boost the firm’s collaborative approach with clients through the IFM Investors Research Lab, which brings together research capabilities from across the team. The research lab is led by Laurence Irlicht, executive director, indexed and quantitative equities, and Mark McClatchey, executive director, active equities. “The idea is for the research lab to support the development of internally and externally generated ideas,” Carter says. “We have gone out to our investors and told them that the new
research facility is available to them, not just for product or fund ideas, but also for stand-alone data analysis that they might not be best placed to conduct. We’re skilled in using the latest tech tools such as big data, learning techniques that’s available for all clients.” Carter notes IFM Investors has a “long history” of working collaboratively with its clients across the listed equities group. “We’re taking that collaboration and moving it to a higher level,” he says. “We’ve had some clients that we’ve been close to that have asked us to work on specific projects with them. But there’s probably a group of clients that haven’t even realised that this is an option or that they’re in a position to ask about it. We’re broadening the offer and deepening the engagement, and they’re now aware we can provide such a deep level of analysis.” As part of this consolidation and increased offering to clients, IFM Investors is also increasing its emphasis on environmental, social and governance (ESG) factors through its ESG Champions, comprising four people from the listed equities subteams, plus four full-time responsible investment professionals, Puddy says. ESG Champions will also work on IFM’s Low Carbon Equity Solutions, as well as further integration of ESG factors into existing processes and quantitative models. The ESG Champions conduct existing programs such as proxy voting and engaging with companies on ESGrelated concerns, Carter says.
DECEMBER 2018 – JANUARY 2019
“We also conduct special projects on issues of concern, such as cluster munitions and other ethical supply chain concerns,” Carter explains. “We’re currently working on a project on Coles and Woolworths around ethical use of labour hire firms in their supply chain. The idea is how we can work with clients and through our membership in the Australian Council of Superannuation Investors [ACSI] to maximise our impact.” ESG-related activities are in line with IFM Investors’ business model of customising for and working with clients, Puddy says. “This is where there’s a bit of overlap with the research capability as well,” he says. “In the past, clients have wanted a particular index-style investment with a particular ESG focus. We’ve constructed customised benchmarks that negatively screen companies that our clients wanted excluded from their investment universe. Other clients have wanted, say, an indexed fund that has a lower carbon footprint than a benchmark. In addition to our current suite of products, our work will see us look at developing some further IFM Investors ESG products as well.”
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\ P OLITICS
WHILE HE’S NOT the treasurer in power, shadow treasurer Chris Bowen’s views on policy and regulation at this most critical juncture for the financial services industry carry as much weight as anyone’s in Canberra at the moment. Since the swing away from the Liberal Party in former prime minister Malcolm Turnbull’s seat of Wentworth in October, industry and political pundits have begun to contemplate the possibility of a change in government. Either way, there will be an election soon – one must be held by May next year. In Bowen, the financial services industry should expect a seasoned politician who has learned from the times he has locked horns with lobbyists.
Bowen has seen it and heard it all before. If Labor does what many think it can do and wrests power from the beleaguered Liberal Party next year, Bowen will be in the hot seat, responsible for oversight of the regulators and possibly – depending on the timing – implementing Commissioner Kenneth Hayne’s final report. While Bowen was cautious not to front run Kenneth Hayne’s recommendations, his comments in this exclusive interview with Investment Magazine are particularly illuminating when it comes to the blurring of the lines of regulator responsibilities and the watching brief he’s keeping on vertical integration.
By Alice Uribe + Photo Matt Fatches
Chris Bowen will listen, but he’s been “around the track”, as he puts it, enough times not to be swayed by a lobby FUELLED SOLELY BY SELF-INTEREST.
Man in waiting DECEMBER 2018 – JANUARY 2019
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P OLITICS \
REGUL ATION OF SUPERANNUATION
IMPLEMENTING HAYNE’S RECOMMENDATIONS Alice Uribe: What would a pathway to implementation of the Hayne royal commission’s final recommendations look like from a Labor government? Chris Bowen: You could actually read the interim report in a number of ways. I’ve said this previously – and I say it carefully because I don’t want to be critical of the royal commissioner – but I think it would have been more prudent to have draft recommendations in the interim report because that way we could all see them, comment on them, point out potential unintended consequences. It appears we won’t have that, so it appears that the final report will include recommendations that we’ll see for the first time – government, opposition, the sector, everybody…and a government of either persuasion will implement the recommendations. I think that’s a given. AU: Both governments will implement all recommendations in totality, is that what you think? CB: I think so, yes. There are genuine questions around timing and implementation details. I would think it unlikely that [Hayne’s] recommendations would be so prescriptive that there wouldn’t be a good deal of work for a Treasurer and a government to do around implementing them.
CONFLICTS AND VERTICAL INTEGRATION AU: What is your view on whether vertical integration should be legislated out of existence? CB: Several banks are already dropping it, of course. You’d have to say banks are reading the writing on the wall. I know that Westpac has said that it won’t but the others, by and large, have been. AU: Ahead of the royal commission’s final recommendations, institutions are negotiating, in some cases, 20-year distribution agreements with vendors they’ve sold their wealth and asset
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management businesses to, isn’t this just vertical integration at arms-length? CB: I think that’s a legitimate question but, again, this is why I was very cautious to start with because I really do want to see what he recommends first.
THE POLITICAL ENVIRONMENT AU: How has the feeling within the Labor Party changed since the Liberal Party’s leadership spill in August? CB: You’d rather be in our position than in their position. You would have rather been in our position than theirs before they spilled and you’d rather be in our position than theirs after. AU: Do you feel vindication for having called for the banking royal commission from the start? Justification perhaps. It’s vindication in the sense that our policy concerns – our reason for calling the royal commission – has been ticked by history. But I wouldn’t say vindication in some sort of brutal political sense. It was a tough decision to call the royal commission and we didn’t do it lightly. We knew that it would at that point be politically controversial and we knew that we’d receive all sorts of incoming criticism from the sector, saying we were creating uncertainty and that it’s bad for investment. But we thought it was justified. Not even we expected the scale and the speed, and the effect, of the findings…It surprised even me and I thought it was justified and necessary. AU: What are your top takeaways from the royal commission hearings and findings? CB: In a very broad sense it’s just the fact so many people thought that bad conduct was OK. The question really became ‘How did we get here?’ The fact enough people thought that this was all right, that’s what really saddens me, without getting into the specifics…I wish it had been done two years ago when we called for it because now the sector would be getting on with it in terms of implementing the recommendations and moving on.
AU: With more than a third of all of Australia’s retirement savings in SMSFs, do you think there’s an argument to shift oversight from the Australian Tax Office, which is principally a revenue collection agency to, say, an APRA-style of regulation? CB: There’s speculation about that. When it comes to regulatory frameworks, I’ve seen it speculated that Hayne might recommend a specific regulator for superannuation as opposed to self-managed super. [The speculation has been] to keep ASIC and APRA but remove superannuation from them and have a regulator covering just the field of superannuation. AU: Do you see value in having a separate regulator for superannuation? CB: I think more broadly on regulation… In the ‘twin peaks’ model of regulation we’ve had historically, we’re all pretty clear about who does what; we’re all pretty clear traditionally about the roles of each of the regulators. I think we’ve lost quite a bit of that through ad hocery. So, for example, BEAR [the Banking Executive Accountability Regime] has gone to APRA. Now, I think there’s at least an argument that BEAR sits better with ASIC, right? AU: The Productivity Commission’s recommendation for a so-called “best in show” superannuation fund shortlist have gotten a mixed response. What are your thoughts? CB: I’m not a fan of ‘best in show’. I think that it has, again, perhaps unintended consequences. I don’t think it’s great for competition to have 10 funds and only 10 funds; I think that’s potentially anticompetitive. I was on the platform with Karen Chester [deputy chair of the Productivity Commission] when she…sort of signalled that they might be moving away from it. I won’t second-guess her…we’ll know soon enough. But a Productivity Commission report is not like a royal commission; it’s not that, you know, you should assume that every recommendation will be implemented. And I saw Stuart Robert [assistant treasurer]…saying that he wasn’t impressed with ‘best in show’; I think he called it “dead”.
DECEMBER 2018 – JANUARY 2019
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US mid-term election results positive for global trade Global trade tensions remain a key investment risk but we remain sanguine that the historic pattern of geopolitics generating more volatility than trend will hold according to Dr Sally Auld, Chief Economist, Australia and New Zealand, J.P. Morgan.
INSTITUTIONAL INVESTORS HAVE been grappling with the implications of looming US-China trade tensions. The US still plans to impose a punitive 25 per cent tariff across all Chinese imports, which could lower China’s overall growth by about 1 percentage point (although policy changes could offset that by about 0.7 percentage points). This would have a severe knock-on effect for Australia’s mining sector given China is currently the world’s largest steel exporter. Iron ore and coal, which form part of the steel production process, are our major exports to China. If trade restrictions prompted Chinese industrial production to fall by about 10 per cent, it would drag Australian exports down by between 10 and 15 per cent. Still, it’s not all bad news. The US, Mexico and Canada managed to agree a revamped trade agreement. The success of these negotiations show us that trade struggles can sometimes be more bark than bite.
Even the contentious Brexit negotiations now appear to be on a smoother trajectory with the EU and UK coming to an in-principle agreement, raising the odds of a deal by early-2019 (although, while the UK remains a major export market for Australia, it will have little direct impact here other than on general investor risk and business sentiment).
‘‘
Low wage growth, deflating residential property market prices and high levels of household debt will probably keep the RBA on hold for the next year
China remains the key risk. While the chances of the US-China trade stoush being resolved more favourably were as low as about 10 per cent a few months ago, they are now probably more around the 40 per cent mark. That’s a significant improvement, but still a major gamble for economic stability. This positive news flow has recently softened some of the geo-political
uncertainty that has escalated in recent years. While an easing of geo-political risks may encourage a more ‘risk on’ approach from investors, there are nonetheless signs that the global economic expansion is mature. This may limit investors’ appetite for risky assets. The US mid-term election results are unlikely to materially affect the trajectory of the US economy. The Trump administration has already achieved a number of its stated policies, including large personal and corporate tax cuts. Still, a divided Congress does imply gridlock for federal policy decisions which can have macroeconomic significance, such as taxes and spending, and so the election results have not generated changes to our US economic forecast. Growth, inflation and unemployment levels remain on the same trajectory. We expect the Federal Reserve to hike interest rates another four times next year while the US dollar and bond yields will move higher over the next 12 months. The Australian economy, while cyclically desynchronized with the US economy, has performed well in the first half of 2018. But still low wages growth, deflating residential property market prices and high levels of household debt are likely to keep the RBA on hold for the next year. Australia is a small, open economy that is highly leveraged to trade. Accordingly, free trade remains a crucial foundation for Australia’s ongoing economic growth. We’d argue that generally, cross-border, geopolitical risk has so far created more market volatility than lasting change. Institutional investors will therefore need to continue to monitor developments in global trade dynamics over the next year. Dr Sally Auld is Chief Economist and Head of Fixed Income and FX Strategy, Australia and New Zealand, J.P. Morgan. Auld will be speaking at the CMSF Conference in March 2019.
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.
DECEMBER 2018 – JANUARY 2019
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CUSTODY MAT TERS \
SOURCE OF MORE THAN JUST TRUTH ASX is promising that its new blockchain-based system will go beyond settlement upgrades to provide new products and services and more – but questions remain. By Rachel Alembakis
THE QUEST FOR a golden source of truth sounds highly philosophical, but it is also a commercial and regulatory goal for the financial services industry. And ASX now states that its upcoming distributed ledger technology (DLT) system for cash equity settlement will provide a single source of truth for trades. ASX will replace the CHESS cash equity settlement system with a form of DLT by 2021, and the new system is expected to result in a shared, secure, single source of truth for settlements, say ASX and Digital Asset, the company that is developing the system. The notion of a golden source of truth featured heavily in a recent presentation at ASX headquarters during the international Sibos conference in October. Digital Asset chief executive Blythe Masters, and ASX executive general manager for equity post-trade services, Cliff Richards, spoke about the current status of DLT development, the potential improvements from implementing DLT for settlement, and the potential advantages for stakeholders. DLT, of course, is more commonly known as blockchain, the algorithm
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used as the basis for trading cryptocurrencies such as bitcoin. But blockchain got nary a mention during the presentation, which focused heavily on less sexy ideas such as reconciliation, smart contracts and reduced settlement latency. “Unlike traditional databases, which are maintained [and] controlled by a single owner with its own perimeter security,
and operational workflows without having to keep their own database, which would have to be reconciled at cost, Masters said.
NEAR REAL-TIME ASX started reviewing replacement options for the 25-year-old CHESS platform in 2015. In January 2016, ASX selected Digital Asset as its technology partner and paid $14.9 million to acquire a 5 per cent equity interest in the company.
Unlike traditional databases, distributed ledgers are shared and replicated so multiple independent entities have access distributed ledgers are shared and replicated so multiple independent entities have access to that information,” Masters said. “In some cases, all the information is available to everybody but, importantly, [that is] not always the case. It’s possible to share, replicate and validate that data without seeing everybody’s information, just the information that is pertinent to you, that you have a legal need and right to learn.” Multiple entities can use the shared ledger to run processes
“A golden source of truth was attractive because we recognise that there is this reconciliation problem, albeit on CHESS itself it’s not that bad,” Richards said. “The point is, no one knows that they’re operating on the truth. The only source of truth now is CHESS and everything else is a copy of it. Because it’s
a copy, you have latency in the system, and people in financial markets know that latency might equal opportunity but it also equals risk.” Another benefit of DLT is the ability to effectuate near real-time settlement and what Masters called “atomic settlement”. She also addressed the concept of “smart contracts” with DLT. This opens up a potential new front of product and service delivery for ASX. Smart contracts can be used not just with cash equity settlement but also in financial vehicle transactions, such as for asset-backed securities, derivatives and more. “What smart contracts allow you to do is automate multiparty processing across these shared, replicated, independently validated ledgers, allowing enormous advances in the productivity of organisations seeking to work on a single co-ordinated workflow referring to a single golden source of truth,” Masters said. ASX has not decided what to do with the 25 years of trading data from CHESS, nor whether that data should be moved onto the DLT platform. It is engaging with stakeholders regarding the benefits of the new system and safeguards to protect privacy, data and permissions. Questions to be answered include who decides what permissions are granted to participants and how that decision is made, and what role the Reserve Bank of Australia and ASIC have in overseeing DLT.
CUSTODY MAT TERS IN A SSO CIATION WITH
DECEMBER 2018 – JANUARY 2019
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IF YOU’RE AN investor facing a dilemma that requires bold decisionmaking, the first thing you should do is move as far as possible from anyone with a tuna sandwich. It may seem a strange suggestion but research by Spike Lee and Norbert Schwarz, published in the Journal of Personality and Social Psychology in 2012, found people had a 24 per cent reduced appetite for investment in the presence of the smell of fish. It turns out there is measurable truth in the old adage ‘there’s something fishy going on here’. “So if you’re a financial planner, don’t serve fish,” said Kathryn Kaminski, the chief research strategist and portfolio manager at AlphaSimplex Group, at a roundtable sponsored by Natixis in Sydney in October. “It gives you an interesting perspective that sometimes the things that you think
Th e
m i n d
don’t affect decisions actually do.” Neurofinance is an emerging research field that tries to better understand the mechanisms that drive behaviour in financial markets. Until the day comes that artificial intelligence takes over the decisionmaking on the trading floor, human minds will continue to dominate investment decisions around the world. And this emerging field – a blend of economics, neuroscience and psychology – is delivering some startling insights that could enable investors to better handle the decisions they face. Kaminski, who in addition to her role at AlphaSimplex is a senior lecturer at the Massachusetts Institute of Technology, explained the way mechanisms that developed over millions of years of evolution now influence investment decisions. Some findings were particularly counterintuitive.
w o rk s
i n
MYSTERIOUS WAY S
When researchers delve into the forces that INFLUENCE INVESTORS’ decision-making, they find everything from evolutionary imperatives to deep-sea wildlife. By Ben Hurley + Photos Tahn Sharpe
DECEMBER 2018 – JANUARY 2019
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SP ONSORED CONTENT \
It turns out, for example, that it’s important for investors to be in touch with their emotions. Research by Lisa Barrett and Myeong-Gu Seo, published in the Academy of Management Journal in 2007, challenged the common view that feelings are generally bad for decisionmaking. They found individuals who experienced more intense feelings achieved higher decision-making performance. “Individuals who were better able to identify and distinguish among their current feelings achieved higher decision-making performance via their enhanced ability to control the possible biases induced by those feelings,” Kaminski said their research showed. In 2010, in The Journal of Finance, researchers Antoine Bruguier, Steven Quartz and Peter Bossaerts examined
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the states of mind of individuals who were successful in predicting stock patterns and stock returns. Counterintuitively, it wasn’t the part of the brain mathematicians would consider the most important in stock picking – that associated with probabilistic reasoning. Instead, the most useful asset to outperforming was understanding how other people would react to other individuals. “So this gives some sense to how theory of mind is an important part of finance, because we are interacting with other humans,” Kaminski said. In 2005, Stanford researchers Camelia Kuhnen and Brian Knutson conducted MRI scans on investors to look at how different parts of their brains reacted to losses and gains. They found the results differed widely among investors, with some people reacting more strongly to loss and others to
gain. This was directly linked to how they managed their financial portfolios. And John Coates and Joe Herbert, in 2008, looked at traders and the role of hormones such as testosterone and cortisol. They found the level of testosterone in traders was predictive of their performance throughout the day. “We really are emotionally and physiologically connected to markets and the risks we take,” Kaminski told roundtable attendees. Participant Charles Wu, General manager, asset allocation, State Super, asked a question regarding the power of narratives in the market. “Could it be that the narrative [of common knowledge or common ideas] keeps markets going?” Wu asked. Kaminski said: “trend-following works very well when the world is changing and people don’t like it. So your goal is
DECEMBER 2018 – JANUARY 2019
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to measure where the market is moving. We don’t have to have an opinion. We’re not projecting, we’re not forecasting that this is going to happen. We’re just deciding how we’re going to react in different scenarios.”
ILLOGICAL BEHAVIOUR People make irrational choices all the time, in life and in markets, but there may be some sense behind this. One example of seemingly irrational behaviour is called ‘probability matching’. If participants are given a coin that has a 75 per cent chance of landing heads-up, are told they will get $1 for every correct call and are asked to predict a series of results, many will predict a line of results that matches the stated probability – mostly heads but with some tails thrown in here and there. The profit maximising strategy would be simply to predict heads all the way. Why do people do this? One theory, Kaminski explains, is that as we evolved, we encountered situations where choices that were bad for some individuals were ultimately crucial for the continuation and adaptation of the species as a whole. She talked about a bird that had to make one choice in life – whether to nest in the mountain or the valley. Most of the time, nesting in the valley is the best decision because it is lush and verdant, and the bird can nest and have offspring even if it doesn’t rain. Those that nest in the mountains will be in big trouble if it doesn’t rain. But every 40 years or so there is a flood that kills all the birds in the valley. The odds are clearly in favour of the birds that choose to live in the valley and any “optimised, smart bird” is going to make that choice for its own survival. But taking a step back and looking at it from the perspective of the whole system, the 40-year flood would wipe out the whole species if they all chose the valley. A bird species that randomises its choices, so the majority choose the valley but some choose the mountain, ultimately ends up succeeding over a species that doesn’t. Another participant, Pauline Vamos, chair, CIMA society, asked how pension funds could use this example to help their members but also to assist their trustees in monitoring the potential behaviour of their own fund managers.
Kaminski replied: “Biology and understanding emotion is going to help us more than we ever thought. Understanding bias, understanding a predisposition for certain things can actually help us.” Behavioural biases, Kaminski said, exist for a reason. This forms the basis of MIT professor Andrew Lo’s adaptive markets hypothesis, which applies the principles of evolution to the interactions that take place in financial markets. Lo is the founder of AlphaSimplex Group. In making decisions, humans take a heuristic approach – meaning a practical method such as a mental shortcut, educated guess or intuitive feeling – which isn’t necessarily the optimal choice.
PA R T I C I PA N T S AMARA HAQQANI Senior policy manager, retirement income and investments, Financial Services Council CELINE KABASHIMA Portfolio manager, AMP Capital KATHRYN KAMINSKI Chief research strategist and portfolio manager, AlphaSimplex Group EDDIE LEE Portfolio manager, asset allocation and fixed income, Findex Group SALLY LOANE Chief executive, Financial Services Council BRENT MATHUS Institutional client portfolio manager, AlphaSimplex Group SANDI ORLEOW Independent member, investment committee, Statewide Super ALEX PROIMOS, Head of institutional content, domestic events, Conexus Financial PAULINE VAMOS Chair, CIMA Society LOUISE WATSON Managing director, Natixis Investment Managers STEPHANIE WATSON, Investment management director, Genworth
CHARLES WU State Super
DECEMBER 2018 – JANUARY 2019
CHARLES WU, General manager, asset allocation, State Super
STEPHANIE WATSON Genworth
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SALLY LOANE Financial Services Council
PAULINE VAMOS CIMA Society
CELINE KABASHIMA AMP Capital
How do we set up a system so that they make better decisions without even thinking about it?
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When resources are available in the form of positive returns, investors adapt to take advantage of them, competition increases and yesterday’s alpha becomes today’s beta. When competition gets too intense or the market finally tanks, it is those with the best-suited heuristics who adapt and create new strategies, while others go down with the ship. “So this type of cycle is what we see exactly in our financial markets, in that the investments that we choose, they wax and wane over time depending on what’s available, and what resources we can find, as well as how stiff the competition is, and the particular market ecology we’re dealing with today,” Kaminski said. “So in an adaptivemarkets world who wins? It’s the market players who apply the best heuristics, those who are most able to effectively adapt and compete, who outperform other market participants to survive and continue.” What does this mean for investing? Sally Loane, the chief executive of the Financial Services Council, mentioned the struggle to get younger Australians to “think about their future self and engage with finance”. Kaminski said “it was a classic problem”. “The job of people who are thinking about the pension is [to determine] how to look at what people do and what mistakes they make and how painful it is for them, then ask, ‘How do we set up a system so that they make better decisions without even thinking about it?’ ” she explained. This approach can help investors understand a range of phenomena in financial markets, Kaminski said. Firstly, alpha begins with a novel technique that ultimately becomes popular, creating the constant need for new approaches. Shocks in financial markets are not anomalies. Rather, they’re an integral part of the financial ecosystem evolving over time. And finally, investors have to be as adaptive as possible to succeed. “We all need to think about how we can develop adaptive approaches in investment techniques, so we can adapt to changes and challenges in the financial system,” Kaminski said.
DECEMBER 2018 – JANUARY 2019
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CHAIR’S SE AT \
By Alice Uribe + Photos Matt Fatches
The
VISION
mission IS THE
Kirsten Mander, CHAIR OF LEGALSUPER, reflects on her first year in the job as she prepares to tackle A CHALLENGING 2019.
Q: IT’S BEEN A YEAR SINCE YOU TOOK ON THE ROLE OF CHAIR AT LEGALSUPER, WHAT DREW YOU TO THE ROLE? IT’S CERTAINLY A CONTROVERSIAL TIME FOR THE SUPER SECTOR, DID THAT CONTRIBUTE TO YOUR DECISION IN ANY WAY? A: That was definitely part of my reason for having an interest in a superannuation fund. I’ve got a background in financial services, private health insurance and funds management, but not in superannuation itself. It was pretty clear that there was going to be a lot of change in superannuation, and that change creates a really interesting opportunity to play a role in influencing how that plays out. This is at the fund level, in helping steer how the fund responds, and at the industry sector level. Q: YOU SUCCEEDED DAVID MILES, WHO HELD THE POSITION OF CHAIR FOR 12 YEARS. HOW HAS IT BEEN, STEPPING INTO HIS SHOES? A: I’ve actually found it relatively seamless. We’re different people, but he’s a very experienced chair and I’m not inexperienced myself as a chair. So while we’ve got very different styles, to some degree, we both operate at a similar level. The role of the chair is to guide and to facilitate, it’s not there to tell people what to do. We also both come from a legal background originally – mine a bit more on the executive side of things from years in companies – and we’ve both been advantaged because we’ve got a great team at legalsuper. We really do have a great
investmentmagazine.com.au
DECEMBER 2018 – JANUARY 2019
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membership base, but the team’s intelligent and they’re hardworking and they’ve got a good culture, so I’ve been able to transition very nicely into the organisation. I really appreciate that. Q: HOW WOULD YOU DESCRIBE YOUR LEADERSHIP ST YLE? A: Leadership is about engaging and persuading people to share your vision, so it’s a lot about building consensus around the vision and mission – making sure everyone is sharing and understands the common purpose. That’s part of where it can sometimes go a bit astray as an organisation gets larger and larger, and people get further and further removed from their role in achieving the organisation’s mission and vision. Q: WHAT SORTS OF PRESSURES DO L AW YERS FACE IN TERMS OF THEIR RETIREMENT NEEDS? A: Those working in the legal sector are reasonably astute and professional, they’re quite engaged around their superannuation, compared with others. They like to use technology more than others, so we do have an ability to get feedback from them. They like to engage with organisations that are smart and responsive and give them high levels of choice and flexibility when they want it. They are increasingly coming under pressure with casualisation of the workforce and the future of work, so they’re concerned about that. That means we, too, need to think about how to make superannuation more flexible for people who are in and out of employment.
DECEMBER 2018 – JANUARY 2019
Q: A NUMBER OF FUNDS ARE NOW USING THEIR MUSCLE TO PUSH FOR IMPROVED CORPORATE GOVERNANCE. WHAT ARE YOUR THOUGHTS ON THIS? A: I think it’s absolutely a good idea. We certainly use our persuasive abilities with funds to argue for better corporate governance, and it comes in very strongly when we do due diligence on new acquisitions or any products coming. Look how successful it’s been with the issue about women on boards in the ASX 200. Q: ARE THERE ANY PARTICUL AR AREAS OF GOVERNANCE ON WHICH YOU FOCUS? A: The board is having conversations about ESG at the moment – how to properly build that into the portfolio and what our stance should be. We have an ESG product and we’re looking at the degree to which we build ESG into other products, along with putting pressure on external parties to build it into their processes.
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We will continue to make sure we’ve got quite a sophisticated assessment of risk/ reward but that’s not what’s driving it, it’s more a case of trying to think ahead five, 10 years and what will be the things that will generate good returns for our members. Q: WE’ VE SEEN SOME OF YOUR FELLOW FUNDS INVESTING IN BIG INFRASTRUCTURE PROJECTS. WHAT ARE YOUR THOUGHTS ON THIS ASSET CL ASS?
Q: HOW HAVE YOU REVIEWED THE FUND’S APPROACH TO INVESTMENT SINCE YOU JOINED THE BOARD? A: We’re looking at our asset allocation at the moment. There are many new asset classes that are becoming available, so we want to see how they fit into the portfolio and what they might mean in terms of returns, but also in terms of reducing volatility, just freeing up our thinking about that.
A: We have some and we’re certainly looking at what other funds are doing but we don’t follow. We focus in on our particular member segment and what we do well. Our future is about being what we are, not trying to be all things to all people. We have a very clear segment and a very clear focus and it gives us some genuine competitive advantage, but it’s done by focusing on what we’re good at. [It’s about] the flexibility we get with our size and with our membership and our internal capabilities and approach to doing business, and the types of assets we look at, and the linkages we have that enable us to build on those. Innovation is not about the next shiny new thing, innovation is about identifying, understanding and focusing on the particular areas that are going to add value to your organisation, and how they will play out in the long term. Q: HOW IMPORTANT IS CULTURE TO AN ORGANISATION? A: I strongly believe in the power of
culture. But I do think that organisations like banks – I’ve worked in large organisations – trying to change them is like steering the Queen Mary.
Innovation is not about the next shiny new thing, innovation is about identifying the particular areas that are going to add value for your organisation investmentmagazine.com.au
Q: WHAT ARE YOUR PRIORITIES FOR 2019 – FOR THE FUND AND FOR YOU PERSONALLY? A: We’ve got a great existing leadership culture at legalsuper, I’m keen to see that continue and enhance, get more sophisticated around risk-reward and how we approach that. Associated with that, I’m keen to deepen and improve our management information at a board level, the board members’ ability to be effective is substantially based on the information they get so it’s both useful for the business and useful for the board to get clearer about what does and doesn’t matter in the business, what moves the dial and what’s happening. So that’s improving the information that’s flowing up, enabling good decisions to be made. I see boards and executive teams having this discussion all the time and the board says, “Please, you’ve given us 500 pages, only give us the important stuff,” and management says, “Well, what do you see as the important stuff?” And then the board says, “I don’t know, shouldn’t you tell us that?” You see this ping-pong thing. Ten years ago, we all did strategic planning. Today, everyone reckons there’s no such thing, so much is changing. But it can’t be like that in our industry so you’ve got to form some views about where these major, seismic changes are going to go. Q: WHAT ARE THE SEISMIC CHANGES THAT YOU SEE, FROM A REGUL ATORY PERSPECTIVE? A: There is an increasing desire from government and regulators to maintain higher levels of scrutiny and control over the business and to impose more and more requirements around business operation. As people are getting older, there are more and more challenges with comorbidity, with people not necessarily living healthier lives…so there are some real costs around that. Our whole superannuation system and what place it has in our economy is a really interesting question. Australian people are among the most affluent people in the world but that’s significantly based on superannuation balances and the value of housing.
DECEMBER 2018 – JANUARY 2019
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LIFESKILLS \
BALANCING ACT: COVER VS RISK The Protecting Your Super package DRAMATICALLY CHANGES the concept of group insurance, giving trustees much to think about when considering greater restrictions to protect premiums.
ANDREA McDONNELL SENIOR CONSULTANT | RICE WARNER
TRUSTEES HAVE A range of new issues to deal with when considering implementation of the Insurance in Superannuation Code of Practice, the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the expected implementation of the Protecting Your Super Package. One of the key issues is balancing the provision of meaningful insurance cover with the avoidance of excessive risk. The Protecting Your Super package dramatically changes the concept of group insurance. The traditional concept is that cover can be provided without the need for underwriting because the type and level of cover are chosen by a trustee or employer and it starts automatically when the person joins an employer. In this way, cover is provided to a cross-section of the working population, commencing at
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a time when the member is generally in good health. This contrasts with retail insurance, in which the individual selects the time, type and amount of cover. Superannuation funds have adopted processes for offering voluntary cover to members, either where the member isn’t eligible for automatic cover or when they require additional cover above the default level. Under the Protecting Your Super Package, cover will start
This may not seem like a significant issue but life insurance is claimed by a small percentage of members in any one year. It may take only a few extra claims (due to covering a small number of additional extreme-risk individuals) to have a significant impact on rates. There are several possible approaches to dealing with this risk, some of which funds will already have in place. At a high level, they can be grouped as follows:
Whilst many funds will want to apply as few restrictions as possible, thought needs to be given to the risk of premiums increasing substantially for all members at a range of different times; for most it will not be on the date they first join their employer or the fund, because they will need to be aged 25 or more and have an account balance greater than $6000 to be granted automatic cover. This creates a risk that some members may manipulate the time at which they obtain cover so that it will be when they know they are more likely to make a claim; for example, by making additional contributions or transferring a balance from another fund to obtain automatic cover.
Full underwriting provides a high level of risk control, with the following possible consequences: • Few members may obtain cover due to the time needed to apply • Some members will be unable to get cover due to health situation • Additional costs unless heavily automated Excluding pre-existing conditions provides mediumhigh risk control with these consequences: • In effect, pushes the underwriting to claim time
• Could be viewed negatively if overly restrictive • Need to consider how far back to look at conditions and for how long the exclusion will last Another approach, shortform underwriting, offers medium risk control but may put some members off applying. Meanwhile, tightening eligibility rules can provide a medium level of risk control when combined with the other controls mentioned here. For funds, it is important to consider what terms are reasonable for switching on cover in all situations, including when members obtain cover for the first time and when they obtain it after having it switched off. Whilst many funds will want to apply as few restrictions as possible, thought needs to be given to the risk of premiums increasing for all members. When the insurer provides its pricing, it should explain what terms have been allowed for starting, stopping and recommencing risk, and advise whether the price takes into account only Protecting Your Super changes or has allowed for changes in the claims experience when making assumptions. Further, the insurer should explain what allowance has been made for members deciding to opt into or out of cover and whether this aligns with fund expectations. LIFESKILLS Lifeskills is a regular section in Investment Magazine. Each month, we publish an independent column from an industry leader with insights into best practice in the group insurance sector. This page is produced with thanks to advertising support from AIA Australia.
DECEMBER 2018 – JANUARY 2019
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SEASON OF INVESTOR DISCONTENT The increasing value to investors of GOOD CORPORATE GOVERNANCE is reflected in the number of ‘no’ votes and shareholder resolutions during recent AGMs. between good corporate governance (including effective management of their environmental and social impacts) and sustainable longterm returns.
REMUNERATION LOUISE DAVIDSON CHIEF EXECUTIVE | AUSTRALIAN COUNCIL OF SUPERANNUATION INVESTORS
MOST ASX-LISTED COMPANIES hold their annual general meeting between September and November. The recent AGM season was characterised by several larger-than-usual votes against management recommendations. This is indicative of a loss of trust in boards, arguably triggered by the ‘banking’ royal commission, which was by no means limited to that sector. These outcomes are also noteworthy for another reason. They demonstrate how seriously institutional investors are taking their role as stewards of capital. As the examples in this article illustrate, investors are voting to hold companies to account for behaviour that falls below community and market expectations. In doing so, investors acknowledge the strong link
ACSI’s 2018 CEO pay report revealed that pay for chief executives has hit record highs with bonus payments a major contributor. Investors are concerned that incentives are often awarded with little regard to performance. Concerns about executive pay delivered two of the most significant outcomes during the AGM season. Telstra received an astonishing 62 per cent vote against its remuneration report. This has been widely reported as the result of awarding significant incentives to executives despite substantial losses in shareholder value. Another prominent vote occurred at Tabcorp, where 40 per cent of shareholders said no to the company’s remuneration report. Upfront bonuses for completing the Tatts transaction were among the concerns investors raised at the company’s AGM. This vote demonstrates Australian investors’ preference for awarding incentives based on the successful integration of acquisitions, rather than granting windfall gains simply for doing the deal. A number of other companies
DECEMBER 2018 – JANUARY 2019
narrowly avoided votes against their remuneration reports.
ACCOUNTABILIT Y As mentioned, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry influenced voting intentions. In determining our voting recommendations, ACSI is looking for evidence that those responsible for overseeing poor conduct have been held to account. Of the major financial institutions to front the royal commission, only Commonwealth Bank had held its AGM at the time this article was written. At the bank’s meeting, we observed wariness among investors about passing judgement before the royal commission’s final recommendations are published. A number of shareholders abstained. It will be interesting to observe the AGMs at the other major banks. Factors we predict may influence investors’ voting decisions include relatively high bonus awards despite flat or declining cash profits, and remediation provisions prompted by revelations during the royal commission.
GENDER DIVERSIT Y Investors’ efforts to improve diversity on ASX 200 boards have continued this AGM season. We now have clear
evidence that the decision of ACSI members and others to vote against all-male boards in the ASX 200 has resulted in improved board diversity. In keeping with our policy, we continued to recommend against the election of boards with poor gender diversity at ASX 200 companies. At the ARB Corporation AGM, close to onethird of shareholders opposed director elections, clearly demonstrating that investors are concerned about this issue. There are now only three all-male boards in the ASX 200 – ARB, TPG Telecom and Tassal Group.
RESOLUTIONS Shareholders put forward a record number of proposals during this year’s AGM season, many involving climate-change disclosure. Recognising the clear link between climatechange risk management and long-term sustainability. At Origin Energy, 46 per cent of investors voted to support a resolution asking the company to provide more transparency on its climate-change lobbying and industry associations. Recent shareholder resolutions once again highlight the need to improve the legal framework in this area. Our research has found that shareholders see value in non-binding resolutions and are tired of the current system, which requires that each proposal have a constitutional amendment attached. To address this, we are advocating for the introduction of nonbinding shareholder resolutions in Australia. As these outcomes show, the collective voice of investors is proving to be extremely effective at holding companies to account for their ESG performance and ensuring they remain focused on delivering long-term value for investors.
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POLICY
THE ‘INCONVENIENT TRUTH’ ABOUT SUPER At this point, dismissing profit-to-member funds’ outperformance is like denying climate change – but the NEW EVIDENCE is hard for anyone to ignore.
EVA SCHEERLINCK CHIEF EXECUTIVE | AUSTRALIAN INSTITUTE OF SUPERANNUATION TRUSTEES
financial advisers in the retail sector who, as the report notes, receive the lion’s share of advice fee revenue. The report was released in November as a supplementary paper to the commission’s May draft report into the efficiency and competitiveness of superannuation. It goes further than previous studies in examining the factors that drive outperformance.
NO MORE EXCUSES RISING SEA LEVELS, melting glaciers and record temperatures for the planet. Despite the plethora of scientific evidence telling us that climate change is happening, there’s still no convincing some. There are parallels between climate change deniers and those who routinely dismiss the outperformance by profit-to-member super funds. Despite more than two decades of reports and independent surveys showing profit-to-member funds at the top, there is still an army of supporters of retail funds (those run by banks and other financial institutions) who continue to express doubts about the veracity of this evidence. This makes the latest report on superannuation from the Productivity Commission essential reading, especially for
Notably, it puts to bed the argument that the outperformance of profitto-member funds can be explained simply by differences in asset allocation. In the words of one journalist from The Australian, the report has “obliterated the last excuse put forward by retail funds for their systemic underperformance”. For many years, detractors of profit-to-member funds have claimed that comparing the performance of retail funds with profit-to-member funds is akin to comparing apples to oranges. The argument goes
that liquidity constraints and an older, more risk-adverse membership force retail funds to invest in more conservative assets. This, in turn, is said to result in lower net returns. Drawing on new and existing data from regulators and research firms, the commission put this claim to the test by comparing like with like. Adjusting for asset allocation and other key factors, it found there was still a 190-basis-point edge in relative performance for profit-to-member funds. The report suggests that asset selection (that is, smarter investment decisions within asset classes) is the main reason for this performance gap. It also points to a correlation between good governance and outperformance.
GOVERNANCE While the commission did not specifically explore funds’ overall governance, the report states that “governance efficacy” – as an indicator of key intangibles such as
The report has obliterated the last excuse put forward by retail funds for their systemic underperformance
DECEMBER 2018 – JANUARY 2019
the calibre of the trustee and investment team, the investment process, and management of conflicts and related parties – plays a role in outperformance by the profit-to-member sector.
WINNING ON FEES The report also examined fees and costs, finding that retail funds paid higher investment costs than profit-to-member funds across all asset classes. Almost all of the high-fee products, containing at least 3 million member accounts and $200 billion in assets, were retail funds, half of which were legacy (closed) products. The largest fee difference was in cash, where retail funds paid 44 basis points, on average, compared with 5 basis points for profit-to-member funds. Noting that the use of related parties was more prevalent in the retail sector, the Productivity Commission suggested that using them might reflect poor governance when it was associated with higher indirect investment expenses. Granular in its analysis and independent, this report must not be ignored. While the sustained (on average) outperformance of profit-to-member funds may be an ‘inconvenient truth’ for the advisers associated with retail funds, there is nothing inconvenient about it for those Australians languishing in underperforming super. As is the case with climate change, the evidence is overwhelming and the time to act is now. A good starting point would be for the government to set up an independent online portal so workers can compare the long-term net returns of every product. Retail fund members could use this to understand how much better off they could be.
investmentmagazine.com.au
13 -15 MARCH 2019
GOLD COAST CONVENTION CENTRE
The Australian Institute of Superannuation Trustee’s (AIST) flagship event, the CONFERENCE OF MAJOR SUPERANNUATION FUNDS (CMSF) is the premier idea sharing and networking event for Australia’s $1.2 trillion profit-to-member super sector. In providing a platform to dissect the most pressing issues, CMSF will be an invaluable opportunity for you to hear from distinguished speakers and gain practical insights into topics covering your industry, your members and yourself.
JOIN US AS WE HEAR FROM
WHAT WILL WE BE TALKING ABOUT? ROYAL COMMISSION PRODUCTIVITY COMMISSION INDIGENOUS SUPERANNUATION ADVICE SOLUTIONS POST ROYAL COMMISSION INNOVATION IN FUNDS FUTURE TRENDS IN CUSTOMER SERVICE
Adele Ferguson
Business Journalist The Age, Sydney Morning Herald & the Australian Financial Review
Ian Silk
Chief Executive Officer AustralianSuper
EARLY BIRD REGISTRATION For more information and to secure your early bird registration before December 12, visit aist.asn.au/CMSF
Craig Reucassel The Chaser & War on Waste
Dr Sally Auld
Chief Economist and Head of Fixed Income & FX Strategy, Australia and New Zealand J.P. Morgan
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