INTELLIGENCE FOR INSTITUTIONAL INVESTORS
BEAUTIFUL ONE DAY,
uncertain the next
The Queensland Government’s chief investment adviser, QIC’s JIM CHRISTENSEN, is readying stakeholders for the risks ahead
AS CHAIR OF THE CBUS SUPER
SUPER FUNDS MUST
YASSER EL-ANSARY ARGUES
HERE’S HOW EUROPE’S
RESPOND TO THE WAY
PRIVATE EQUITY INVESTORS
LARGEST INVESTOR, APG,
STEPHEN DUNNE IS SETTING THE
TECHNOLOGY IS CREATING A
GET A SECOND BITE OF THE
IS PUTTING AI TO WORK IN
PARAMETERS FOR GROWTH
‘GIG ECONOMY’ FOR WORKERS
CHERRY COME FLOAT TIME
ITS INVESTMENT PROCESS
LET’S BUILD A BETTER WORLD FOR INVESTING. LET’S MEASURE UP. Let’s make the financial world as diverse as the one we live in. Let’s put ethics at the heart of everything we do. Let’s always put investors’ needs above our own. Let’s deliver real value for the investment fees we charge. Let’s create jobs, build bridges, ensure prosperity. Let’s do our part. Let’s start today. Let’s measure up. Get started at letsmeasureup.org
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THIS ISSUE \
CONTENTS APRIL 2018
06 CIO PROFILE QIC’s Jim Christensen knows the next five years will be tough, which means setting clear expectations
12 SUPER AWARDS The Conexus Financial Superannuation Awards judges took the unprecedented step of appointing joint Fund of the Year winners
24 CMSF 2018 Industry leaders need to think about how technology will reshape the workforce – for both their members and staff
30 EUROPE Europe’s largest investor, the €473 billion APG, is putting artificial intelligence to work in its investment process
“As we internalise more investment capability, clarity around investment decision-making grows in importance” STEPHEN DUNNE | INVESTMENT COMMITTEE CHAIR | CBUS SUPER
21 CURRENCY Institutional investors, like holidaymakers, often cop a raw deal in the global FX markets, Brett Elvish argues
23 LIFESKILLS MTAA Super has improved its online and telephone services for insurance claims, Chris Porter writes
27 INVESTMENT Yasser El-Ansary writes that private equity investors get a second bite of the cherry when PE-backed companies float
28 POLICY Labor’s tax proposals must be considered with regard to sustainability and intergenerational fairness, Eva Scheerlinck writes
32 GLOBAL PARTNERS Brett Himbury sees big opportunities for Australian super funds to partner and co-invest in South Korea
34 SOCIETY The Benevolent Society’s Claudia Lennon reflects on a collaboration between the finance and welfare sectors
\ FROM THE EDITOR
SALLY ROSE / email@example.com
DIRECTOR OF INSTITUTIONAL CONTENT
Amanda White HEAD OF DESIGN
A LETTER from the editor
Suzanne Elworthy SUB-EDITOR
Haki P. Crisden PHOTOGRAPHER
Matt Fatches firstname.lastname@example.org
ACT NOW ON COMPLAINTS
USTRALIAN SUPER FUNDS are taking an average of 117 days to handle customer complaints. That is a disgraceful statistic. And of course, it means many members are waiting far longer than four months to have their complaint resolved. The law requires funds to complete internal dispute resolution processes within 90 days. Australian Securities and Investments Commission senior executive leader, investment managers and superannuation, Jane Eccleston, told the Conference of Major Superannuation Funds 2018, held in Brisbane March 14-16, that the regulator is concerned about the lag in handling complaints. So much so, that ASIC is planning to launch a review into the issue, Eccleston said, although this has been delayed until the new onestop-shop external dispute resolution body, the Australian Financial Complaints Authority, is up and running later this year. Eccleston flagged that ASIC will consider recommending that super funds be given a shorter window in which to respond to complaints before consumers are allowed to take the matter to AFCA. Any fund that takes, on average, more than the mandated 90-day limit – or even close to that – to handle a complaint should be acting now to reduce that. Just as funds should be getting on the front foot to ensure that they have taken, or are
taking, adequate steps to correct the issues that are driving the complaints. After all, looking at what clients are most likely to complain about can provide a signal as to where there might be systemic problems or misconduct. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has delivered juicy headlines from day one. So far, the public hearings have dealt exclusively with banks and mortgage brokers but the second round of hearings, due to kick off on April 16, will focus on the wealth-management and financial planning industry. What emerges from that will probably provide some prelude to the types of scandals sure to emerge when hearings dedicated to misconduct in the superannuation sector are held later in the year. Complaints about misconduct in relation to financial advice and insurance will probably be amongst the most prevalent issues that arise in the royal commission’s hearings dedicated to superannuation. Simply saying ‘but the banks are worse’ will not cut the mustard. Not with Justice Kenneth Hayne and his posse, or with the general public. This is my last issue as editor of Investment Magazine. A huge thank you to everyone who has helped me and contributed to the title’s success over the last 18 months. It has been a blast.
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ADVISORY BOARD MEMBERS Debbie Alliston, head of multi-asset portfolio management, AMP Capital | Richard Brandweiner, chief executive, BTIM Australia | Peter Curtis, head of investment operations, AustralianSuper | Joanna Davison, chief executive, FEAL | Michael Dundon, chief executive, VicSuper | Kristian Fok, chief investment officer, Cbus Super | Robert Goodlad, chief executive, CIMA Society of Australia | David Haynes, executive manager, policy and research, Australian Institute of Superannuation Trustees | Geoff Lloyd, chief executive, Perpetual | Graeme Mather, head of distribution, product and marketing, Schroders | Mary Murphy, chief digital officer, First State Super | Paul Newfield, senior investment consultant, Willis Towers Watson | Nicole Smith, chair, MLC Superannuation Trustees | Anne Ward, chair, Colonial First State and Qantas Super | Nigel Wilkin-Smith, director portfolio strategy, Future Fund
FIDUCIARY INVESTORS SYMPOSIUM MAY 21-23, 2018 BLUE MOUNTAINS NSW
SYNCHRONISED GLOBAL GROWTH AND THE GOLDILOCKS YEARS Managing assets as a fiduciary comes with a complex range of responsibilities and commitments. It is imperative that asset owners remain current in this changing and complex environment, to better meet their fiduciary responsibility. The 10th-annual Fiduciary Investors Symposium brings asset owners, consultants and investment managers together to hear the latest research and thinking related to asset allocation, risk management, alpha generation, and investment operations. Experience the latest thinking, expert opinions, thought-leadership and unrivalled networking opportunities.
fiduciaryinvestors.com.au CONTACT alex.proimos@conexusf inancial.com.au
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\ CIO PROFILE
Since his 2016 homecoming to QIC, the $85 billon house of alternatives, investment chief JIM CHRISTENSEN has spent plenty of time thinking about how to be prepared when things GO WRONG. By Sally Rose + Photos Glenn Hunt
GET TING REAL about RISK APRIL 2018
CIO PROFILE \
HE INVESTMENT OUTLOOK over the next few years looks pretty dismal compared with the double-digit returns investors have grown accustomed to over the last decade, so it is critical for asset owners and managers to have a crystal-clear understanding of their clients’ risk appetites. For the Queensland Government’s top investment adviser, Jim Christensen, that has meant spending countless hours over the last year, meeting with stakeholders and ensuring they, themselves, have a clear understanding of their own investment objectives, and how much risk they are prepared to take on in a bid to meet them. “Quite a few of our clients have been served pretty well by their strategy for some time, but the world is different and more challenging now,” Christensen says. “Getting absolute clarity around what a fund’s objectives are and marrying that with the strategy is very important, because if we’re not on the same page, then down the track there are going to be disagreements.” Christensen concedes it is a “strange conversation” to initiate. “Because returns over the past decade, the past five years in particular, have been very good, lots of funds with a moderate-to-high risk profile have delivered double-digit returns,” he explains. “But over the next five years, we think returns on these moderate-risk funds are going to be around half that, with a high single-digit return a pretty good outcome.” QIC began life in 1991 as the Queensland Investment Corporation, tasked with
\ CIO PROFILE
delivering long-term returns to help the state fund its asset liabilities associated with programs such as WorkCover and public servants’ defined-benefit plans, as well as the investment portfolios backing local councils, hospitals and cultural institutions. Since 2001, the Queensland Governmentowned firm has been allowed to take on external mandates, prompting its growth into a major player as a specialist global diversified alternatives house. Today, QIC has more than $85 billion under management on behalf of 110 institutional clients, half of which are from outside the Queensland Government family, including superannuation pension managers based in other states and internationally. Christensen regards it as a big advantage for QIC that it operates on both the buy and sell side. “It means that there are more expertise and resources in my team than if we were investing only QIC’s own money,” he says. The 404-member investment team is growing. In late January, former DMP Asset Management chief executive Allison Hill joined QIC, reporting directly to Christensen, in the newly created role of director of investments for the global multi-asset division. She’ll continue many of the conversations around risk appetite. As Christensen sees it, asset owners have three options for how they react to the lower-return outlook: ramp up risk, lower their return targets, or come to accept targets may be missed for a number of years. He believes the latter is the only sensible response. “Most people like to be successful in their objectives, so they either lower their objectives or they take on more risk,” he says. “But the world is genuinely uncertain and you’ve got to ask yourself if it is actually prudent to take on more risk.” Christensen’s view is that in most cases it is not, but that ultimately depends on the risk profile of the end client. Most of QIC’s clients have longer-term horizons, which means they can handle some short- to medium-term illiquidity risk, but he is worried about the outlook for the group of smaller clients with a shorter time horizon and mandates that make them unable to withstand capital losses. Taking the time and effort to ensure
expectations around risk are aligned up front makes it easier to act quickly when markets turn. “It’s about getting risk levels set at a tolerance that makes sense and setting strategic long-term asset allocation,” Christensen says. “Once we’ve got that in place, there’s a lot of trust there that means we can change managers or allocations so long as they are within these broad, agreed ranges.” To date, QIC has not made any major strategic changes to client portfolios and is maintaining risk levels at about their long-term averages.
HOMECOMING It is a little over two years now since Christensen returned to QIC to take on the top job as chief investment officer and managing director of its global multi-asset division. He joined from TelstraSuper, the country’s largest corporate super fund, where he had held the role of CIO for six years. Prior to joining TelstraSuper, Christensen had spent more than 12 years at QIC, culminating as managing director of its active-management division. It has been a happy homecoming for the Queenslander, who from 2010 to 2015, commuted between TelstraSuper’s
Melbourne head office and the family home in Brisbane almost weekly. Christensen couldn’t have been happier when the opportunity came up to lead the investment team at QIC and spend more time with his wife and kids. Such plum positions in the industry are few and far between in the Sunshine State. While QIC runs as an independent body, being government-owned can bring a perceived pressure to invest in the state of Queensland. “We get pitched a lot of stuff from folk up here in Queensland, and from all over the world…Having a lot of money to invest means you’re a very popular guy,” Christensen observes. However, he says that while local deals have the advantage of easier due diligence, their financial merits have to stack up. “You probably know your own back yard a bit better, but you’ve still got to hold it up against the lens of what other stuff is available around the globe,” he says. “Everything needs to justify its place in the portfolio.”
LIQUID ALTERNATIVES Over a truly long-term horizon, of 20-30 years, Christensen still sees great value in real illiquid assets, although he laments that it is getting harder to find
The world is genuinely uncertain and you’ve got to ask yourself if it is actually prudent to take on more risk
CIO PROFILE \
Jim Christensen QIC CIO AND MANAGING DIRECTOR GLOBAL MULTI-ASSET Appointed January 2016 PREVIOUS ROLES 2010-15 1997-2009
TelstraSuper, chief investment officer QIC, various roles culminating as managing director, active management division
QUALIFICATIONS Christensen has earned a master’s degree in economics, and bachelor’s degrees in science and economics, all from the University of Queensland.
QIC CHIEF EXECUTIVE: Damien Frawley CHAIR: Don Luke TOTAL FUM: $85 billion PERCENTAGE OF FUM MANAGED INTERNALLY: 69.2 per cent PERCENTAGE OF FUM MANAGED ON BEHALF OF QLD: 49.4 per cent TOTAL STAFF: 828 INVESTMENT STAFF: 404
real estate and property deals that look attractive in the short-to-medium term. One of the main ways QIC has been trying to juice up returns within the agreedupon risk settings of clients’ strategies is by allocating more to its diversified liquid alternatives funds. “Tactically, over the past six months, we have been adjusting our exposures to liquid assets in line with our internal dynamic asset allocation processes,” Christensen says. “This has generally meant a slight reduction in equity exposure and an increase in exposures to fixed interest.” QIC’s approach to building liquid alternatives strategies is to find systematic, factor-based exposures that offer excellent transparency. Basically, it’s looking for equity-like returns that are largely uncorrelated with equity risk. The strategies are typically long-short funds, although QIC does offer long-only solutions for clients with mandates that preclude shorting.
\ CIO PROFILE
The systemic risk factors that can be isolated and targeted include quality, value, carry, momentum, trend-following and volatility, across a wide range of liquid markets. Volatility risk-premia strategies have been favoured recently. As a result, when volatility made a notable return to global markets in late February, the liquid alternatives strategy dipped between 1.5 per cent and 2 per cent, but outperformed global equities, which were down 3.5 per cent to 4 per cent for the month. This was “broadly in line with expectations”, Christensen says. “The overall strategy has strong risk-control measures that limit the impact of extreme movements in volatility, such as we experienced in February.” Since its inception, the QIC Liquid Alternatives Fund has generated total returns of about 6 per cent annualised, in line with its objective. “Within the liquid alternatives strategy, there are a number of specific volatility strategies, which ranged from flat to negative outcomes in February,” Christensen says. “Over time, these strategies have contributed strongly to the fund’s overall performance.” Liquid alternatives remain only about 5 per cent of QIC’s total portfolio, which is dominated by real assets such as property and infrastructure.
to the Australian economy and financial markets, as interest rates inevitably rise in the years to come, Christensen warns. “In terms of our doomsday scenarios, they are all linked to things like a housing market crash,” Christensen says. “The level of household debt is high and that’s probably one of the largest concerns we’ve got. If you look at interest payments, compared with what they were pre GFC, they are relatively low, so there is headroom to stomach some extra interest payments, but everyone should be aware that it is going to happen at some point.” When rates do rise, Christensen notes, some households won’t cope with their mortgage repayments. “Some households have been paying down more than the minimum for some time, so will have a buffer, but clearly there are also newer entrants with a lot of debt that will be under stress if marginal rates trickle higher.” That said, Christensen remains confident that the Reserve Bank of Australia won’t allow a housing bubble collapse. “Rates will rise at a moderate pace in Australia, while remaining well below historic averages for the foreseeable future,” he predicts. “The increase in rates will invariably have a negative impact on the sector, but the moderate backup in yields means this is manageable.
The macroeconomic risks Christensen worries more about, in terms of the likelihood of them happening, all come from China. “In Australia, we are very much linked to China’s fortunes,” Christensen says. QIC’s quant team is focused on monitoring the risks of a hard landing for China’s slowing growth, and Christensen visits China at least once a year to “get a feel” for things on the ground. “I was in China in August last year, and the mood was generally positive on the outlook from the locals,” Christensen says. “On China, we have a broadly consensus view that growth is moderating, in line with government forecasts, but will remain healthy and supportive of global economic activity.” For QIC, one of the advantages of being a state-owned entity is the entrée it provides into the international sovereign wealth fund community.
Most of the investment decision-making processes at QIC are run using quantitative models, which indicate that mortgage stress is, hands down, the biggest threat
The level of household debt is high and that’s probably one of the largest concerns we’ve got
EYE ON CHINA
CIO PROFILE \
This includes an ongoing dialogue, and some co-investments, with the roughly $US1 trillion ($1.3 trillion) China Investment Corporation, although Christensen remains tight-lipped on the specifics of that relationship. “We’ve got good relationships with a number of government funds around the world, but particularly up in Asia,” he says. “They’ve got a much deeper insight into what’s happening in China than we will have.” Another benefit of working with sovereign wealth funds is the opportunity to learn from how they manage the challenges that come with massive scale. “Some of these organisations have hundreds of billions, or even trillions, of dollars and there are all sorts of challenges that come with putting that sort of money to work.”
KEEPING CALM QIC has 10 offices around the world, with staff working out of: Brisbane; Sydney; Melbourne; New York; Los
We’ve got good relationships with a number of government funds around the world, but particularly up in Asia. They’ve got a much deeper insight into what’s happening in China than we will have
Angeles; Cleveland, Ohio; San Francisco; Fort Lauderdale, Fla.; London and Copenhagen. When Christensen isn’t travelling, members of the QIC investment team know that if they want to talk to him about an idea, they can always join him on his daily run along the Brisbane River. “If people want to find me, they can come
for a run with me at lunchtime,” Christensen says. “I like to run most days. So, it irritates me if I can’t get out for 6-8 kilometres.” He credits the running with helping him keep a clear, calm head. “Markets will do unpredictable things,” he says. “And if you’ve been around long enough, you’ll realise that…because you can’t be jumping at shadows.”
SERIES 1: BOND BASICS
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\ SUPER AWARDS 2018
A MERGER OF EQUALS
The Conexus Financial Superannuation Awards 2018 recognised excellence and innovation in high-performing funds of all sizes. By Kate cowling | Sally Rose | Tahn Sharpe Photos Matt Fatches
FOR THE FIRST time in the six-year history of the Conexus Financial Superannuation Awards, the judging committee awarded the coveted Fund of the Year prize to two soon-to-merge funds. Fund of the Year and the rest of the awards were announced at a gala black-tie dinner held at the Ivy Ballroom in Sydney on March 8. While there are many other awards nights on the industry calendar, the Conexus Financial Superannuation Awards are unique in that they are not aligned with a research or ratings house, and do not charge funds to participate. Actuarial and consulting firm Rice Warner assists with quantitative analysis. The judging committee comprises California State Teachers’ Retirement System (CalSTRS) chief investment officer Chris Ailman, Fund Executives Association Ltd (FEAL) chief executive Joanna Davison, CHOICE chief executive Alan Kirkland,
Financial Services Council chief executive Sally Loane, Rice Warner chief executive Michael Rice, and former minister for financial services and superannuation, Bernie Ripoll. Australian Prudential Regulation Authority deputy chair Helen Rowell is a special adviser to the judging committee, which remains the only truly independent awards panel in the sector. “APRA views sound governance practices as fundamental to the delivery of value-for-money outcomes for members,” Rowell says. “I was, therefore, very pleased to see the steps taken by the judging panel this year to enhance the approach to assessing governance and give it more weight in determining the winners in various categories.” The 2018 Conexus Financial Superannuation Awards were produced with thanks to platinum sponsor AIA Australia and event partner FEAL.
“AIA is honoured to sponsor the Conexus Financial Superannuation Awards, because we feel this is a great way of recognising the important work funds do, looking after millions of members,” AIA Australia head of corporate and master trust clients Anthony Clough said.
MALCOLM TURNBULL, Prime Minister
SUPER AWARDS 2018 \
KATHERINE KASPAR, Kinetic Super & SCOTT HARTLEY, Sunsuper
FUND OF THE YEAR KINETIC SUPER AND SUNSUPER Merger partners Kinetic Super and Sunsuper were jointly awarded the prestigious overall prize for Fund of the Year. Sunsuper chief executive Scott Hartley said it was a “great honour” and thanked the judges for recognising “two great funds coming together”. Kinetic Super chief executive Katherine Kaspar agreed. “I’m feeling very emotional right now because this is Kinetic’s final year, it’s our last hurrah and we are really going out with a bang,” she told the crowd after the fund won Small Fund of the Year. “This is validation that we are continuing to meet the needs of our members with low fees, solid investment returns and a world-class service offering, including our insurance offering. It is fair to say our metrics have never been better.” Kaspar said the awards highlighted that the fund’s board members had made the bold decision to merge even though Kinetic’s good performance metrics meant they didn’t have to do so. “It was an honourable decision to… get even better benefits [for our members] and therein assist them in getting better retirement outcomes through a merger with Sunsuper,” she said. She said Sunsuper shared Kinetic’s values, respected its heritage and was committed to serving its members.
MARK DELANEY, AustralianSuper
CIO OF THE YEAR MARK DELANEY, AUSTRALIANSUPER AustralianSuper’s Mark Delaney was named Chief Investment Officer of the Year. The Chief Investment Officer of the Year award goes to the CIO who is deemed to have made the greatest contribution over the last 12 months to the implementation of investment strategies and the advancement of members’ interests. Speaking via video from California, CalSTRS CIO Chris Ailman announced Delaney as the winner. Delaney was unable to collect his award in person, but said via video that it was a “great honour” to win, especially amid a field of “such tough competitors”. Delaney thanked his investment team. “They do almost all the investment decision-making and lead the process, so it’s a team award and I would really like to thank them very much,” Delaney said. He also thanked his colleagues in the rest of the organisation and AustralianSuper members. Other finalists for CIO of the Year were: Australian Ethical’s David Macri, MLC’s Jonathan Armitage, Statewide Super’s Con Michalakis, and Sunsuper’s Ian Patrick.
\ SUPER AWARDS 2018
PENSION FUND OF THE YEAR QSUPER
KINETIC SUPER TEAM
QSuper was named Pension Fund of the Year yet again. Labor Senator Jenny McAllister presented the award to QSuper executive general manager, strategy and performance, Glen Hipwood. Hipwood said the QSuper team was proud to have won the award for the fourth consecutive year. Over the last 12 months, a focus for the fund has been making sure pension-aged members know about its innovative balance transfer bonus. “One of our key objectives is not just having good products, but making sure our members understand and use them,” Hipwood said. Other finalists for Pension Fund of the Year were: AustralianSuper, LGIAsuper, Sunsuper, UniSuper, and VicSuper. The shortlist was chosen based on an evaluation of each fund’s product design, member services, fees and investments.
MEMBER SERVICES FUND OF THE YEAR VICSUPER IAN CHISHOLM, Kinetic Super TEIFI WHATLEY & SCOTT HARTLEY, Sunsuper
DEFAULT FUND OFTHE YEAR AUSTRALIANSUPER AustralianSuper was named Default Fund of the Year. Australian Prudential Regulation Authority deputy chair Helen Rowell presented the award to AustralianSuper group executive, product, brand and reputation, Paul Schroder. Schroder said it was important for Australians to go into robust default funds and that the industry has a part to play in facilitating that. “These are people who don’t make the choice themselves, let’s make sure they are defaulted into funds that are making them the most money and offering them the best insurance,” he said. Other finalists for Default Fund of the Year were: LGIAsuper, QSuper, Sunsuper, Super SA, and UniSuper.
VicSuper was named Member Services Fund of the Year. CHOICE chief executive Alan Kirkland presented the award to VicSuper chief executive Michael Dundon. “I’m most proud of the digital efforts that we’ve made,” Dundon said. “We’re moving forward in terms of engaging our members by offering robo-advice type education tools and packaging in a really personalised and integrated way.” Kirkland said the judges assessed the quality of member services based on several factors key to member satisfaction and engagement. “The greatest emphasis was placed on the quality of a fund’s advice network – a key tool for members looking to improve their retirement outcomes,” Kirkland said. “The quality and accessibility of the funds’ websites and online tools were also important scoring criteria.” Other finalists for Member Services Fund of the Year were Cbus Super, QSuper, Sunsuper, TelstraSuper, and UniSuper.
SUPER AWARDS 2018 \
BEST TECHNOLOGY OFFERING BT PANORAMA BT Panorama picked up the award for Best Technology Offering. Financial Services Council (FSC) chief executive Sally Loane presented the award to BT Panorama acting head of product management and platforms, Dina Kotsopoulos. Kotsopoulos said the BT Panorama team was delighted to win the award for the second consecutive year. “I think the fact that we’ve been able to integrate into the bank, and that we’ve got a mobile app that allows our end-to-end members to engage with us, is why we’ve been successful in this space,” she said. Other finalists in the category for Best Technology Offering were: AustralianSuper, Cbus Super, HESTA, QSuper, and Russell Investments Master Trust.
JENNY MCALLISTER Australian Labor Party Senator for NSW
BEST ADVICE OFFERING VICSUPER VicSuper won Best Advice Offering. Former parliamentary secretary to the Treasurer Bernie Ripoll presented the award to VicSuper executive manager, distribution, Josh Parisotto. Parisotto said change in the financial services industry, including the ongoing Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, has heightened the need for advice and member demand matches that. “The part of our offering we are most proud of is the depth and the breadth of advice services we provide to our members,” he said. “It’s fair to say we’re looking at branching out our services, in terms of ancillary benefits around estate planning and aged care.” Other finalists for Best Advice Offering were: AustralianSuper, First State Super, QSuper, Sunsuper and UniSuper.
BEST INSURANCE OFFERING KINETIC SUPER
HELEN ROWELL, APRA & PAUL SCHRODER, AustralianSuper
TO SEE THE FULL PHOTO GALLERY AND EXTENDED COVERAGE PLEASE VISIT VICSUPER TEAM
Kinetic Super has taken home the trophy for Best Insurance Offering. Rice Warner chief executive Michael Rice presented the award to Kinetic Super head of member services George Tannourji. Tannourji said, “As a small fund, we’ve created a really innovative design, which helps members make sure they’ve got enough cover without significantly eroding their account balance.” The recognition comes just weeks before the high-performing fund is set to finalise its merger deal with Sunsuper, which won Large Fund of the Year. “The merger with Sunsuper is the big focus,” Tannourji said. “There are a lot of synergies in our culture, but bringing everybody together is going to be a bit of a challenge. So, there’s a mixture of excitement and trepidation.” Other finalists for Best Insurance Offering were: AustralianSuper, BT Super, Statewide Super, Sunsuper, and UniSuper.
\ SUPER AWARDS 2018
INNOVATION AND TRANSFORMATION VICSUPER
SMALL FUND OFTHE YEAR KINETIC SUPER
A successful launch of its digital advice offering earned VicSuper the gong for Innovation and Transformation. Conexus Financial head of institutional content Amanda White presented the award to VicSuper chief executive Michael Dundon. Dundon said it had been a “long hard road” since the fund first embarked on building its new robo-advice tool three years ago. “Looking back, probably what I am most proud of is that we took the time at the start to really listen to members about what they needed first,” he said. Other finalists in the Innovation and Transformation category were: REST Industry Super, Russell Investments Master Trust, Statewide Super, and Sunsuper.
Kinetic Super has taken home Small Fund of the Year. Fund Executives Association Ltd (FEAL) chief executive Joanna Davison presented the award to Kinetic Super chief executive Katherine Kaspar. The room cheered especially enthusiastically for Kinetic’s win, recognising that the fund will cease to exist as a separate entity from mid-May. Kaspar spoke of how the board and executives of the high-performing small fund took the bold decision to merge with Sunsuper to give its members even better outcomes. “We kept asking what more can we give to our members; can we enhance the service offering? Can we enhance our digital footprint? Can we engage in a better way with our members? That was part of our decision-making,” she said. Other finalists in the Small Fund of
the Year category were: Bendigo SmartStart Super and BUSSQ.
MEDIUM FUND OF THE YEAR LGIASUPER LGIAsuper has taken home Medium Fund of the Year. NZ Super chief investment officer Matthew Whineray presented the award to LGIAsuper chief operating officer Timothy Willmington. “We’ve invested heavily in the digitalised platform in the last year and moved onto a new administration platform with Bravura,” Willmington said. “The combination of those two has certainly led to greater servicing for our members.” The future for LGIAsuper is about using technology to benefit members, he added. “We want to continue focusing on member servicing,” he explained, “and take the fund to a whole new level in terms of the digital offering, straight through processing, those sorts of things.” Other finalists in the Medium Fund of the Year category (for funds with between $5 billion and $10 billion in assets) were: EISS Super, Energy Super, LG Super, and Statewide Super.
L ARGE FUND OF THE YEAR SUNSUPER
BT PANORAMA TEAM
GRAHAM LONG, Wayside Chapel
TIMOTHY WILLMINGTON, LGIAsuper
Sunsuper has taken home the Large Fund of the Year. AIA Australia head of corporate and master trust clients, Anthony Clough, presented the award to Sunsuper chief executive Scott Hartley. Hartley said the win was a reflection of the transformation the organisation has been through, from the board through to member services. “Members are more engaged with their superannuation and they are making choices,” he said. “The new basis for competition is online; it’s data, it’s digital and it’s the member experience. We are seeing that in the work we’re doing, in the stats, and it’s really exciting. This is the stuff that will make a difference to people’s retirement outcomes.” Other finalists in the Large Fund of the Year Category (for funds with more than $10 billion in assets) were: AustralianSuper, HESTA, QSuper, Sunsuper, TelstraSuper and UniSuper.
WITH OVER $333 BILLION AT STAKE, TRUST IS MORE IMPORTANT THAN EVER. LET’S MEASURE UP. AN OPEN LETTER TO THE AUSTRALIAN INVESTMENT MANAGEMENT PROFESSION. As a collective that invests more than $333 billion of superannuation assets and representing more than 5.2 million superannuation members, we, the undersigned, and CFA Societies Australia ask investment managers to take concrete steps to ensure they are placing their clients’ interests ahead of their own, for the ultimate benefit of Australian workers, retirees, and taxpayers whose funds we oversee.
By signing this open letter, we join a number of our industry peers in the United States and Canada, representing nearly $1.9 trillion in AUM.
SIGNED 15 MARCH 2018 BY (IN ALPHABETICAL ORDER):
CFA Institute, a global organization of more than 145,000 investment management professionals committed to the highest standards of education and ethics, has created a powerful tool for demonstrating public commitment to best practices in asset management: the CFA Institute Asset Manager Code (the Code).
THIS ENTERPRISE-LEVEL CODE COVERS A WIDE RANGE OF CLIENT-FOCUSED TOPICS, INCLUDING: Communication with Asset Owners Risk Management Manager Conduct Conflicts of Interest Confidentiality By claiming compliance with the Code, firms dedicate themselves publicly to putting client interests first, raising standards of practice, and contributing to the transparency and integrity of the greater profession. Over 700 asset management firms in more than 30 countries and regions already make that public commitment. We urge investment management firms to embrace the standards set forth in the Code. We are convinced that doing so will send a powerful message to our employees, business partners, and stakeholders who count on us to manage the assets entrusted to our care.
Learn more about how your firm can adopt the Code at cfainstitute.org/assetcode
© 2018 CFA Institute. All rights reserved.
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DUCKS – in a–
In this Q&A, the chair of the Cbus Super investment committee, former AMP Capital boss STEPHEN DUNNE, outlines how he is ensuring the right systems and processes are in place to support the $43 BILLION CONSTRUCTION INDUSTRY fund’s growing scale and complexity. Edited by Sally Rose + Photos Matt Fatches
CHAIR’S SE AT \
[People] are moving because of a desire to be able to focus clearly on their craft and to be closer to the end recipient of their success, an attraction to our long-term investment horizon, the desire to be engaged in whole-of-portfolio thinking, and the Cbus culture. Q HOW DO YOU ENSURE THAT REMUNERATION INCENTIVES ARE ALIGNED TO THE CULTURAL VALUES YOU WISH TO PROMOTE WITHIN THE ORGANISATION? Q YOU JOINED THE BOARD OF CBUS SUPER AS CHAIR OF THE INVESTMENT COMMIT TEE IN 2016. WHAT IS THE MOST IMPORTANT FACTOR IN ENSURING GOOD GOVERNANCE AS THE FUND EXPANDS ITS INTERNAL INVESTMENT CAPABILITIES? A There are a number of investment governance factors we are focused on, but one in particular we’ve been paying a lot of attention to lately is ensuring clarity around decision accountability. Being clear who is responsible for making an investment decision, what is needed and expected of the person or team making that decision, and how success will be recognised and over what time period. As we internalise more investment capability, clarity around investment decision-making grows in importance. We are clear that the investment committee must own the long-term strategic asset allocation decisions. In doing so, we engage heavily with CIO Kristian Fok and his team to understand their thoughts and recommendations but, at the end of the day, the investment committee owns the call. Q DO YOU BELIEVE OFFERING PERFORMANCE-BASED PAY INCENTIVES IS AN ESSENTIAL DEVELOPMENT FOR SUPER FUNDS THAT WANT TO AT TRACT TOP INVESTMENT TALENT? A Not essential, in the sense of being
central to the proposition, but it is one necessary element. The reason Cbus has been successful in attracting top investment talent is not because of pay.
A It is the board’s responsibility to ensure that the overall remuneration structure is aligned to the values of the organisation. If the firm values collaboration and longterm success, then [an incentive] structure that rewards individual performance measured over short-term periods will be a massive tide against the culture you are trying to promote. Having got the macro structure aligned previously, I have found identifying, rewarding and celebrating role models of the firm’s cultural values a powerful tool. Using a two strikes and you are out approach for those who are not a cultural fit for the firm is equally powerful. Q WHAT IS YOUR TOP TIP FOR INVESTMENT PROFESSIONALS ABOUT HOW TO IMPROVE THE QUALIT Y OF THEIR COMMUNICATION WITH THEIR BOARD, AND INVESTMENT COMMIT TEE IN PARTICUL AR? A Keep it short. If you cannot get your recommendation and rationale across succinctly in a five-page board paper, then you haven’t got your own thinking clear enough. Q HAVING BEEN A CEO (OF AMP CAPITAL FOR 12 YEARS), WHAT DO YOU THINK ARE THE HALLMARKS OF A CONSTRUCTIVE REL ATIONSHIP BETWEEN SENIOR EXECUTIVE MANAGEMENT AND THE BOARD? A Clarity and respect. Clarity of decisionmaking, respect for the value each group brings to the success of the firm. CEOs and management teams often undervalue their boards, seeing them as a compliance function or a group to keep happy. In my
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sign up to the asset manager code of professional conduct, which encourages the practice of ethical principles that put the interests of clients first. Q WHAT DO YOU SEE AS THE BIGGEST CHALLENGE TO IMPROVING DIVERSIT Y IN THE FINANCIAL SERVICES SECTOR?
early days as a CEO, I could certainly have been accused of this mindset. Top CEOs can clearly articulate the skills and competencies of their board and bring these to bear for the firm’s success and be clear about how their team works with the board to fully utilise these skills. Where new skills are needed, voice that view to the chair. Q WHAT IS THE MOST STRIKING THING YOU’ VE LEARNED THROUGH YOUR INVOLVEMENT WITH THE BANKING AND FINANCE OATH OVER THE L AST DECADE? A The global financial crisis, subsequent actions by central banks, market rebounds, and excessive liquidity provide an environment where many lessons were dished out, and often brutally. But for me, the most important lesson was not with regard to market behaviours but around the importance of connection with the community. The financial services industry plays an incredibly important role in society. Earlier this decade, the industry was shown to have clearly lost sight of that role and subsequently lost the community’s trust. Firms and the people operating in
the banking and finance sector need to recognise that they have a duty not just to shareholders and to clients but to the community at large. Q IN JANUARY 2018, YOU TOOK ON A NEW ROLE AS CHAIR OF THE CFA SOCIETIES OF AUSTRALIA ADVOCACY COUNCIL. WHAT DO YOU MOST WANT TO ACHIEVE IN THIS ROLE? A Having worked with many charterholders, I value how the institute seeks to continually strengthen the professional capabilities of its members and instil a solid ethical foundation in the profession. The purpose of the Advocacy Council is to champion ethical behaviour in local markets, promote benchmarks and standards for good market integrity and establish credentials for professional excellence in financial services. We aim to do this by giving charterholders in Australia and New Zealand a voice in shaping the future of the financial markets in a way that serves the community at large. In the short term, the council is advocating for Australian and New Zealander fund managers to
A A significant amount of progress has been made in improving the diversity of workforces in financial services firms. The financial services boards I am involved with all have workforce diversity on their agenda and I see tangible progress being made, with changed recruitment practices and successful flexible work arrangements being embraced and replicated. The next big challenge is promoting inclusion to get the benefit from a diverse workplace. Quite a number of years ago, a colleague introduced me to a book, The Loudest Duck by Laura Liswood, which discusses how we can embrace differences to get the most out of diverse teams. I remember when I had Laura come to speak to my management team and we were discussing the saying ‘the squeaky wheel gets the grease’. My Japanese and Chinese colleagues had never heard of that saying but had heard of the saying the ‘the loudest duck gets shot!’ This highlighted to me that peoples’ different gender, cultural heritage and upbringing brings different insights and ways of working that are all valuable. Leaders need to develop their capability not only to recognise the differences people bring to the table but also how to tap into those differences. Q DO YOU BELIEVE IT WOULD BE AN IMPROVEMENT IF SUPER FUND BOARDS WERE REQUIRED TO APPOINT INDEPENDENT DIRECTORS TO AT LEAST ONE-THIRD OF THEIR BOARD POSITIONS? A No. It is arbitrary. The most important question to ask of super boards is do they have the set of competencies needed to steer their super fund into the future. Where needs are identified, boards need to support the chair and nominations committee in seeking out individuals who will complement other directors’ skills. This is what competent boards do and what members expect.
FX’S UNEARNED TRUST Operators in the institutional foreign exchange market have a track record that doesn’t warrant the confidence asset managers show in them.
BRETT ELVISH FOUNDER AND DIRECTOR | FINANCIAL VIEWPOINT
AS A FREQUENT traveller in Asia, I typically take cash with me to convert into local currency at a money changer. I do this because the banks at home hit you with marketing lines such as no commissions, no fees – and then sting you on the exchange rate. That’s not to say there aren’t challenges using money exchanges in Asia. Travelling in Bali recently, I noticed a number of money changers offering rates that were simply too good to be true – a red flag that you might be getting counterfeit cash. Yet many travellers, full of the holiday spirit (or other spirits!), were likely reeled in. High fees, ambiguity, marketing tricks and shady
practices are, unfortunately, to be expected in this context, but it is not only mugs on holiday who are getting ripped off in the global FX markets – institutional investors often cop a raw deal, too. Institutional FX activity is complex, opaque, and plagued by asymmetric information favouring the custodians and investment banks on the sell side. The sector is littered with scandals. Globally, fines are running into the billions of dollars across custodian and investment banks, and Australia’s five largest banks
UNQUANTIFIED COST When it comes to FX matters, the attention of chief investment officers is typically focused on hedging and associated liquidity management. What is not often appreciated is that FX can be the largest asset owner trading activity and for many it would be the largest cost that remains unquantified and unmonitored, despite regulation encouraging otherwise. Trust in the chosen service provider is typically relied upon. But is that trust well founded, particularly when opposing economic interests
Interests are not always aligned, and execution convenience may be at the expense of best execution
have all been slapped with enforceable undertakings relating to FX activities in the last 18 months. Every asset owner and asset manager has been exposed to these issues, yet few have taken substantive action and have appropriate governance arrangements in place.
are at play and the track record of FX participants is clear? Custodians are often given great or unlimited discretion in determining FX rates applied to client trades, and they are not held to high standards of transparency. Some big fines have made custodians more cautious, but too many are still
not being held to account. Furthermore, despite custodian rhetoric about straight-through-processing, custodian FX is still plagued by manual activity and associated errors. Small errors on large volumes can be material and easily go undetected – to either party’s detriment. Blind trust is clearly inappropriate. Interests are not always aligned, and execution convenience may be at the expense of best execution. Many asset managers (internal or external) are not quantifying their FX costs. This all raises questions about the value of best-execution policies reviewed as part of operational due diligence, and how managers are conforming with their best-execution contractual obligations. Good practice and Australian prudential standards dictate that material service providers should be independently monitored and evaluated, regularly. Upon launching the FX Global Code last year, Reserve Bank of Australia deputy governor Guy Debelle said, “The foreign exchange industry has been suffering from a lack of trust.” I would say that many FX participants are being given too much trust, of which many are not worthy. Ethics is sometimes defined as doing the right thing when no one is watching. Well it is clear that when it comes to FX markets, the right thing, or at least investors’ interests, are not always being well looked after. Fiduciaries are on notice, thus also at fiduciary risk in this regard. The good news is that there is plenty that can be done to hold FX providers to account. The solution requires quality actionable data, diligence and perseverance.
IN YOUR MEMBERS’ MOMENT OF NEED, WE’RE HERE. In 2017 alone, we paid over $1.3 billion in claims to both Group members and Retail clients. That’s over $5 million every working day.
Because we’re here for your members when they need it.
TELE-CLAIMS, ONLINE TRACKING EASE BURDEN MTAA SUPER has made it easier for members to track their claims online and lodge them over phone, as part of efforts TO MEET OR EXCEED SERVICE STANDARDS from the incoming Code of Practice.
CHRIS PORTER EXECUTIVE MANAGER OPERATIONS | MTAA SUPER
Chris Porter is the executive manager of operations at MTAA Super. He has more than 32 years of industry experience.
IN MARCH, MTAA Super announced we will be amongst the first funds to adopt the new Insurance in Superannuation Voluntary Code of Practice. MTAA Super was a key member of the working group tasked with the development of the code, joining with other superannuation providers, insurers, and industry associations to ensure it addressed member needs and improved insurance products. The code will give clarity and certainty to members about their insurance and help them better understand the important benefits it provides. MTAA Super already meets or exceeds many of the requirements set out in the code. Well before it was drafted, we instituted a fee cap to ensure insurance was affordable for our members. This was particularly important for
low-income earners and young people who are less likely to have dependants or significant debt. The average cost of default insurance for our members is about 0.8 per cent of a member’s salary, meeting the code’s target of 1 per cent or less. MTAA Super also meets
all age groups. For members with our default cover (which is most of our members), it also resulted in a substantive reduction in their overall insurance fees. We know making an insurance claim can be daunting and often happens under difficult circumstances.
We know making an insurance claim can be daunting and often happens under difficult circumstances
a number of the service levels outlined in the code in regard to making a claim. We are seeking to enhance our service to ensure we meet or exceed all aspects of the code.
IMPROVING CL AIMS As part of MTAA Super’s member-first philosophy, we are always looking to secure the optimum insurance offering for our members. In 2017, we negotiated competitive insurance fees for death and total and permanent disablement (TPD) cover, securing a significant decrease in the cost of this cover across
BET TER SERVICE To support our members when they need it most, we recently launched two new claims support services – our online claims tracker and our teleclaims service. The tele-claims service is a dedicated telephone line to assist members making a TPD or income protection claim. Instead of filling in forms, members can call a claims assessor directly and talk through the details of their claim in person. As members making a claim may be incapacitated, uncertain and concerned,
this approach makes the claims process more accessible and offers a human voice at an often-challenging time. Our online claims tracker is a secure portal where members can track the progress of their claims at any time. It shows members the status of their claim and allows them to upload documents to their dedicated claims assessor. The tool also notifies members of any outstanding items required to keep their claim progressing. This means members always know their claims’ status and reduces any undue delays in the process.
MORE TO COME While we meet or exceed many of the code’s standards, we still have some work to do. Changes that require updates to our policies, procedures or administrator’s systems will pose the greatest challenge. We will be working with our insurer and administrator to understand the impact of the new standards, so we can plan and properly implement the required changes without hurting our current service levels. As our administrative staff are often the first point of contact with our members, we are working hard to ensure they share our passion for the code and understand the benefits it will bring our members and the broader industry. We are confident we will meet all the code’s standards well within the 2021 deadline. 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.
and the fate
of the WOR K FORCE
Rather than be bedazzled or befuddled by NEW TECHNOLOGIES such as robotics and artificial intelligence, SUPERANNUATION INDUSTRY LEADERS need to think carefully about how they will reshape the workforce – for both their members and staff. ADVANCEMENTS IN AUTOMATION, robotics and artificial intelligence are re-shaping workforces across the developed world. While some of the changes are exciting, average workers are increasingly finding themselves lacking the rights associated with traditional employment, with potentially dire repercussions for those individuals as they approach retirement. Many experts are now talking about society being on the cusp of a fourth industrial revolution, in which the changes brought about by mainstream application of AI technology will be comparable to the modern industrial revolutions wrought by the steam engine, electrically powered mass production, and computing. AI may still be relatively nascent but its effects, and the effects of less-sophisticated digital technologies, have already given birth to what is known colloquially as the
‘gig economy’. This refers to the growing number of workers who earn a living via companies that never employ them – for instance, Uber drivers. These workers never get access to the benefits of more traditional employment, such as sick leave, holiday pay, or the superannuation guarantee. The rise of the gig economy and what it means for Australia’s retirement system was a prevalent theme in many of the presentations and panels at the Conference of Major Superannuation Funds 2018, held in Brisbane, March 14-16. Among many of the presenters and delegates there was a common feeling that the union movement and superannuation industry must act to shore up rights for workers in the gig economy if the nation’s enviable retirement savings system is to survive the advent of the fourth industrial revolution.
25 NICHOLAS DAVIS World Economic Forum
World Economic Forum executive committee member and head of society and innovation, Nicholas Davis, encouraged the gathering of super fund trustees to feel empowered that they are in a position to have a positive influence on how the emergence of the gig economy will affect their members. “The Australian economy is shifting on a fundamental level,” Davis said. “But it’s a myth that this is something that is just coming at us from Silicon Valley that we have no control over…Super funds, in particular, can play a powerful role in defining how the workforce is reshaped.” Davis said that although only about 1 per cent of Australian workers are part of the gig economy, this was expected to increase dramatically in the years ahead. He also noted that there are lessons to be learned from observing the problem of rising income inequality in the US, where 16 per cent of workers are now in non-standard employment contracts. He said it was important to think about how new technologies might augment existing jobs, rather than just automate them, noting that in some US cities hit hard by the collapse of the domestic car-manufacturing industry, about 50 per cent of displaced workers never re-entered the workforce. “We need to think about how the opportunities that come with the fourth industrial revolution can be spread more broadly…and I see a role for super funds and unions in that conversation,” Davis explained.
POOR TO BE HARDEST HIT He said that while it is impossible to predict what the future workforce will look like, super fund trustees should ask questions such as: How will benefits be realised and distributed? Who will be worse off? And how might technology advancements help us become more human, not less? “Technology is not neutral,” Davis said, as he urged delegates to remember that the widespread launch of automation, robotics, and AI will probably cause more harmful disruption to low-income workers. As an example, he pointed to the distress caused to thousands of Australian welfare recipients last year as a result of Centrelink’s botched robo-debt collector campaign.
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Queensland Council of Unions general secretary Ros McLennan said the job of the super fund industry was not just to “take the temperature” of Australian society but also to “change the temperature”. “We need to be mindful about how we use technologies that may displace people and their ability to look after their families,” McLennan said. “We need to have a stronger collective voice on turning back the tide on insecure work.” She said roughly 40 per cent of Australian workers fall into the category of insecure employment, with many of them struggling to get by week-to-week – let alone thinking about putting anything aside in super. Office of Innovation and Science Australia chief executive Dr Charles Day said it was sensible to make changes to the super system in response to the rise of the gig economy.
TANCY TAN JPMorgan
TAKE ACTION NOW “The people who founded super couldn’t have imagined the world we live in today, so it is only natural to update it,” Day said. Australian Institute of Superannuation Trustees chief executive Eva Scheerlinck said the time to make changes is now, before the gig economy becomes a much bigger problem. “We already have a big gap, with those people earning less than $450 per month from a single employer and the selfemployed falling outside the compulsory system,” Scheerlinck said. “We don’t want the group of people sitting outside the system to continue to grow. We need to make sure people are being paid super from the first dollar they earn.” AustralianSuper group executive of membership, Rose Kerlin, said scrapping the $450 monthly threshold on the super guarantee would bring 1 million people back into the system. She also advocated for speeding up the timetable to lift the super guarantee from 9 per cent to 12 per cent, to improve adequacy, and re-thinking who is obligated to pay super on a worker’s behalf. “Super needs to be an entitlement of work, not an entitlement of employment,” Kerlin said.
CLOSER TO HOME The conference also heard how new
technologies are set to affect workers within the superannuation industry. Robotics will bring down costs and change the superannuation industry workforce for the better, said JPMorgan’s Tancy Tan, who is the bank’s head of robotics for the Asia-Pacific region. Singapore-based Tan, who works for one of the world’s earliest adopters of robotics in the financial sector, said Australian super funds have moved on from talking about the technology to meeting with robotic software vendors. “One of the objectives of robotics is really to free up people from mundane, repetitive tasks, so that humans can channel their energy into creating better products and innovative solutions – the areas that add value to a business,” Tan said. “Definitely, over the next two to three years, all organisations will be jumping on the bandwagon.” Software capable of machine learning and making forecasts by feeding on an enormous amount of data will soon provide super funds and their clients with real-time information about portfolio investments and be a 24/7 online assistant that can speak multiple languages, Tan predicted. While other sectors, and governments, have already embraced AI-powered technologies to underpin better online retail, advertising and customer service,
the financial services sector is just now catching up, Tan said.
IMPRESSIVE AI TRIALS JPMorgan’s trading arm has been testing an AI program called LOXM to execute equities trades at maximum speed and optimal prices, and to offload large equity stakes without causing market swings. The program was trained on billions of historical transactions to enable it to do so. In LOXM’s trials, it has delivered significant savings and outperformed existing manual and automated trading methods. The technology is more likely to improve the work done by super fund employees than replace them, Tan said. “Robotics will bring down costs, which adds value for super funds,” she said. “Robotics is changing the role of the workforce in the financial services industry.” Tan’s advice to financial services professionals is to think about how they can co-exist with robotics. “The robotics revolution is here,” she said. “It’s not the future, it’s current. Don’t stand in front to block or stop, stand beside it to make your life better and smarter.”
PRIVATE EQUITY OFFERS TWO BITES OF THE CHERRY SUPERANNUATION FUNDS that invest in private equity often get a second chance to realise value by re-investing in PE-BACKED COMPANIES when they float.
YASSER EL-ANSARY CHIEF EXECUTIVE | ASSOCIATION OF PRIVATE EQUITY AND VENTURE CAPITAL (AVCAL)
IT IS A well-established fact that long-term investing in private assets has been one of the major drivers of the Australian superannuation sector’s strong performance over the last 25 years. But a trend that is less often acknowledged is that the value created by Australia’s private equity and venture capital sector often pays off twice for the country’s industry super funds. Australia’s private equity and venture-capital industry is valued at about $30 billion. Roughly 25 per cent of that is sourced from local superannuation funds, mostly from the profit-to-member funds sector.
LONG-TERM VALUE Putting capital into private equity and venture assets makes plenty of sense for long-term investors. The consistent outperformance against other
strategies is patently clear. There aren’t many investment strategies that can lay claim to consistently delivering after-fee returns to investors of 5 per cent or more above public market equivalents over the medium and longer term, even
equity investment twice. When the private equity backed business makes an initial public offering, it is not uncommon for some of the same super funds that were investors in the private equity fund that helped to create an improved, more
PE-backed businesses taken public are likely to continue to deliver sustainable increases in value over many years after the listing entity has sold down during periods of economic or capital market uncertainty. Typically, private equity funds will have a three-tofive-year horizon on their investment into a specific business. When it comes time for a private equity investor to sell down their interest in one of their portfolio companies, there are three key pathways to exit: selling to a strategic trade buyer, selling to another private equity owner, or pursuing a sharemarket listing. It’s the last of those three options that presents a unique opportunity for many super funds to realise the benefits of their private
valuable and sustainable business to also become cornerstone institutional investors in the same newly listed business. The data shows PE-backed businesses taken public are likely to continue to deliver sustainable increases in value over many years after the listing entity has sold down their interest in the business. This is supported by the data analysed in the April 2017 Rothschild/AVCAL report examining weighted average returns for all initial public offerings since 2015 with an offer size of $100 million or more. This showed that the performance of private
equity-sponsored businesses delivered a return in excess of 14 per cent. This compares favourably with a benchmark return of just over 5 per cent for the ASX Small Industrials Index for the same period. Being able to participate twice in the ongoing value creation within private equity backed businesses is not something that can be planned for at the time institutional backers are making a decision to allocate capital. But it is a very fortunate outcome that can deliver for super funds, and the millions of hardworking Australians who are members of those funds.
JOB CREATION When you think about the macro context surrounding super funds investing in private equity, the picture becomes even more attractive. Private equity funds invest billions of dollars every year into Australian businesses to help nurture and support their growth and expansion in domestic and offshore markets. Recent analysis conducted by Deloitte Access Economics on behalf of the private equity industry in Australia confirmed that our industry contributed about $43 billion to the national economy in 2015-16, and through doing that, supported more than 327,000 full-time equivalent jobs across almost every industry sector of the market. That represented roughly 11 per cent of all new jobs created across the economy. Given the competitiveness and productivity challenges confronting the nation over the years ahead, private equity investment should certainly be a feature of how we continue to modernise the economy and create jobs for the next generation of Australians.
TAX CHANGES WORTH A LOOK Proposals to wind back dividend imputation credits, negative gearing and the capital gains tax discount should be viewed through the lens of sustainability and intergenerational fairness. Research by Essential Media, recently commissioned by the Australian Institute of Superannuation Trustees, suggests there is a limited understanding of what negative gearing is or how it works, even among property investors who negatively gear.
EVA SCHEERLINCK CHIEF EXECUTIVE | AIST
A DEEPER DEBATE
IT WAS NO surprise that Labor’s newly announced policy on dividend imputation tax credits sparked a flurry of sensational media headlines. History tells us that any tax change affecting retirees or superannuation leads to much confusion and angst. Indeed, the brouhaha over the Turnbull Government’s super changes in the 2016 federal budget has only just subsided, even though the changes affect less than 4 per cent of retirees. The complexity of the tax arrangements for retirement income and superannuation is a big part of the problem. In this case, specifically, very few people seem to understand how dividend imputation works and the potential for the public to be misinformed is enormous. The same can be said about the changes to negative gearing that Labor has recommended.
Clearly, there is a need for both sides of politics to focus on communicating more simply and clearly with the general public about any potential tax changes. There is also a need for debate within the super industry to go deeper than the usual commentary about the need to stop tinkering. While AIST acknowledges the need to keep tax changes in super to a minimum, we also recognise the need to consider the bigger picture – the sustainability and fairness of our retirement income system. Increasingly, economists
and other commentators are raising concerns about the long-term consequences – particularly for young taxpayers – of providing generous tax benefits for older, wealthier Australians. Some have gone so far as to label the decision by the Howard and Costello Government to make super payouts completely tax-free for the over-60s as one of the worst taxation policy decisions ever made.
CONSIDER THIS Against this background, AIST believes Labor’s dividend tax credit policy deserves serious consideration by policymakers. This includes consideration of whether the policy could be fine-tuned to ensure low income pensioners are not unfairly affected. We also think it is time to reconsider Australia’s negative gearing and capital gains tax policy.
Very few people seem to understand how dividend imputation works and the potential for the public to be misinformed is enormous
Negative gearing affects the adequacy of Australia’s retirement income systems in number of ways: • Fuelling house price growth and reducing home ownership. • Encouraging households to borrow, thus potentially leading to more people entering retirement with a mortgage. • Distorting the decisionmaking process involved in investing in property versus making voluntary super contributions. • Reducing tax revenue, adding pressure on the Commonwealth budget. The annual cost to the federal budget of negative gearing on residential property is estimated at more than $4 billion. Taken together with the tax expenditure of the CGT discount for investorowned properties, the total tax expenditure for property investment is more than $12 billion a year. While this is considerably less than the estimated $37 billion in annual tax expenditure on superannuation, super tax concessions are distributed across the entire working population of more than 12 million Australians, as well as a growing proportion of self-funded and partpensioner retirees. In contrast, the effects of tax concessions related to property are limited to about 2.5 million property investors. And unlike superannuation – where investments are spread across a diverse range of assets, including muchneeded infrastructure – the majority of tax expenditure on negative gearing is unproductive. Australia’s retirement income system must be fair to all and must be sustainable.
NETWORKING EVENTS YOUNG SUPER NETWORK AIST’s Young Super Network (YSN) is an organised community of young professionals working in the superannuation industry. Joining YSN provides access to a number of social and professional development events throughout the year (many of which provide CPD hours) – facilitating open and creative discussion on industry issues with high calibre guest speakers.
WHY BE A YSN MEMBER? COMPLIMENTARY MEMBERSHIP NETWORKING FUNCTIONS
Membership is complimentary for AIST members and is suitable for individuals who are just starting out in the super industry, or have a few years’ experience and are looking to further develop their career.
The Young Super Network currently operates in Melbourne, Sydney, Brisbane, Adelaide and Hobart.
For more information and to book your tickets for any of the YSN events go to aist.asn.au/ysn_events
Thought Leadership Lunches Held in Melbourne and Sydney, AIST’s Thought Leadership Series draws on political, social and industry speakers to provide updates on the latest industry trends and issues, while also helping to facilitate networking.
Tuesday 17 April, 2018
Thursday 19 April, 2018
Tuesday 26 June, 2018
Thursday 28 June, 2018
Thursday 22 November, 2018
Tuesday 27 November, 2018
Review the topics for the 2018 Luncheon series and register today at aist.asn.au/thought-leadership-series
APG TAKES THE LEAD ON
THE €473 BILLION ($753 billion) APG, Europe’s largest investor, is constantly looking for new ways to innovate that can enhance its processes and decisionmaking to benefit the 4.5 million members it serves. For many investors, the sophisticated application of artificial intelligence, machine learning and big data remains a fantasy, but APG has had data scientists as part of its investment team since 2016. The company-wide evolution started about three years ago, when chief operating officer of APG Asset Management, Marcel Prins, asked the question: “What will the workplace environment for an investor look like in 2020?” This led to AI becoming a core part of the conversation at the group level as the fund looked to change its business model. It was important to the fund that the changes not become just a top-down exercise; technology innovation had to develop into a core function of every department and every decision. In APG’s 2020 vision, innovation and investment technology will become a key driver for pension fund success. Specifically, the fund’s leadership thinks ‘investech’ will give portfolio managers new and expanded data, leading to unique insights, better operational efficiency and, ultimately, better returns. APG head of quantitative equities, Gerben de Zwart, says that from an investment point of view the team looks beyond the mystique of AI and homes in on what it can bring to the client. Much of the fund’s client focus centres on sustainability, and de Zwart says AI can lead directly to better responsible investments.
IMPACTFUL ACQUISITION In February, APG announced it would take over Deloitte Netherlands’ data analytics activities for sustainable investing. The acquisition gives APG
Europe’s largest investor, the €473 billion ($753 billion) APG, is one of the few large asset owners putting artificial intelligence (AI) to work effectively in its investment process. By Amanda White
an edge in a number of ways. Firstly, the fund will inherit a mature data science team that is “ready for action”. It will also now have its own infrastructure, and a data engine with a smart algorithm that can extract information and turn it into actionable insights. APG’s clients have set clear responsible investment goals they want to achieve by 2020, including: lowering the carbon footprint of the portfolio by 25 per cent; being invested only in companies that behave well; and doubling its allocation to sustainable development investments. “There’s a lack of data on investments as identified by the UN Sustainable Development Goals [SDGs],” de Zwart says. “For example, we all agree with the goal of zero hunger…but it is difficult to quantify which companies are [actively working on] that. Machine learning and AI can help.”
APG and fellow Dutch investor PGGM have been at the forefront of converting the concept of the SDGs into an investible universe. The two funds developed a methodology to identify investment opportunities linked to 13 of the 17 SDGs, and refer to this methodology as the taxonomies. These are available for all investors to use. “The beauty of this new machine learning is it can take those taxonomies and look for companies where they apply,” de Zwart says. “The Deloitte team can make an important impact on realising those goals and KPIs we have.” APG also plans to leverage the infrastructure, data and processes of the Deloitte team and apply these to factor investing and other areas over time. “We are very excited about this acquisition,” de Zwart says. “The
acceleration we will realise from this innovation is a multiple-year acceleration, and we expect higher returns via more responsible investment.” The Deloitte data team and infrastructure are a complement to the machine learning APG already has. “We have an innovation team and an innovation portfolio, so it’s not one idea that will make a difference, but about 15 different ideas that could all lead to drivers,” de Zwart explains; for example, machine learning has the potential to save time on reading company reports. The technology should take two analysts’ reports, read them and see if there is sufficient difference in the reports for the portfolio manager (PM) to bother reading both. If there are no sufficient differences, the portfolio manager can read just one report.
In the quant world, de Zwart says, using 10 different data sets, mostly centred on financial statements, has been the norm for 35 years. Now there are 500 different data sets available. “Now that data is unlimited, it’s turning the daily work of quant PMs 180 degrees,” he says.
DATA OVERLOAD But the abundance of data does not come without its challenges. De Zwart warns other investors that a vision is required to lay out how to deal with innovation and, for example, prioritise which data set to use for what and when. “How you deal with the overload of data is a question to ask, and it’s a journey,” he says. “We have changed the culture in the company to be open to new ways of doing things and looking for alpha.”
This is an important point to stress, and APG’s experience shows the entire company needs to be involved, not just a single team, in order to profit from collaboration and develop IT systems that get the most out of AI integration. “Investments have become even more data-driven than ever. There must be a close relationship between the investment and IT departments,” he says. “The IT department will play a pivotal role. They are servicing PMs in a different way than they used to.”
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SOUTH KOREA A LAND OF OPPORTUNITY IFM Investors sees a big chance for Australian superannuation funds to partner and co-invest in the Asian nation’s pension market.
BRETT HIMBURY CHIEF EXECUTIVE | IFM INVESTORS
THERE ARE A multitude of reasons why the time is ripe for the Australian superannuation industry to engage with South Korea. South Korea is Australia’s fourth-largest trading partner. The countries enjoy a freetrade agreement. We have an opportunity to build on this relationship with the provision of services, including financial, to augment the agriculture and mining trade that underpins this position. The South Korean Government is committed to ensuring the nation is a major exporter of capital. One of the ways it is doing this is by having large, globally empowered asset owners, who can attract foreign asset managers. On top of awarding investment mandates, South Korean asset owners are actively seeking partnerships
with foreign investors. That is why IFM Investors recently opened a Seoul office, and appointed Kelly Ki Jeong Lee client relationship director for the country. The decision was supported by the reception we have already received from South Korean institutions. IFM Investors has been successful in the market to date, in large part, I believe, due to our investor-aligned ownership structure. Our presence will ensure we remain well positioned to partner with local clients seeking to diversify their investments offshore across infrastructure debt and equity asset classes for the longterm benefit of South Korean workers.
INVESTOR-FIRST More than ever, clients across the Asian region are embracing investment models that take an
investor-first approach to solving the asset-liability gap facing many pension and insurance schemes. South Korea is the world’s eighth-largest pension market, just behind Australia. The National Pension Service (NPS), South Korea’s ₩535 trillion ($650 billion) national pension fund and prime social insurance program, is the world’s third-largest public pension fund and is on track to become the largest by the mid-2030s. The South Korean institutional investment market is not only large and diverse, it also features highly sophisticated long-term investors that are particularly open to allocating to foreign managers. Driving this is the need for returns, because performance in domestic assets has been poor for much of the last
The South Korean institutional investment market is not only large and diverse, it also features highly sophisticated long-term investors that are particularly open to allocating to foreign managers
decade. The local equity market has essentially been flat over this period, while bond yields, especially on government debt, have been compressed for a number of years. Without the returns available at home, the large, liquid institutions have had to allocate to foreign assets to find the returns they need to fund pension liabilities. South Korean institutions are no different than any of our other clients across the globe in seeking the highest possible net returns at the lowest possible risk. They also experience many similar challenges, such as the need to secure retirement income in a country with one of the most rapidly ageing populations in the world, while facing a lowreturn environment and market volatility driven by political uncertainty.
LESS HOME BIAS In response, local pension and insurance investors are reassessing their home bias and looking to non-traditional assets, such as infrastructure debt and equity. IFM’s new Seoul office, our third in Asia after Tokyo and Hong Kong, not only serves to benefit our growing South Korean client base, it also underlines a commitment to the nation and the Asian region. For our existing investors, opening the South Korean office will broaden and deepen our client relationship across the Asian region. It will provide the ability to pool client mandates, opening further investment opportunities for all clients globally and allowing IFM Investors to negotiate better terms on deals. Our continued growth is possible only because shareholders allow us not to be conflicted or confused by short-term needs.
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THE LANGUAGE OF COMING TOGETHER Two sectors – one dealing in intergenerational wealth, the other in intergenerational trauma – have learnt from each other via collaboration.
CLAUDIA LENNON MANAGER | THE BENEVOLENT SOCIETY’S RESILIENT FAMILIES PROGRAM
Resilient Families, was created with Westpac, the Commonwealth Bank, NSW Treasury and Family and Community Services in 2012, it was new territory for all of us. The aim was to create an innovative funding structure to support a response to a complex social problem. Our ultimate goal was to provide early intervention to highrisk families, resulting in a reduction to the number of children entering out-of-home care.
A RISK THAT PAID OFF IT IS NOW six years since The Benevolent Society started working closely with the NSW Government and the finance sector to develop one of Australia’s first social benefit bonds. When The Benevolent Society Social Benefit Bond,
I’ll admit that, at first, I was somewhat sceptical of bankers talking about child protection. But taking the risk and working alongside the finance and government sectors has absolutely paid off. This collaboration was strengthened by respectful working relationships that
allowed everyone to contribute and be a part of a complex solution. The process has been a great learning experience for all involved. The bringing together of the expertise around the table has ensured a robust framework that is measuring significant impact for children and families, alongside investor returns that allow us to see sustainable change in a space where the financial sector has not previously been. One of the biggest lessons from the formation and the delivery of the social benefit bond has been the coming together of two languages – that of the finance sector and the social welfare sector. In the welfare industry, we have a saying that ‘child protection is everyone’s business’. This social benefit bond allows people to make child protection their business using their area of expertise.
LEARN BOTH SIDES
The investment of those with intergenerational wealth is allowing us to build a pathway to reach those with intergenerational trauma APRIL 2018
As a social worker, concepts such as ‘bond issuer’ meant nothing to me a few years ago, but that has changed. The collaboration has allowed for the transfer of knowledge and processes that would usually sit within a finance sector to become part of our welfare business. On the flipside, our finance partners have now also been exposed to the language and
concepts of child protection, such as ‘risk of significant harm’ and ‘safety and risk assessments’. Furthermore, it has allowed finance partners to see the impact family preservation can have on the trajectory of a child. We didn’t always get it right and had to reconsider our measures. Our theory is well beyond the standard profit or loss. We are dealing with a level of complexity traditional financial instruments haven’t had to explore and we had to ensure that we got the balance right in considering the needs of government, clients and investors. Throughout the process, I learned the language of ‘intergenerational wealth’, as the finance sector uses it, in regards to helping clients with inherited wealth make solid investment decisions. As soon as I heard this term, I wondered how we could match intergenerational wealth with the intergenerational trauma we see every day in the welfare sector. Intergenerational trauma runs through so many of our clients that cross different services, including child protection, mental health and domestic violence. The investment of those with intergenerational wealth is allowing us to build a pathway to reach those with intergenerational trauma and, we hope, create sustainable change. This is how our two very different sectors can work together. Through the bringing together of varied expertise, and by working alongside the people the services are designed for, long lasting change that impacts on all of us can be achieved. That is when the language finally shifts from I to we.
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