Investment Magazine February 2017 by Conexus Financial

INTELLIGENCE FOR INSTITUTIONAL INVESTORS

ISSUE 135

SALARY Survey 2017 Meet the super industry’s highest earners

PROFILE REST’S GM INVESTMENTS BRENDAN CASEY ON LEADING MILITARY AND INVESTMENT OPS YEAR OF THE ROOSTER INVESTMENT CHIEFS BRACE FOR A BLOCKBUSTER 2017 IN GEOPOLITICS RG 97 NEW PORTFOLIO AND FEE DISCLOSURE RULES COULD AFFECT ASSET ALLOCATION SANTIAGO PRINCIPLES NEW ZEALAND SUPER BOSS ADRIAN ORR ON BEST PRACTICE IN SOVEREIGN WEALTH FUNDS

FEBRUARY 2017

The power of working in unison. A team of riders means greater strength, working together to achieve a single goal. Just like the key elements of our CommInsure group insurance business combine to make our offering exceptional: thought leadership, a commitment to partnership and best member outcomes.

CommInsure is a registered business name of The Colonial Mutual Life Assurance Society Limited ABN 12 004 021 809 AFSL 235035 (CMLA). CMLA is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. The information is of a general nature only and is not specific advice.

CONTENTS FEBRUARY 2017

PROFILE

“Leadership, planning and resilience are the qualities the army has given me” BRENDAN CASEY REST INDUSTRY SUPER GENERAL MANAGER INVESTMENTS

EDITOR’S LETTER What we can all learn from playing politics for a day.

2017 SALARY SURVEY More super fund executives are negotiating bonus structures, but where are the incentives to think long term?

FIONA REYNOLDS The PRI boss says 2017 is the year for asset owners to step up and lead the sustainability agenda.

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INFOCUS REPORT The international trend towards favouring a factor-based approach to investing is catching on at some of Australia’s largest asset owners.

HANDS OFF A straw poll of finalists in the Conexus Financial Superannuation Awards 2017 reveals industry heavyweights are at their wits’ end with regulatory change.

TRANSPARENCY

Heads of investment operations are under the pump to implement RG97, meanwhile their investment chiefs are struggling with what it means for asset allocation.

SINGLE TOUCH PAYROLL AIST’s policy expert David Haynes on how the government’s new payments compliance system for employers could shake up fund selection.

YEAR OF THE ROOSTER The year ahead is set to be a big one in geopolitics. Diversification will be key to keeping portfolios resilient.

ADRIAN ORR The NZ Super boss on what Australian super funds can learn from the sovereign wealth fund community’s experience with the Santiago Principles.

F E B R UA R Y 201 7

\ FROM THE EDITOR

EDITORIAL EDITOR

SALLY ROSE / sally.rose@conexusfinancial.com.au

Sally Rose MANAGING EDITOR

Keith Barrett DIRECTOR OF INSTITUTIONAL CONTENT

A LETTER from the editor

Amanda White JOURNALIST

Dan Purves HEAD OF DESIGN

Kelly Patterson ART DIRECTOR

Suzanne Elworthy SUB-EDITOR

GEOPOLITICS AN OUTRAGEOUS GAME

Haki P. Crisden PHOTOGRAPHER

Matt Fatches

matt@mattfatches.com.au

RECENTLY SPENT a Sunday afternoon in Victoria’s beautiful Yarra Valley, impersonating Philippines President Rodrigo Duterte. Not that anyone would have mistaken me for him in my bright yellow dress, but that wasn’t the point. I was participating in a ‘war games’ exercise. My fellow players included chairs, deputy chairs, and investment committee chairs from 35 Australian superannuation funds. Imagine a live role-playing session for finance and governance nerds. The purpose of the thought exercise, led by Princeton University history professor Stephen Kotkin, was to imagine how a series of seemingly inconsequential geopolitical events – a cyber-hack here, a personal insult there, a bomb blast in a far-flung corner of the world over there – might conceivably cascade into a seismic shift in the world order as we know it. And, by extension, what that might mean for global financial markets. Coming at the end of US President Donald Trump’s outrageous first week in office, it was, quite frankly, all a little too close for comfort. The super fund trustees who were in the room that day are collectively responsible for roughly $670 billion in retirement savings belonging to millions of Australian workers. While their duty is to oversee their funds’ commitment to long-term investment strategies, maintaining a focus on the next 30 years rather than getting distracted by daily news headlines, it had clearly crossed a few people’s minds that recent political

FEBRUARY 2017

events in the US might have farreaching consequences for the world, along with implications for their role as fiduciaries. Kotkin himself admitted that, after spending 20 years telling people the long-term effects of geopolitical shocks on markets are almost always overstated, he was starting to get worried that the latest changing of the guard might be different. ‘Might’ being an important qualifier there. The best investors usually profit in times of upheaval and crisis. We’ve already seen an unexpected Trump bump in equity markets. Only a fool would claim certainty on whether it will last. Personally, my real worries about living in the era of Trumpenomics have little to do with where my super balance is headed over his four-year term. What I’m anxious about is what this all means for our international society. As Principles for Responsible Investment managing director Fiona Reynolds observed once she’d retired from playing Trump for the afternoon, “What’s the point of retiring with a decent super balance if you can’t breathe the air and your social fabric is torn apart?” On that cheerful note, I hope you enjoy the first issue of Investment Magazine for 2017. In our cover story, my colleague, Dan Purves, has pored over the executive pay disclosures of the country’s 60 biggest government and not-for-profit funds. And coming up, look out for the March issue, where the remuneration policies of retail funds will come under our microscope. Ñ

COVER ARTIST

Rocco Fazzari CHIEF EXECUTIVE

Colin Tate

ADVERTISING BUSINESS DEVELOPMENT MANAGER

Karlee Samuels

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

Sean Scallan

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

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anastasiap@conexusfinancial.com.au (02) 9227 5703 CLIENT RELATIONSHIP MANAGER (EVENTS)

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Special T Print ISSN 1838-8949 Subscriptions are $165 including GST per year for 11 issues within Australia Exclusive Media Partner of Average Net Distribution:

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ADVISORY BOARD MEMBERS

Graeme Arnott, chief operating officer, First State Super | Richard Brandweiner, partner, Leapfrog Investments | Joanna Davison, chief executive, FEAL | Brian Delaney, global head of clients, QIC | Kristian Fok, executive manager for investment strategy, Cbus | Damian Graham, chief investment officer, First State Super | Rob Hogg, head of global strategies and quant methods, UniSuper | Sheridan Lee, principal, Shed Enterprises | Geoff Lloyd, managing director, Perpetual | Graeme Mather, head of distribution, product and marketing, Schroders | Damien Mu, chief executive, AIA Australia | Mary Murphy, chief digital officer, First State Super | Fiona TraffordWalker, director of consulting, Frontier Advisors

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SPONSORED ADVERTORIAL

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would fall from 90% to as low as 18%, leaving up to 12.5 million Australians without protection.2 Life insurance therefore plays a crucial role in achieving the objective of superannuation and the automatic default opt-out should be maintained as it provides a valuable safety net for thousands of Australians.

As with any relationship it’s important to continually assess its relevance and the mutual benefits it brings. Do members continue to benefit from this partnership? Are there any issues that may compromise its sustainability? Could improvements be made?

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Identifying the insurance needs of members and designing appropriate levels of cover is key to delivering an optimal service. So too are improved structures to help reduce the risk of over or under insurance; balancing the adequacy of retirement savings against the cost of cover; transparency and education.

Improved offerings AIA Australia believes in ongoing evaluation to improve its offerings – proposing several solutions that seek to enhance value for members.

Life insurance in superannuation: the benefits Life insurance seeks to guard against the risk that an individual may be stopped, due to an unforeseen event or injury, from continuing to build a sufficient superannuation balance to provide for retirement as a substitute or supplement to the Age Pension. Research shows that almost half of those with life insurance through superannuation believed they would not be covered if it was not provided automatically1 and that if the current opt-out system moved to opt-in, the percentage of insured individuals

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Member awareness and understanding It can sometimes be difficult to encourage individuals to consider their specific insurance needs and understand their coverage. Many people adopt a ‘set and forget’ approach which fails to account for the changing needs in one’s life. For some, insuring income seems less tangible than insuring a physical asset and for others, the nature of life insurance is quite confronting – in fact many would rather avoid considering it. Research shows those with life insurance in their superannuation see it as a real positive4 and AIA Australia believes insurers and superannuation funds can work together to improve financial literacy amongst members, help them understand their needs and as a consequence close the under-insurance gap. 1

AIA Australia – Life today study - 2016

AIA Australia modelling

Rice Warner – Underinsurance in Australia - 2015

AIA Australia – Life Today study – published 2016

\ INVESTMENT MAGA ZINE 2017 SAL ARY SURVEY

money scrutiny MAKING

Investment Magazine

2017

SALARY SURVEY

EARNING

By Dan Purves and Sally Rose Illustration

Rocco Fazzari

THE PEOPLE RUNNING THE LARGEST NOT-FOR-PROFIT FUNDS IN AUSTRALIA ARE BEING PAID MORE THAN EVER, UPPING THE ANTE ON CRITICISM. The Investment Magazine Pay Survey takes a look at how incentives and salary structures in wealth management align with the interests of stakeholders.

BRUCE WATSON, JOHN PEARCE, DAVID GALBALLY FEBRUARY 2017

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INVESTMENT MAGA ZINE 2017 SAL ARY SURVEY \

ORE HIGH-FLYERS in Australia’s not-for-profit superannuation sector are taking home milliondollar salaries than ever before, as their pay packets are boosted by bonuses calculated against short-term targets. Is this a positive reflection of the industry’s maturation, or a worrying signal? What does the trend mean in a sector that prides itself on a long-term approach to investing and has been pivotal in forcing local listed companies to better link executive salaries to long-term incentives? And why are the remuneration policies of some of the smallest super funds so generous, relative to those in place at their much larger and more sophisticated rivals? These are just some of the questions raised by the key findings from the third-annual Investment Magazine Pay Survey. The survey shines a light on what the chairs, chief executives and chief investment officers of the country’s biggest not-for-profit investment funds get paid. In previous years, the Investment Magazine Pay Survey has attempted to compare the pay deals at retail and not-for-profit super funds side by side. However, due to the complex and opaque business structures of the wealth-management arms of the big banks, it has proven difficult to make fair comparisons. The remuneration policies and practices of the country’s biggest retail wealth managers will be examined in detail in the March 2017 issue of Investment Magazine. Here, in the February issue, we report on what was uncovered by scrutinising the executive remuneration packages of the industry, corporate, and public-sector superannuation fund sector. All not-for-profit funds with more than $1 billion in assets under management were reviewed. The survey also included government-owned investment funds, such as the federal government’s Future Fund, NSW Treasury’s TCorp, and the Victorian Funds Management Corporation, bringing the total number of institutional investors included to 55. The survey covered the financial year ended June 30, 2016.

CEOS FAREWELLED WITH GOLDEN HANDSHAKES

Atop the list of highly paid investment fund chief executives was the head of the $124 billion Future Fund, David Neal. The sovereign fund does not disclose exactly what its executives get paid, reporting instead a wide band of possible total remuneration based on performance. For 2015-16, Neal had a reported base pay of $528,824 but was entitled to up to $1,329,155, including performance-linked bonuses. The survey shows that executives at the biggest funds don’t necessarily get the plum deals. In fact, AustralianSuper chief executive Ian Silk didn’t even make the top five in pay, despite running the largest industry fund in the country, with more than $100 billion. Silk ranked seventh, with total remuneration of $798,196. One of the best ways for not-for-profit super fund bosses to get a bumper pay deal last financial year was to quit. The second highest-paid chief executive was former Mine Wealth + Wellbeing chief executive Bruce Watson, who stepped down from leading the $9 billion Newcastle-based industry fund

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TOP 5 EARNERS THE HIGHEST PAID CHIEF INVESTMENT OFFICERS Fund

FUM ($b) CIO

VFMC

51 Justin Pascoe

UniSuper

55 John Pearce

Total rem ($) 1,550,000-1,559,999 1,331,690

Raphael Arndt

528,824-1,329,155

Stephen Gilmore

528,824-1,329,155

Future Fund

124

AustralianSuper

100 Mark Delaney

1,238,922

Commonwealth Super Corporation

37 Alison Tarditi

1,190,351

THE HIGHEST PAID CHIEF EXECUTIVE OFFICERS Fund

FUM ($b) CEO

Future Fund

Mine Wealth + Wellbeing

124 David Neal 9 Bruce Watson

Equip Super

8 Danielle Press

Total rem ($) 528,824-1,329,155 1,198,937 955,417

Sunsuper

36 Scott Hartley

903,509

UniSuper

55 Kevin O’Sullivan

846,916

THE HIGHEST PAID CHAIRS Fund

FUM ($b) Chair

Total rem ($)

4 David Galbally

277,200

First State Super

75 Neil Cochrane

232,074

Telstra Super

17 David Leggo

221,930

UniSuper

Future Fund

TWUSUPER

55 Chris Cuffe 124 Peter Costello

220,000 202,280

for coalminers (formerly Auscoal) in February 2016. Watson was farewelled with a $711,855 golden handshake which, combined with a mix of long- and short-term bonuses, inflated his $264,666 base pay to a total remuneration package worth $1,198,937. That placed Watson’s earnings almost on par with Neal’s, despite the latter being responsible for a fund with roughly 14 times as much in assets under management. The third highest-paid chief executive was another small super fund boss on her way out. Former Equip Super chief executive Danielle Press, who left Equip in June 2016 to take a new gig as chief executive of the Myer Family Trust, earned a total of $955,417 from the $8 billion default fund for Victorian electricity workers. Most of her pay came from bonuses. Rounding out the top five chief executives were Scott Hartley, who earned $903,509 at $36 billion Queenslandbased industry fund Sunsuper, and Kevin O’Sullivan, who earned $846,919 at $55 billion university sector default fund UniSuper.

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\ INVESTMENT MAGA ZINE 2017 SAL ARY SURVEY CHIEF INVES TMENT OFF ICER FUND VFMC UniSuper Future Fund

FUM ($bn) 51 55 124

AustralianSuper Commonwealth Super Corporation QSuper First State Super

100 37 65 75

Telstra Super

Mine Wealth + Wellbeing Hostplus Tcorp

9 20 70

Sunsuper Super Qantas Super Cbus Super

36 7 34

Equip Super HESTA Local Government Super VicSuper Maritime Super Australian Catholic Superannuation and Retirement Fund MyLifeMyMoney Super (formerly Catholic Super) Statewide Superannuation Trust Kinetic Super Vision Super TWUSUPER CareSuper NGS Super

8 34 10 16 5 7

Rio Tinto Staff Superannuation Fund RBF Funds SA Christian Super legalsuper MTAA Super ESSSuper IAG & NRMA Super Tasplan Super AMIST

5 6 25 1 3 9 24 2 3 2

Energy Super AustSafe Super REST EISS

6 2 39 5

WA Local Government Super LUCRF Super LGIAsuper Australia Post Super Media Super Prime Super Club Plus Super First Super AvSuper Intrust Super Fund REI Super Queensland Independent Education & Care Superannuation Trust BUSSQ

7 7 3 8 4 11 7

3 5 10 7 5 3 2 2 2 2 1 1 4

CIO OR EQUIVALENT ROLE Justin Pascoe John Pearce Raphael Arndt Stephen Gilmore Mark Delaney Alison Tarditi Brad Holzberger Richard Brandweiner

BASE REMUNERATION ($) 420,000-429,999 572,650 380,000-700,000 380,000-700,000 655,715 591,278 640,943 624,692

LTI ($) – – See STI See STI – – – 64,400

TOTAL REMUNERATION ($) 1,550,000-1,559,999 1,331,690 528,824-1,329,155 528,824-1,329,155 1,238,922 1,190,351 1,185,360 792,800

104,160 153,584 – – – 333,561 189,525 27,253 22,799 177,919 – – 62,873 – –

44,416 – 229,710 – – – – – – – – – – – 1,500 – –

779,373* 79,385* 726,659 625,704 >598,750 >598,750 >598,750 594,009 588,525 587,006 472,842 586,926 551,011 452,600 447,250 424,501 413,002

STI ($) – 645,880 148,824-629,155 148,824-629,155 548,207 568,355 485,453 84,400 (+30,000 performance award) 467,636

Jim Christensen Graeme Miller David Bell Sam Sicilia Steve McKenna Mark O'Brien Jonathan Green Ian Patrick Andrew Spence Kristian Fok Trish Donohue Michael Strachan Rob Fowler Craig Turnbull Oscar Fabian Grant Harslett Michael Block

235,178 74,423 336,359 432,880 – – – 210,812 399,000 475,827 378,846 409,007 517,210 413,333 363,570 360,287 382,378

Garrie Lette Con Michalakis Paul Kessell Michael Wyrsch Andrew Killen Suzanne Branton Ben Squires Mary Fallon Wayne Grant Ian Lundy Mike Grdosic Tim Macready Ed Smith Philip Brown Matt Kempton Geoff Burgess Mark Williams Murray Rutherford Megan Pham William Graus Simon Mather Ronan Walsh Ross Etherington Matt Olsen Chris West Leigh Gavin Martin Drew Guy Rundle Ezinne Udeh Martinez Justin Nunan Caroline Lee Gemma Dooley Sonia Liu Sue Field No CIO No CIO No CIO

355,622 367,989 278,227 344,331 298,918 301,500 246,250 148,433 201,181 216,912 – 247,311 – 229,731 – 162,000 203,440 223,082 180,726 176,229 186,303 168,149 166,153 157,874 159,576 46,250 24,923 – – – – – – – – – –

– – 67,931 – – – – – 32,286 38,478 – – – – – 29,000 – – – 16,688 – – – – – – – – – – – – – – – – –

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

390,622 390,621 379,043 377,043 341,031 331,500 320,318* 162,253* 313,096 275,997 265,001-275,000 270,806 266,451* 253,201 240,000-249,999 242,000 236,857 226,152* 181,035* 224,604 205,151 183,274* 182,307* 172,401* 181,983 49,808* 28,089* Not disclosed Not disclosed Not disclosed Not disclosed Not disclosed Not disclosed Not disclosed – – –

–

See CEO

* Served part of the FY15-16

FEBRUARY 2017

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INVESTMENT MAGA ZINE 2017 SAL ARY SURVEY \

RISE OF THE ROCKSTAR CIO

While O’Sullivan may be one of the most handsomely paid super fund executives in the country, he pocketed less than UniSuper chief investment officer (CIO) John Pearce. The investment chief more than doubled his base pay of $572,650, by earning $645,880 in short-term incentives, to bring his total pay to $1,331,690. This made Pearce the highest-paid super fund investment boss in Australia for the third year in a row. UniSuper director and remuneration committee chair Sue Gould says Pearce’s package reflects high performance and the complexities of his role, which includes overseeing more than half of all funds under management in-house. “We believe having a portion of our executive’s remuneration that is variable and aligned to performance is more appropriate than having their entire compensation package fixed [annually] and therefore not responsive to performance that benefits members,” Gould says. “We’ve structured our short-term incentive plans to incorporate medium- to longer-term performance measures in lieu of a formal LTI [long-term incentive] plan. This structure works for our business, as it helps us attract the best talent and enables them to clearly contribute to our strategic plan, which is ultimately about providing our members with greater retirement outcomes.” Pearce’s pay remains the highest confirmed remuneration in the land among super fund investment chiefs but he was possibly out-earned by former Victorian Funds Management Corporation CIO Justin Pascoe. The $51 billion state government investment fund did not disclose Pascoe’s actual pay, recording only that he was entitled to a base pay of $420,000 and total remuneration of up to $1,559,999, including incentives. At the Future Fund, CIO Raphael Arndt and chief investment strategist Stephen Gilmore had identical pay bands of from $380,000 up to $1,329,155 – depending on a mix of incentives. AustralianSuper’s Mark Delaney entered into the elite million-dollar club, after a short-term bonus bumped his total annual remuneration to $1,238,922. Commonwealth Superannuation Corporation, the $37 billion public servants’ pension fund, paid CIO Alison Tarditi $1,190,351, nearly half of which she earned via short-term incentives. Brad Holzberger took home a similar remuneration package for his role as CIO

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The high cost of GOVERNANCE at TWUSUPER The highest-paid chair in the survey was TCorp’s Rob Whitfield, who pocketed $550,000 in total remuneration for the year; however, chairing the board of the state government investment fund forms just part of his broader duties as a senior executive at NSW Treasury. For the second consecutive year, TWUSUPER, a $4 billion industry fund aligned with the Transport Workers Union, dished out more than any other super fund in chair fees. Its members paid $277,200 for David Galbally to chair the fund. Galbally’s chair fee was 37 per cent higher than that paid former federal treasurer Peter Costello to oversee the board of the Future Fund, which manages 41 times more capital than TWUSUPER. Heather Ridout was paid $171,000 ($106,200 less than Galbally) to chair AustralianSuper, which has 25 times the funds under management and is a far more complex organisation. The second-highest paid super fund chair was First State Super’s Neil Cochrane who received $213,776 for overseeing an asset pool more than 17 times larger than TWUSUPER’s. Galbally declined to comment for this article. TWUSUPER deferred questions to a public relations firm, which provided a written statement on the fund’s behalf. “Members interests are best served by having a chair and a board capable and qualified to make decisions that will keep the fund successful, and maximise returns and member services,” the statement read. In the latter half of calendar year 2016, TWUSUPER announced its fifth change of chief executive in three years. Rather than being paid to him directly, Galbally’s board dues was paid to Madgwicks Lawyers, a legal firm where the criminal lawyer is a partner.

at QSuper, the $65 billion default fund for Queensland public servants. Holzberger earned $1,185,360, of which $485,453 was vested from short-term incentives.

DANGLING CARROTS IN EASY REACH

The use of short-term incentives [STIs] to encourage high performance is on its way to becoming mainstream. The 2017 Investment Magazine Pay Survey shows roughly half of super funds now have STIs built into their executive remuneration policies. At the time of the inaugural Investment Magazine Pay Survey, three years ago, however, the board of Cbus Super was wrestling with the decision to abandon its long-held ban on performance payments. In 2015, Cbus began implementing STIs for the most senior investment staff at the $34 billion industry fund for construction workers. Payouts from these STIs ballooned in the most recent financial year. “We are cognisant of what other funds and the broader sector are doing with remuneration, and of the need to ensure we remain competitive in attracting and retaining talent,” Cbus executive manager, people and culture, Johanna Neilsen says. Cbus executive manager investment management, Trish Donohue, received STIs worth $22,799, bringing her total remuneration to $472,842, while executive manager investment, Kristian Fok, received STIs worth $27,253, bringing his total remuneration to $587,006. Both Donohue and Fok had healthcare and travel allowances bundled into their remuneration package. While the use of STIs is on the rise across the industry, only seven of the 55 funds surveyed incorporated long-term incentives (LTIs) into their remuneration structures for top executives. And only two of those seven funds had LTIs in place for both their chief executive and CIO: $9 billion Mine, Wealth + Wellbeing, and $16 billion VicSuper. Mine, Wealth + Wellbeing CIO David Bell had a higher proportion of his pay linked to LTIs than anyone else in the sector. Almost one-third, $229,710 or 31.6 per cent, of Bell’s total remuneration came from LTIs, more than double his STIs, which were worth $104,160. Attitudes around longer-term incentive structures are evolving across the industry. “The best interests of our members are met by ensuring a focus on achieving sustainable long-term returns to build retirement savings,” First State Super chief executive Michael

FEBRUARY 2017

\ INVESTMENT MAGA ZINE 2017 SAL ARY SURVEY CHIEF EXECUTIVE OFF ICER FUND Future Fund Mine Wealth + Wellbeing Equip Super Sunsuper UniSuper Hostplus AustralianSuper First State Super Telstra Super Commonwealth Super Corporation QSuper REST Tasplan Super Cbus VicSuper Tcorp NGS Super HESTA Local Government Super Maritime Super Vision Super EISS Australian Catholic Superannuation and Retirement Fund LGIAsuper CareSuper Australia Post Super Club Plus Super legalsuper WA Local Government Super Statewide Superannuation Trust Funds SA AustSafe Super MyLifeMyMoney Super (formerly Catholic Super) Prime Super Intrust Super Fund MTAA Super BUSSQ Energy Super VFMC TWUSUPER AvSuper AMIST ESSSuper Qantas Super IAG & NRMA Super RBF Media Super First Super LUCRF Super REI Super Rio Tinto Staff Superannuation Fund Christian Super Kinetic Super Queensland Independent Education & Care Superannuation Trust * Served part of the FY15-16

FUM( $bn) CEO 124 David Neal 9 Bruce Watson Harry Mitchell 8 Danielle Press 36 Scott Hartley 55 Kevin O’Sullivan 20 David Elia 100 Ian Silk 75 Michael Dwyer 17 Chris Davies 37 Peter Carrigy-Ryan 65 Michael Pennisi 39 Damian Hill 3 Neil Cassidy Wayne Davy 34 David Atkin 16 Michael Dundon 70 Stephen Knight David Deverall 7 Anthony Rodwell-Ball 34 Debby Blakey 10 Peter Lambert 5 Peter Robertson 8 Stephen Rowe 5 Alexander Hutchison 7 Greg Cantor 10 David Todd 11 Julie Lander 7 Stephen Milburn-Pyle 2 Paul Cahill 3 Andrew Proebstl 3 John McNally 7 Nicolle Rantanen Richard Nunn 25 Jo Townsend 2 Craig Stevens 7 Frank Pegan 3 Lachlan Baird 2 Brendan O'Farrell 9 Leeanne Turner 4 David O'Sullivan 6 Robyn Petrou 51 Lisa Gray Warren Lee 4 William McMillin 4 Paul Sayer 2 Michelle Wade 2 James Thomas 24 Mark Puli 7 Micheal Clancy Jane Perry 2 Troy Maguire 6 Philip Mussared 5 Graeme Russell 2 Bill Watson 5 Charlie Donnelly 1 Mal Smith 5 Brett Grant 1 Peter Murphy 3 Elizabeth Thomas Megan Bolton Andrew Barnett 1 Cathy Connellan

BASE REMUNERATION ($) 380,000-700,000 264,666 77,958 453,266 570,821 495,628 577,517 746,000 650,000 500,462 462,936 358,762 479,802 261,934 392,509 578,974 502,634 – – 451,009 519,636 533,340 488,167 496,349 471,481 483,941 401,000 458,278 337,499 357,966 – 378,893 238,379 209,585 – 330,630 373,872 356,324 366,813 362,740 318,679 300,000 220,000-229,999 180,000-189,000 356,484 – 347,500 363,338 – 249,180 182,117 224,000 304,333 321,459 319,242 292,463 270,928 190,000 286,767 246,669 42,979 49,578 59,945

** Had $711,855 paid in post-employment benefit which significantly pushed up the total

FEBRUARY 2017

STI ($) 148,824-629,155 128,354 – 364,321 227,384 243,600 190,504 – 30,000 149,441 137,404 200,000 99,228 – 20,000 – 91,217 – – – – – – – – – – – 46,438 65,000 – 12,300 – 111,120 – 52,857 – 18,547 – – 25,650 57,000 – – – – 47,025 – – 124,590 97,052 45,000 16,780 – – – 12,033 45,146 – – 11,261 – –

LTI ($) – 9,050 – 137,830 – – – – – – – 32,613 – – – 1,000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 21,000 – – – – – – – – – – –

TOTAL REMUNERATION ($) 528,824-1,329,155 1,198,937** 94,438* 955,417 903,509 846,916 807,261 798,186 731,246 719,236 708,741 673,786 644,445 627,670*** 432,468* 626,103 614,158 >598,751* >598,751* 566,177 553,437 552,648 552,500 538,502 527,392 520,397 499,000 493,278 482,477 482,046 450,933 449,931* 448,553* 334,938* 415,001-425,000 420,664 419,411 417,500 411,813 409,456 408,005 405,272 390,000-399,999* 180,000-189,000* 395,864* Not disclosed* 381,376 380,394 370,000-379,999 373,770* 279,169* 354,000 351,618 350,177 350,074 327,462 317,961 316,962 314,010 284,499* 280,445* 55,032* 65,299

*** Had $323,100 paid in post-employment benefit which significantly pushed up the total

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INVESTMENT MAGA ZINE 2017 SAL ARY SURVEY \ CHAIR FUM ($bn)

FUND

CHAIR

BASE REMUNERATION ($)

TOTAL REMUNERATION ($)

Tcorp TWUSUPER First State Super Telstra Super UniSuper Future Fund

70 4 75 17 55 124

Rob Whitfield David Galbally Neil Cochrane David Leggo Chris Cuffe Peter Costello

– – 213,776 175,757 200,913 –

550,000** 277,200 232,074 221,930 220,000 202,280

REST AustralianSuper Hostplus LGIAsuper HESTA Cbus Super Commonwealth Super Corporation MTAA Super Qantas Super Equip Super Mine Wealth + Wellbeing Kinetic Super VFMC Statewide Superannuation Trust First Super

39 100 20 10 34 34 37 9 7 8 9 3 51 7 2

Ken Marshman Heather Ridout David Elmslie Bronwyn Morris Angela Emslie Steve Bracks Patricia Cross John Brumby Anne Ward Andrew Fairley Grahame Kelly Frank Gullone James MacKenzie Juliet Brown Allan Stewart Michael O'Connor Brian Parkinson Naomi Edwards Ben Swan Bruce Hartnett Mark Birrell Henry Smerdon Craig Alwyn Peate John Hawker Janet Torney Peter Bugden Karl Morris David Miles Tim Kennedy Dick Shearman Claire Higgins Brian Scullin Padraig Crumlin Gerard Noonan Peeyush Gupta George Fishlock Mark Williamson Helen Nugent Kevin Foley John Simpson Joan Fitzpatrick Bob Lette Catherine (Cate) Wood Tim Shanahan Alan Bowman Michelle Tredenick Steve Butler Sandy McDonald Kevin Cottrill Richard Haddock Neville Cox Mark Spencer Terry Burke Joanne Farrell Philip Edmands

173,364 171,100 135,826 125,000 142,239 141,781 136,368 135,776 109,589

189,833 187,355 165,440 164,000 155,752 155,250 150,367 148,675 147,049 141,899 141,000 132,685 120,000-129,000 126,838 123,200 82,170 121,658 118,013 117,589 117,023 110,799 109,475 107,568 106,307* 80,461* 105,391 101,383 96,939 96,266 91,810 91,176 89,828 87,254 85,412 84,315 84,191 83,461 70,000-79,999* 40,000-49,999* 70,000-79,999* 40,000-49,999* 78,830 77,909 76,882 75,000 70,000 64,484 57,600 56,940 52,632 30,733* 19,541* 26,508 Not paid for Trustee role* Not paid for Trustee role*

Vision Super Tasplan Super Sunsuper Super VicSuper Australia Post Super AustSafe Super Local Government Super Club Plus Super

8 3 36 16 7 2 10 2

MyLifeMyMoney Super (formerly Catholic Super) QSuper legalsuper LUCRF Super NGS Super REI Super RBF Maritime Super Media Super StatePlus AvSuper Energy Super Funds SA

7 65 3 5 7 1 6 5 5 24 2 6 25

ESSSuper

BUSSQ CareSuper WA Local Government Super Prime Super IAG & NRMA Super EISS Intrust Super Fund AMIST Australian Catholic Superannuation and Retirement Fund Christian Super

4 11 3 3 2 5 2 2 7 1

Queensland Independent Education & Care Superannuation Trust Rio Tinto Staff Superannuation Fund * Served part of the FY15-16

1 5

–

123,000 119,000 –

115,834 123,200 72,270 111,103 107,707 60,394 –

110,799 79,977 98,236 97,084 73,480 63,610 101,383 –

82,435 81,973 83,266 81,138 87,254 78002 77,000 76,887 73,007 – – – –

71,991 71,250 70,212 68,493 64,000 58,890 52,603 –

48,066 31,051 19,813 13,780 – –

** Includes remuneration for other duties as NSW Treasury Secretary

investmentmagazine.com.au

FEBRUARY 2017

\ INVESTMENT MAGA ZINE 2017 SAL ARY SURVEY

LONG-TERM THINKERS

Only seven out of the 56 not-for-profit funds included in Investment Magazine’s annual pay sur vey incorporate long-term incentives (LTIs) in their executive remuneration policies. Only two funds used LTIs for both the chief executive and chief investment officer.

Fund 1

FUM ($bn) Name

Mine Wealth + Wellbeing

Base rem ($)

STI ($)

LTI ($)

Total rem ($)

336,359

104,160

229,710

726,659

David Bell (CIO) Bruce Watson (CEO)

264,666

128,354

9,050

1,198,937

8 Danielle Press (CEO)

453,266

364,321

137,830

955,417

Equip Super

First State Super

75 Richard Brandweiner (CIO)

624692

84,400 (+30,000 performance award)

64400

792800

Telstra Super

17 Jim Christensen (CIO)

235,178

467,636

44,416

779,373

QSuper

65 Michael Pennisi (CEO)

358,762

200,000

32,613

673,786

IAG & NRMA Super

2 Troy Maguire (CEO)

224,000

45,000

21,000

354,000

VicSuper

Oscar Fabian (CIO)

363,570

62,873

1,500

447,250

Michael Dundon (CEO)

502,634

91,217

1,000

614,158

Dwyer says. “This requires a CIO with the right skills and knowledge to lead the investment team and achieve returns.” In 2015-16, First State awarded its thenCIO Richard Brandweiner $114,000 in STIs and bonuses, plus $64,000 in LTIs, bringing his total remuneration to $792,800. However, many funds insist LTIs are too problematic to implement and enforce. Hostplus chief executive David Elia thinks STIs are a better tool to drive a high-performing culture. “It’s not that we haven’t looked at the question of long-term incentives, but the long term is made up of a whole series of short-term actions,” Elia says. “The board’s view is that it’s the short-term measurable behaviours that ultimately lead to long-term outcomes.” The $20 billion hospitality industry fund paid Elia a total of $807,261 (including $190,504 in STIs) during 2015-16, making him the sixthhighest paid fund chief executive. Giving executives the option to defer their STIs is another trend slowly gaining popularity across the industry, at funds such as Sunsuper. As a result of a review conducted with the help of external advisers in 2016, QSuper has scrapped LTIs in favour of deferred STIs. QSuper chair Karl Morris declined to elaborate on how this deferral structure was expected to produce better long-term outcomes for members. Morris defended the change as based on independent advice and industry benchmarking, with a view to attracting and retaining high-quality talent.

FEBRUARY 2017

LTIS PREACHED BUT NOT PRACTISED

Deciding on appropriate targets to trigger incentives is not simple. Investment performance is largely dictated by market performance, inflows are dictated by mandated contributions, and the market is largely saturated, so movement or the chance to grow other than through mergers is limited. All of this makes it difficult to measure the impact an individual has on long-term performance. Nevertheless, it’s notable that so few super fund investment chiefs have part of their pay linked to LTIs, given that the sector has been so vocal in pushing for more long-term focus in the remuneration policies of the listed companies in which they invest. Deloitte partner Russell Mason, who specialises in consulting to both for-profit and not-for-profit super funds, thinks the industry needs to take its own medicine and ensure bonuses are linked to longer-term performance. “If you are going to set the bar high for those companies you invest in, you have to do that internally,” Mason says. “While super funds are not commercial profit organisations, as far as I’m concerned, the members are the shareholders, so they should be treated accordingly.” The trend towards more super funds using short-term bonuses to incentivise their executives is seen by some as an inevitable consequence of increased competition between not-for-profit and retail funds. Stephen Moir, the founder and director of

specialist recruitment firm for the accounting and finance industries Moir Group, says employers in not-for-profit super have a feelgood factor that helps them attract talent. “There is no question that executive pay rates are higher in the retail wealthmanagement sector than at the not-for-profit super funds,” Moir says. “But super funds tend to be very good at being able to attract people of a high calibre by appealing to their desire to feel a sense of purpose about what they do.” He argues that before judging super funds too harshly for not being proactive about linking executives’ remuneration to LTIs, it’s important to remember that base pay in the sector is lower, and the use of overly generous short-term incentive structures less rampant. “Senior positions at retail funds usually have a short-term incentive on top of the base salary, which can be worth up to 100 per cent extra, and is typically pretty easy to achieve,” Moir says. While the use of incentives, in some form or another, is definitely on the rise across the not-for-profit super sector, many of its boards remain staunchly philosophically opposed to the practice. Media Super, a $5 billion industry fund for journalists and entertainers, has such a board. “Our staff are well remunerated to discharge their function without a specific incentive to outperform – they’re expected to be exemplary always,” Media Super chair Gerard Noonan says. “Bonuses and incentives have led to ridiculously skewed pay rates for many, many executives in corporate Australia. We’ve no intention of going there.” Ñ

investmentmagazine.com.au

COLUMN \

New year, new chapter for responsible investment The time has come for institutional asset owners, such as superannuation funds, to take the lead in making the Principles for Responsible Investment mainstream best practice. IN THE YEAR ahead, there will be new policymakers and new priorities in many countries, making it more important than ever that investors take the lead in helping to set the sustainability agenda. At the Principles for Responsible Investment (PRI), we have long believed that institutional investors should use their considerable financial strength to influence policymakers on environmental, social and governance (ESG) considerations. Managing ESG risks contributes to improved returns for investors and has a positive impact on the long-term health of financial markets. In the past, investors typically waited for governments to act first on such issues. Happily, we’ve seen this mindset change in recent years. The COP21 meeting, held in Paris in late 2015, marked the first time global investors made their voices heard in overwhelming numbers on the importance of tackling climate change. But most institutional asset holders still are not doing enough to take ownership of the responsible investment agenda. Sitting atop the investment chain, institutional asset owners are integral to driving responsible investment forward and should be taking the lead on this issue. These organisations should scrutinise and address the barriers holding them back from a truly long-term approach to investing. How the boards of superannuation funds structure their agendas and measurements of success can lead their internal and external investment managers to act with better regard for long-term outcomes. Trustees should be asking fund executives what they are doing to screen for ESG risks and how they are monitoring the risk management of external fund managers. To support asset owners with their ESG integration, the PRI recently published the report Investment Policy: Process & Practice: Asset Owner’s Guide to Complete ESG

investmentmagazine.com.au

BY FIONA REYNOLDS ___

Fiona Reynolds is the managing director of Principles for Responsible Investment (the PRI), a London-based international non-profit advocacy organisation.

Incorporation, which provides step-by-step guidance on how asset owners should be integrating ESG. The new guide is aimed at public and corporate pension funds, superannuation funds, insurance companies, endowments, foundations and family wealth offices. It is designed to help them revise their investment policy to incorporate all long-term factors, including ESG considerations. Clarifying asset owners’ fiduciary duties is also critical for moving ESG forward. In particular, there should be no doubt that investors should explicitly account for ESG issues in their investments, and in their engagement with companies and issuers. In 2015, the PRI, United Nations Environment Programme Finance Initiative, and The Generation Foundation launched Fiduciary Duty in the 21st Century. This examined fiduciary duty across eight key

markets: the US, the UK, Germany, Canada, Brazil, South Africa, Australia and Japan. The report concluded that considering sustainability as part of prudent capital management is not only important to upholding fiduciary duty, it is obligatory. A roadmap for each country has been published, which includes views from investors, policymakers and lawyers. The roadmaps make recommendations covering both policy and practice that will allow fiduciaries to fully integrate ESG risks. In addition to clarifying definitions around fiduciary duty, the PRI is also taking steps to address barriers to ESG across the broader financial sector. The organisation’s mission calls for it to promote a sustainable global financial system that supports long-term value creation and benefits the environment and society as a whole. We have identified 30 underlying conditions that could cause the financial system to fail to support sustainable economic development and prioritised the most prominent causes. We looked at areas where we can match our ambitions with our resources and expertise. We have prioritised nine key obstacles we will focus on in our work in 2017: 1 | Short-term investment objectives 2 | Attention to beneficiary interests 3 | Policymaker influence on markets 4 | Capture of government policy by vested interests 5 | Influence of brokers, ratings agencies, advisers and consultants on investment decisions 6 | Principal-agent relationships in the investment chain 7 | Cultures of financialisation and rent-seeking in market actors 8 | Investment incentives misaligned with sustainable economic development 9 | Investor processes, practices, capacities and competencies. Ñ

FEBRUARY 2017

\ PROFILE

CALM UNDER

fire

As adept at giving orders as taking them, REST INDUSTRY SUPERâ&#x20AC;&#x2122;S Brendan Casey juggles his dual careers in military operations and investment operations with aplomb. By Dan Purves and Sally Rose Photo Matt Fatches

FEBRUARY 2017

investmentmagazine.com.au

PROFILE \

M BRENDAN CASEY REST Industry Super general manager investments Since: November 2016 Other current roles: Deputy president of the Alumni Council, University of Sydney, April 2015 – present; Army Reserve senior officer, Australian Army, November 1984 – present

Recent previous roles: Head of CIO operations, Suncorp Group, July 2013 – October 2016; Financial consultant, Skildar, May 2002 – June 2013; Head of electronic trading and equity infrastructure, CBA Institutional Equities, March 2009 – March 2010 Education: Casey has a PhD in theoretical chemistry from the University of Sydney and graduate diplomas in both management and applied finance and investments.

…………

REST Industry Super History: Founded in 1988, as an

ANAGING $42 BILLION in investments at one of the country’s largest superannuation funds is a big job but, even on its toughest days, the pressure pales in comparison to working under enemy rocket fire in Afghanistan. REST Industry Super’s recently appointed general manager investments, Brendan Casey, says 32 years in the Australian Army Reserve, including an active deployment overseas in 2011, have shaped him for the biggest civilian leadership role to date of his varied career. “Leadership, planning and resilience are the qualities the army has given me,” says the former chemical engineer turned quantitative analyst, turned stockbroker, turned asset manager, turned investment operations expert. A defence background that has taught Casey how to both lead and follow orders is set to prove invaluable in working with the REST investment committee – well known as one of the most hands-on in the industry. Casey recently sat down with Investment Magazine at REST’s Sydney offices, in his first media interview since joining the superannuation fund on November 1, 2016. He painted a picture of himself as a man not easily ruffled. “[In Afghanistan], I went through six months where every other day people were rocketing our base,” he says. “People were dying every day. That was such an extreme level of stress. I can’t imagine anything happening here that could come close… It is much easier working in a civilian environment…much gentler.”

industry fund for retail employees.

Funds under management: $42 billion Number of members: 1.9 million Member demographics: 51 per cent of members are under 29 years of age.

Average member account balance: $23,000 Leadership: Ken Marshman, chair; Damian Hill, chief executive; Brendan Casey, general manager investments

investmentmagazine.com.au

FEBRUARY 2017

\ PROFILE

“The beauty of that is that I’m always calm and it’s hard to stress me.” Immediately prior to joining REST, Casey spent a little over three years at ASX-listed insurance and wealth management firm Suncorp as its head of investment operations. At REST, he fills the fund’s top investments job, which had been left vacant for five months following the departure of Ronan Walsh in May 2016, after just six months in the position. REST independent chair Ken Marshman told Investment Magazine Casey’s “terrific” background in investments and investment operations made him an ideal candidate for the role, and that he was also impressed by his life experience beyond the financial services industry. “He has a very diverse set of backgrounds and interests; a wellbalanced but very active life,” Marshman says. “He appears to be driven to excellence…and his track record shows a high level of mental agility.” Casey started his professional life as a chemical engineer working internationally for DuPont and gained a PhD in chemistry, specialising in polymers. A dearth of career opportunities for senior scientists at home in Australia, where he and his wife, who also holds a PhD in chemistry wanted to raise their family, led to a career change. After answering a advertisement in the Sydney Morning Herald titled ‘Move from science to finance” Casey landed a job as a quantitative analyst at County (now Citi) and never looked back, proceeding to rise to head of portfolio and trading, then moving on to various roles with Commonwealth Bank of Australia before landing at Suncorp and now REST. Former Suncorp chief investment officer Nick Basile, recruited Casey as his deputy at the insurer, having previously been his boss at CBA.

MILITARY PRECISION

Basile says Casey has a “firm but fair” management style that “gets things done.” “Probably the best recommendation you can give someone is to hire them

again,” Basile says. “He tends to have very high expectations of his team, but he communicates goals early and clearly and delivers.” Basile says Casey was always clearly ambitious and sought out career development. And as he was building his career in the financial services sector, he was simultaneously progressing up the ranks in the Australian Defence Force. At the age of 19, Casey was already commanding a 10-man section in the infantry. Today he is responsible for 14,000 high school cadets as the commander of the NSW Australian Army Cadet Brigade. The plan is that his next assignment will see him promoted to brigadier general in the Army Reserve, in charge of 5000 adult service personnel. It is notable that someone so ambitious and experienced at leading others is also comfortable following orders. Most super funds of REST’s size employ a CIO to lead their investment strategy, under the guidance of the board’s investment committee. At REST, the investment committee, working closely with the fund’s longstanding asset consultant JANA, has always taken a much stronger role. Casey says the fact the fund was recruiting for a general manager investments to implement its strategy, rather than a traditional CIO to set the strategy, was exactly what appealed to him. “The job description matched me so perfectly,” he explains. “The investment committee fills the role of a strategic CIO and I fill the role of an operational CIO. “Day-to-day decisions a CIO might make, I make. But longerterm decisions go to the investment committee, which meets monthly.” REST’s investment committee is led by fund chair Marshman and comprises five other trustees, plus JANA founder John Nolan, who sits on the investment committee as a non-voting member. JANA executive director John Coombe, head of research and investment outcomes Steven Carew, senior consultant Matt Griffith

FEBRUARY 2017

Across the industry, there is a push towards in-sourcing, but REST has always had a pseudo-internal investment team

investmentmagazine.com.au

PROFILE \

REST INDUSTRY SUPER STATISTICS

and consultant Matt Gadsden also attend REST investment committee meetings. The industry fund’s ties with its National Australia Bank-owned asset consultant, which has held the mandate for 26 years, clearly run deep. Marshman is a former chief executive and chair of JANA. So far, Casey is finding the close working relationship with the investment committee and its advisers constructive. “JANA obviously have a house view but they’re willing to challenge that thinking on [how well it applies] for us,” he says. “They definitely speak their minds, especially John Coombe – he is not one to be handcuffed.”

investmentmagazine.com.au

TILT TO CASH

PERIOD

RETURN P.A. (%)

10 years

6.36

7 years

8.12

5 years

10.68

3 years

6.77

1 year

7.53

ASSET TYPE

ALLOCATION (%)

Australian shares

Overseas shares

Property

Infrastructure

Growth alternatives

Total growth assets

Defensive alternatives

Bond

Cash securities

Total defensive assets

The portfolio strategy Casey has been tasked with implementing over the short term is to tilt away from equites towards cash and credit securities. REST is already holding 6 per cent of the portfolio in cash, ready to buy bargains in the event of a market dip. This is driven by a view that equity markets are overvalued in a low interestrate environment and fear of heightened geopolitical risk, following Brexit and the election of Donald Trump as president of the United States “There are different views within the investment committee on whether things are going to be positive or negative because of Trump,” Casey says. “A lot of people think there will be

a short-term boost in the US economy, but there is concern as to whether it can sustained…and what effect his policies might have in other markets.” Another element of REST’s investment model that is different to other funds is its heavy reliance on subsidiary Super Investment Management (SIM): a separate, but wholly owned, externally operated funds management business. “Across the industry, there is a push towards in-sourcing, but REST has always had a pseudo-internal investment team,” Casey says. REST does not manage any investments internally, but has about 20 per cent of its mandates with SIM, an arrangement set up more than

FEBRUARY 2017

\ PROFILE

Whether death cover should remain a mandatory inclusion for default super members – is a question that is definitely worthy of a review

two decades ago. Since its creation, SIM has been forbidden from taking on any clients other than REST. “That is a philosophical approach in that we want them purely focused on REST and returns for our members,” Casey says. It is also REST policy that SIM cannot be the fund’s exclusive manager in any asset class, with the exception of cash management, to keep the business on its toes. “We perform due diligence on SIM, receive monthly reports, and assess them against benchmarks and their peers, just like any other manager,” Casey says. The REST model of having a powerful investment committee fulfilling the strategic CIO role, a general manager investments focused on implementation, and external fund managers (including the wholly owned SIM) carrying out the day-to-day trades is unique in the industry. “It is not typical, but it has obviously worked very well, as can be seen by how well the fund has performed and the great returns delivered for members,” Casey says. The fund’s MySuper option – REST Core – was the top-performing

FEBRUARY 2017

growth fund in Australia over the 10 years to June 2016, with an average annual return of 6.4 per cent. Casey hopes to add “a couple” of new roles to his team of 11 direct reports at REST, but says he is more concerned with building capability than headcount. “The biggest area where I want to work with my team on lifting their capabilities is improved project planning skills,” he says. “Defence is all about planning…the finance sector not so much.” With $42 billion in funds under management, REST is placed as the ninth-largest super fund in the country by funds under management. But with more than 2 million accounts, it ties with its biggest rival ($103 billion AustralianSuper) as the super fund with the biggest membership. This fact hints at one of the biggest challenges for REST’s executive management: looking after the interests of members with meagre balances. REST is the default fund for some of the biggest employers in the retail and hospitality sector – such as Woolworths, Coles and McDonald’s. More than half (51 per cent) of REST’s members are under age 29. Most members were automatically signed up to the fund when they got a low-paid casual job early in their working life. Educating young members about the importance of super and how small contributions made early in life can add up to a better retirement is an important focus for the fund. The demographics of REST’s membership also have a direct impact on the investment strategy Casey is tasked with implementing. “Our members have got a long future ahead of them, so our style is to focus on growing long-term returns,” he says. The fund’s core MySuper strategy has a 78 per cent allocation to growth assets. Frustratingly for Casey and his team, one of the most important drivers of total net returns for their most vulnerable members is completely beyond their control. It is required by law that all super funds automatically sign default members up to a group life-insurance

policy that includes three types of cover: death, total and permanent disability (TPD), and income protection. The relative merits of default group life insurance, particularly for members with low balances – for whom the premiums leave a heavy dent in their retirement savings – is the subject of hot debate.

INSURANCE DILEMNA

Each year, some default members with low balances pay out more in insurance premiums than they receive in investment earnings. It’s a perverse situation, where default insurance premiums are eroding the retirement savings the scheme is intended to protect. This is particularly challenging at the moment, when sluggish global growth means super funds are likely to struggle to deliver the type of average annual investment returns members have grown used to in the past decade over the 10 years ahead. Casey told Investment Magazine that the insurance conundrum is an issue he has discussed with REST chief executive Damian Hill, who is a contributor to the Insurance in Superannuation Industry Working Group established in December 2016 with the goal of producing a new code of conduct by the end of 2017. REST now has the simplest and cheapest default group life-insurance policy of any super fund in the market. “That is intentional, because it is arguable whether very young people get much benefit from default life insurance,” Casey says. Basic cover for total and permanent disability and income protection tends to represent good value to most members, but for the large swathe of REST’s members, who are aged under 25 and don’t have any dependents, the value of death cover is highly questionable, he says. In the coming months, a parliamentary joint committee will examine the question of whether death cover should remain a mandatory default inclusion for default super members. “It’s a question that is definitely worthy of a review,” Casey says..Ñ

investmentmagazine.com.au

\ SP ONSORED CONTENT

Looking for that

WOW factor An Investment Magazine InFocus report, in partnership with Northern Trust Asset Management

Factor-based investment strategies ARE A GLOBAL TREND that’s finally catching on at some of Australia’s largest superannuation funds. Especially as asset owners become disenchanted with the shortfalls of more traditional active or passive philosophies, and face intense pressure to MEET RETURN TARGETS IN CHALLENGING MARKETS.

By Sally Rose

FEBRUARY 2017

AS SUPERANNUATION AND pension funds grapple with having to lower return targets and adjust investment strategies in response to the difficult market outlook, more and more are coming to the conclusion that now is the right time to implement factor-based strategies. Recent research sponsored by Northern Trust found 70 per cent of global asset owners surveyed said they expected to have to lower return targets in the year ahead. This sentiment was reflected locally in the results of Investment Magazine’s annual CIO Survey, with 70 per cent of Australian asset owners admitting they were not confident of meeting their return targets in 2017. “All around the world at the moment, investment chiefs are concerned that the outlook for equity markets is lacklustre and returns from the bond markets will probably be terrible, so they have to look for new ways to improve net returns,” Northern Trust Asset Management senior vice-president and director of quantitative research, Michael Hunstad, says.

Hunstad leads Northern Trust’s factorbased research and product development across active and passive equity, fixed income, real estate, and commodity markets. The firm, which has more than $US900 billion ($1.2 trillion) in assets under management, has roughly $US60 billion invested in factor strategies globally. Factor-based investment strategies, sometimes referred to more generally as alternative-beta strategies, aim to achieve much of the cost savings associated with passive investing, while capturing some of the higher returns promised by active management. The idea is to screen and modify an index to target specific factors the asset owner cares about. The six main factors these strategies target are: value, size, low volatility, quality, dividend yield and price momentum. “Since the global financial crisis in 2008, there has been a growing realisation across the industry that fundamental active management tends to underperform, especially once you consider the fees,” Hunstad says. “On the other hand, asset owners want more juice than passive cap-weighted index strategies can deliver.”

THREE STAGES FOR SUCCESS

He says the key to success with factor strategies lies in three critical stages: picking the most appropriate mix of factors to target, getting the portfolio construction right, and monitoring performance.

investmentmagazine.com.au

SP ONSORED CONTENT \

Colonial First State, the Commonwealth Bank of Australia’s $203 billion superannuation and wealth-management arm, is one local asset owner embracing factor-based investing. These strategies have been a part of Colonial First State’s MySuper option, FirstChoice Lifestage, since the product was launched in May 2013. To date, Colonial First State has implemented factor-based approaches in both value investing and volatility strategies across various segments of the equities portfolio. These mandates are handled by a combination of CBA-owned and other managers. The value factor strategy plays a greater role for younger member cohorts, while the volatility factor strategy is more important for older ones. “Our aim is to match the characteristics of factors to the objectives we set for each of our member cohorts,” Colonial First State head of investments Scott Tully says. “FirstChoice Lifestage is designed to automatically adjust the risk profiles of members’ investment portfolios as they age, which is particularly valuable for default members, who tend to be less engaged with decisions about their super.” Tully revealed Colonial First State is doing research to determine whether factor-based strategies can be included within the fixedincome portfolio. Cbus Super is another major Australian asset owner looking to allocate more capital via factor-based strategies. The $35 billion industry super fund for workers in the construction sector began using factor-based strategies within its global equities portfolio

a little over two years ago. Specifically, Cbus uses a factor approach for a low-volatility strategy and a fundamental indexation strategy. These mandates are handled by external managers working closely with members of Cbus’s internal team. “Alternative beta strategies allow us to access preferred factors in a low-cost and transparent manner,” Cbus investment manager, public markets, Brett Chatfield says. “It is relatively early days and we would want to look at three to five years’ worth of data before drawing strong conclusions… but we have been comfortable that the strategies have delivered consistent with our expectations of their risk-return profiles and fit within the total portfolio.” In 2016, the alternative beta sub-sector within global equities outperformed the index by about 1.1 per cent, net of fees. Cbus is now considering how it might use similar strategies within its Australian small-caps, emerging markets, and global fixed-interest portfolios, Chatfield says.

WIDESPREAD IN THE US AND EUROPE

More Australian superannuation managers, like Colonial First State and Cbus are turning to factor-based strategies but the trend is yet to take-off across the local market to anywhere near the extent it has among large pension funds in the United States and Europe. Tully suspects the main reason Australian asset owners are yet to go factor-based with the same gusto is that the style is more difficult to implement in our relatively small local market. An incumbency barrier is

VA L U E SIZE LOW VOL ATILIT Y QUA L I T Y DIVIDEND YIELD PRICE MOMENTUM investmentmagazine.com.au

another challenge, as many super funds find their legacy investment approaches are difficult to unwind. Chatfield agrees the work required to identify, implement and measure factors effectively might make the decision to begin adopting a factor-based approach a daunting one, especially for smaller funds. “It takes meaningful resources internally, both in terms of research and systems, to thoroughly research such strategies and to determine the optimal way to incorporate them into overall portfolios,” he says. Cbus has one of the largest internal investment teams in the local super fund industry and is on a hiring spree as it works towards a five-year goal of managing 20 per cent of total assets in-house. For smaller funds, selecting a manager who is prepared to work closely with them to create a customised approach can help. Northern Trust is trying to carve a niche for itself in the local market by helping their clients fill that information vacuum. “With so many thousands of factor products out there in the market, I can understand why it’s tempting to buy an off-the-shelf solution, but for a large, sophisticated investment fund, that is almost never the right answer,” Hunstad says. “We find one of the ways we can add a lot of value for our clients is by helping them identify what factors are already dominant in their legacy portfolios, and exactly what they should be targeting to achieve their investment goals.” That might mean targeting a certain rate of return, or de-risking the portfolio. Increasingly, it is a complex mix of multiple factors. Performance monitoring and attribution, so it is clear what factors were most important in driving returns, is also critical, Hunstad says. At this point, he argues, the big question for asset owners with regard to factor strategies should have moved on from ‘Should we implement this?’ to ‘How do we best implement this?’ “How a factor-based portfolio is constructed and implemented will almost entirely determine whether it fails or succeeds, much more so than what manager wins the mandate,” he says. Hunstad argues factor-based strategies will work best for those asset owners able to take a long-term approach, but can also be a helpful risk-management tool for those funds under pressure to meet performance benchmarks over yearly horizons..Ñ

FEBRUARY 2017

\ CONEXUS FINANCIAL SUPERANNUATION AWARDS

Superannuation 2017

AWA R D CAT E G O R I E S A N D F I NA L I S T S (finalists listed alphabetically)

AustSafe Super | EISS Super | Intrust Super | Kinetic Super MEDIUM FUND OF THE YEAR ($5 billion to $10 billion in assets)

JUDGING COMMIT TEE MEMBERS CHRIS AILMAN

Chief investment officer, CalSTR S (US) JOANNA DAVISON

Chief executive officer, FEAL SIMON HOYLE (JOINT CHAIR)

Director of retail content, Conexus Financial ALAN KIRKLAND

Chief executive officer, CHOICE SALLY LOANE

Chief executive officer, Financial Services Council ADRIAN ORR

Chief executive officer, NZ Super (NZ) MICHAEL RICE

Chief executive officer, Rice Warner HON BERNIE RIPOLL MAICD

Former Parliamentary Secretary to the Treasurer and Chair, PJC Corps and Financial Services

Energy Super | LGIAsuper | MTAA Super | NGS Super

AMANDA WHITE (JOINT CHAIR)

LARGE FUND OF THE YEAR

Director of institutional content, Conexus Financial

Cbus Super | QSuper | Sunsuper | UniSuper

– SPECIAL ADVISER –

(more than $10 billion in assets)

CHIEF INVESTMENT OFFICER OF THE YEAR Australian Ethical: David Macri | Cbus Super: Trish Donohue and Kristian Fok | MLC/Plum: Jonathan Armitage | Statewide: Con Michalakis

HELEN ROWELL

Deputy chairman, Australian Prudential Regulation Authority (APR A)

The winners of the Conexus Financial Superannuation Awards 2017 will be unveiled at a black-tie event at the Ivy, Sydney, on March 9, supported by Vanguard and AIA Australia. You can purchase single tickets or tables for 10 by visiting conexussuperawards.com.au. The Conexus Financial Superannuation Awards proudly support The Wayside Chapel.

FEBRUARY 2017

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CONEXUS FINANCIAL SUPERANNUATION AWARDS \

SUPER BOSSES’ RALLYING CRY TO GOVERNMENT:

Hands off

THERE ARE MANY CHALLENGES facing all segments of the sector but in order to meet any of them, fund CEOs say, THEY NEED A BREAK from all this change. By Sally Rose

THE LEADERS OF some of Australia’s most successful super funds have spoken with a united voice in calling on the federal government to take a breather from announcing any more changes to superannuation laws in 2017. Investment Magazine conducted a straw poll of chief executives from the 20 superannuation funds recognised for excellence as finalists across 11 categories in the Conexus Financial Superannuation Awards 2017. We asked these super fund bosses to identify the biggest challenges facing their industry in the year ahead. The overwhelming majority spoke of fighting an uphill battle to overcome the general public’s mistrust of the system; a problem exacerbated by the confusion over a swathe of changes to tax concessions and contribution rules foreshadowed in the May 2016 federal budget and set to be implemented in 2017. “Uncertainty driven by continual legislative change serves to erode confidence and trust in superannuation as a reliable, long-term savings vehicle,” says Anthony Rodwell-Ball, the chief executive of NGS Super, the $7 billion industry fund for non-government schools. The 2016 federal budget included the biggest suite of changes to the regime of superannuation contribution rules and related tax concessions since the nation’s compulsory retirement savings system was introduced in 1992. The crackdown on super tax perks for the rich represents an attempt by the Turnbull Government to make the system fairer and more economically sustainable – a critical challenge as the baby boomer generation enters retirement at a time of turmoil and low-growth in the global economy. After heated debate, and some modifications, most of the changes have passed into law and will be in effect from July 1, 2017. The timeline for implementing the changes has left

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many super funds, particularly smaller providers and those that manage their back-office administration in house, struggling to have compliant systems in place by the looming deadline.

A MATTER OF TRUST

But perhaps a more important long-term downside of the reforms is that the negative publicity surrounding them has harmed public trust and confidence in the system, leaving members less likely to make engaged decisions – or voluntary contributions. Australian Catholic Superannuation & Retirement Fund chief executive Greg Cantor lamented that political intervention was derailing the $7.5 billion faith-based super fund’s efforts to improve the financial literacy of its members and help them become more engaged with decisions about their super. “The government is not making it easy for people to have faith in the system,” Cantor says. “Our members tell us they trust us but they can’t trust either of the two major political parties.” Intrust Super chief executive Brendan O’Farrell is frustrated by the inability of the major political parties to achieve bipartisan accord on superannuation policy. “Australia is seen to have one of the best superannuation systems in the world. But there must be a long-term vision to ensure super funds can invest more in building quality solutions, and less in addressing constant legislative changes,” says the chief executive of the $2 billion Queensland-based industry fund. QSuper chief executive Michael Pennisi is worried that superannuation will “continue to be in the press for all the wrong reasons” in 2017. “Super was obviously a big election issue in 2016, sparking much debate and a number of tax changes that will take effect from July 1, 2017,” Pennisi says. “What the

FEBRUARY 2017

\ CONEXUS FINANCIAL SUPERANNUATION AWARDS

general public wants from the government is a sense of stability in the direction of future policy.” The chief executive of the $65 billion default fund for Queensland public servants wants the industry to do a better job of spruiking the “great benefits” it provides. “It is incumbent on us [the industry], and on the government, for the good of the country, to make sure people believe the super rules of today will stand up tomorrow and the next day,” he says. “Our super system is a fundamental building block of the Australian way of life.”

APATHY IS THE ENEMY

Frustration and confusion over changes to the super rules has just added to the public’s longstanding disenchantment with the system, MTAA Super chief executive Leeanne Turner argues. She says combatting member apathy has long been, and remains, the biggest challenge for the $9 billion industry fund for workers in the motor trades – and for the super industry at large. “Apathy and a lack of engagement with super present an obstacle to the adequacy of individuals’ retirement savings and, ultimately, people’s wellbeing in their later years,” Turner says. Energy Super chief executive Robyn Petrou agrees building member engagement and trust remain the top challenges for the superannuation industry. “Australians continue to remain largely disengaged from their superannuation

Our super system is a fundamental building block of the Australian way of life Michael Pennisi

until they are only a decade or two away from retirement,” Petrou says. “Too many members don’t understand how their super fund can assist with bolstering their financial wellbeing during their working lives, with insurance and financial advice.” The boss of the Queensland-based $6 billion industry fund for workers in the energy sector called “the government constantly changing the rules” the leading cause of rising member disillusionment. National Australia Bank executive general manager wealth products, Paul Carter, whose remit includes the $70 billion MLC Super, agrees a lack of member engagement continues to be the biggest challenge facing the superannuation industry. “Turning this apathy around will be like turning an ocean liner around. It will be slow but with sustained progress, we can make a difference,” he says. Carter says super has “been the subject of political whims for too long”. He called on the federal government to be ambitious and aspirational as it readies to introduce new legislation defining the objectives of the super system. “These objectives should be clear,

FUND OF THE YEAR 2016 WINNER | UNISUPER FUND OF THE YEAR 2017 to

be announced on the night

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| CHIEF EXECUTIVE | QSUPER

measurable and robust to ensure they target an adequate replacement income in retirement to mitigate generational inequity and gaps in living standards, as well as costly and destabilising interventions into the future.”

RETAIL, NOT-FOR-PROFIT SEGMENTS CLASH OVER SOME CHANGES

The not-for-profit and retail segments of the super sector are largely united in their calls for the government to “stop tinkering” with the super tax rules. But there are many mooted changes to the super rules on which the not-for-profit and retail sectors are in staunch disagreement. Perhaps nowhere more so than on plans to throw open the default fund selection process to encourage more competition from the banks. UniSuper chief executive Kevin O’Sullivan says responding to the outcomes of a Productivity Commission inquiry into the efficiency and competitiveness of the industry could be one of the biggest challenges for the industry in 2017. Another top priority for the industry in the year ahead will be ensuring members receive appropriate insurance through their super fund, and ensuring the public better appreciates the value of those insurance arrangements, O’Sullivan says. The chief executive of the $55 billion default fund for university employees also identified the need for funds to “take concrete steps to deliver truly relevant and appropriate post-retirement solutions” as a high priority. Investments in technology and datamanagement processes will also be critical, as funds set about meeting the multiple challenges of engaging disaffected members, lifting the quality of their insurance offerings, and developing next-generation retirement income products. And as super fund chief executives are facing all these challenges, their chief investment officers will be grappling with how to meet their investment return targets in difficult financial markets. Ñ

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INVESTMENT OPERATIONS CONFERENCE \

struggle to IMPLEMENT The

RG 97

The government’s upcoming rules changes will force super funds to be MORE DETAILED AND TRANSPARENT in the way they disclose the underlying assets, fees and costs associated with their portfolios. Complying with the new demands is one of the biggest challenges to confront investment operations teams in decades. By Dan Purves and Sally Rose

INVESTMENT OPERATIONS Conference FEBRUARY 21 | 2017 THE WESTIN, SYDNEY, NSW

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CRITICS OF THE new RG 97 rules argue that the heavy burden of compliance is set to create one more obstacle to super funds investing with a long-term mindset, by disadvantaging those with a higher allocation to unlisted assets. The Australian Securities and Investments Commission’s (ASIC) controversial updated regulatory guidance on fees and cost disclosures (note RG 97) is set to come into effect from October 1, 2017. JANA executive director John Coombe, one of the most powerful asset consultants in the industry, gives a scathing critique of the new rules. “Without a shadow of a doubt, the regulators are the biggest barrier to long-term investing,” Coombe says. “They already limit how much illiquidity funds can have and now they are imposing this additional cost to investing in unlisted assets. I am concerned about what they are trying to achieve with RG 97; it’s crazy.” Many, like Coombe, are worried the compliance challenges will deter funds from investing in unlisted assets. Historically, a higher allocation to unlisted assets has been the key driver of not-for-profit super’s superior average investment returns over the retail super sector. At the moment, super fund members can typically see what investment managers their fund has mandates with, and find a list of the top 20 stocks and bonds in the portfolio, plus any major real-estate or infrastructure assets in which their fund has a significant stake. Under the incoming regime, funds will be required to name at least 95 per cent of their underlying holdings, and provide much more detailed data about fees and other costs of particular investments every six months. This will produce lists with thousands of line items. Also controversial is the exemption for platform-

based superannuation providers – a segment of the industry typically controlled by the big banks and other retail wealth managers, such as AMP, that allows individuals to select the specific holdings within their own portfolio. Industry groups pushed for a heavy watering down of the changes, but won only a delay to allow funds more time to get ready. Providing members with a detailed breakdown of ‘look-through’ costs, including indirect fees, in their unlisted holdings will be one of the trickiest obligations to meet. Private asset classes are generally traded off market and infrequently, making them difficult to revalue every six months. Becoming RG 97 compliant is causing grief for heads of investment operations and their back-office teams at super funds all around the country. Those funds without the latest technology and up-to-date data-management processes will be the most at risk of floundering.

IS THE INDUSTRY READY?

TCorp general manager, investment implementation and operations, Jonathan Green, says that while the industry has begun the journey towards implementing more sophisticated and efficient investment operations systems, it still has a long way to go. He warns that collecting data is just the first step. For this data to be valuable, funds have to be able to glean meaningful information from it, and then make wise decisions about how to use it. “Whether it’s RG 97 compliance, disclosure of holdings, attribution analysis, or positions of dealing, the next five-plus years of investment operations will be defined by those organisations that can embrace that,” Green says. TCorp, the investments arm of the New South Wales Treasury, is one of the largest institutional asset owners in the country, with nearly $70 billion in funds under management. The Australian Prudential Regulation Authority will be responsible, along with ASIC, for monitoring RG 97 compliance. APRA executive Stephen Glenfield, the regulator’s head of supervision for south-west Australia and chair of its superannuation industry group, argues that the updated rules will improve integrity and transparency. “You want your members to make an informed choice about what they are doing,” he says. “Why shouldn’t members have transparency?” Glenfield rejected Coombe’s criticism that the new regime would hinder long-term investing. “You will never see APRA coming out and talking about short-term results,” he says. Ñ

FEBRUARY 2017

\ INVESTMENT OPERATIONS CONFERENCE

Single Touch Payroll will give members’ fund choices a nudge The new payroll system should make it harder for businesses to evade tax and dud their employees out of superannuation. But getting the design right will be critical to ensure it does not pervert how individuals choose a fund. IT MIGHT NOT be the stuff of media BY headlines, but the launch of Single DAVID HAYNES Touch Payroll (STP) could prove one ___ of the most significant developments affecting the superannuation David Haynes is executive industry in 2017. manager policy and research at the Australian Institute of STP is a government initiative Superannuation Trustees. designed to make employers report on how they’ve met their PAYG tax and superannuation obligations with the same frequency as they pay their workers’ wages. The potential ramifications of STP are little understood outside of technical circles, but they are set to be big and wide-ranging. STP will help the government combat tax evasion and social security fraud, as well as giving the Australian Taxation Office (ATO) more information, more quickly, to enforce employer compliance in regards to superannuation obligations. The new system will be available to all employers from July 1, 2017. It becomes mandatory for employers with 20 or more employees from July 1, 2018. Under the new system, employers will have to report wages, PAYG income tax, withholding tax and super information at the same time that they make these payments. At present, there is normally a lag between payments and reporting. This makes it difficult for workers to keep track of their super contributions, and means rogue employers who are not meeting their Super Guarantee obligations can go undetected for a long time. STP will give the ATO real-time data on whether or not super has been paid and make This could lead to wholesale it much easier to tackle the problem of unpaid changes in the way super, which costs workers an estimated $6 individuals select their fund billion a year.

FEBRUARY 2017

With the government yet to decide on a date to mandate STP reporting for small businesses (and it is small, rather than large, businesses that are more prone to default on their SG obligations), it may be some years before the full impact of STP on unpaid super is realised. Many small businesses – concerned that more frequent PAYG withholding and super payments could have adverse cashflow consequences – have been less than enthusiastic about this reform. In contrast, the impact of STP on choice of fund could be immediate and profound. In a single touch, employees could find themselves making a snap decision about which super fund to use – a choice that may not be in their best interests. The reason is in the design. As part of the implementation of STP, the ATO is preparing a bunch of online forms for individuals commencing work with a new employer. This includes a new Superannuation Choice of Fund form. Completion of this form will remain voluntary, but digitising it is likely to change behaviour. This could lead to wholesale changes in the way individuals select their fund. The Australian Institute of Superannuation Trustees is part of the ATO group working on the design of these new online forms. The way information is laid out, the wording of consumer warnings and explanatory text, as well as decisions about the use of mandatory or voluntary fields, will all shape the choices people make. Across the financial services sector, there are countless examples of new technology leading to cost reductions and better servicing. But there are also valid concerns that new processes must not come at the expense of consumer protection. The move to online forms may be inevitable but that doesn’t mean we should accept poorer outcomes for consumers. We need to ensure that the launch of online Choice of Fund forms genuinely helps people make the right decision for themselves. Selecting a super fund is much more than a simple box-ticking or, indeed, mouse-clicking or screen-swiping, exercise. Consumers must be able to make an informed choice with all of the relevant information before them, such as details of their current funds and their new employer’s default fund. Ñ

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22-24 March 2017 Gold Coast Convention and Exhibition Centre The Australian Institute of Superannuation Trusteeâ&#x20AC;&#x2122;s (AIST) flagship event, the Conference of Major Superannuation Funds (CMSF) is the premier idea sharing and networking event for Australiaâ&#x20AC;&#x2122;s $700 billion profit-to-member superannuation sector. This year CMSF will focus on content that brings you thought leadership and practical insights on topics covering your industry, your members and yourself. The following speakers are already confirmed for 2017:

Paul Berney

Kristen Boschma

Geraldine Davys

Christy Karamzalis

Eser Keskiner

Managing Partner, mCordis

Head of Brand Strategy, Bastion Collective

Chief Marketing Officer, iSelect

Industry Head, Financial Services, Google Melbourne

Associate Partner, McKinsey & Company

The Hon Michael Kirby AC CMG

Patrick van der Pijl

Nickie Scriven

Shai Vichness

Amanda Young

Former Justice of the High Court of Australia

Chief Executive Officer, Business Models Inc

Managing Director Melbourne, ZenithOptimedia Worldwide

Managing Director, Head of Senior Leveraged Lending, TIAA Global Asset Management

Chief Executive Officer, First Nations Foundation

For full program details and to register vist www.aist.asn.au/cmsf

\ MARKET OUTLOOK

O n th e ge o p o l i t i c a l h o r iz o n

IN THE YEAR OF THE ROOSTER

It’s impossible for asset owners to predict what mess Donald Trump’s crowing or Theresa May’s game of chicken might lead the world into in 2017. Not to mention what new geopolitical upsets are around the corner. DIVERSIFICATION WILL BE THE KEY TO KEEPING PORTFOLIOS RESILIENT. By Dan Purves

AT THE OUTSET of 2017 – the Chinese Year of the Rooster – chief investment officers are acutely aware of the potential for the world’s politicians to wreak havoc with their plans. After a turbulent 2016, this could be the year when the risks of inadequate portfolio diversification come home to roost. This January, the world heard a promise by British Prime Minister Theresa May to implement a clean and hard Brexit from the European Union, followed by an incendiary inauguration speech from new US President Donald Trump. These two figures, who were at the centre of the biggest geopolitical shocks of 2016, are set to continue shaping global markets in the year ahead. More worrying for investment chiefs is that there are so many potential geopolitical triggers for market upsets already pencilled in on the calendar.

FEBRUARY 2017

Elections will be held in the Netherlands, France and Germany, and possibly in Italy and the UK. Far-right populist parties touting nationalistic, protectionist policies stand to gain ground in all those polls. A twice-a-decade leadership reshuffle in China, which is scheduled for the latter half of 2017, could throw up another wildcard. These are just a few of the major geopolitical events investors are trying to plan for – what former US defense secretary Donald Rumsfeld would refer to as the “known unknowns”. But, of course, the biggest geopolitical shocks are always the “unknown unknowns” that no one sees coming. “Any CIOs who think they have a handle on geopolitical risks are fooling themselves,” Statewide Super chief investment officer Con Michalakis warns. “The fact is, you can’t predict the future and history has shown that markets don’t price geopolitical risk well.”

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MARKET OUTLOOK \

What worries Michalakis is that with asset prices inflated from eight years of record low interest rates and extraordinary international monetary policy, even a small geopolitical shock might lead to major falls in global financial markets. He has already re-positioned Statewide’s $7 billion portfolio to better withstand the inevitable volatility. This meant branching out into absolute returns and not being too reliant on equity risk, but still keeping some bonds for risk protection. “At the moment, you want to be fairly diversified and take a little bit of risk off the table,” he says. MLC chief investment officer Jonathan Armitage is also relying on diversification to protect the more than $100 billion portfolio he shepherds. “Corporate profitability in the US and elsewhere will be subject to a number of forces, which makes forecasting unusually challenging,” Armitage says. “The direction of government policy will also be interesting, with a new administration in the US, presidential elections in France and the evolution of UK policy regarding Brexit.” He says ensuring portfolios have adequate diversification will be especially important, given the heightened chance that both equity and bond markets could be set for a tumble. “There is clearly an important question around whether the recent moves in bond markets, especially in the US, are temporary or reflect a more permanent shift in valuations,” he explains. Armitage cites a well-timed shift out of long-dated US treasuries and into private credit as his best investment call of 2016.

DISSECTING THE TRUMP FACTOR

Trump’s inauguration speech on January 20 painted a dystopian picture of the super power, with “rusted out factories scattered like tombstones across the landscape”, as he pledged to protect US borders from “the ravages of other countries”. Trump is spruiking a mantra to “make America great again” via a program to “buy American and hire American”. However, his power over domestic reforms is dependent on having Congress on his side. Geopolitical forecasters, including George Friedman and John Mauldin of Mauldin Economics, advise investors to pay attention to the actions of US Speaker of the House Paul Ryan and the chair of the House Ways and Means Committee, Kevin Brady. Without these two Republicans onside, most of Trump’s domestic policies will be dead in the water. Nevertheless, Trump remains a maverick with the potential to disrupt, as was demonstrated when a tweet he sent wiped $US4 billion ($5.3 billion) off Lockheed-Martin’s equity market valuation. UniSuper head of global strategies and quant methods Rob Hogg is concerned about what

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KEY DATES 2017 March 15 Netherlands parliamentary election. Early polls tip farright, anti-Islam, eurosceptic Geert Wilders’ PVV party could win a coalition government. March 31 UK Prime Minister Theresa May’s self-imposed deadline to trigger Article 50, starting two-year countdown for an expected ‘hard’ Brexit. April 23 – May 7 French presidential election. Risk of populist, eurosceptic government and euro referendum. April 29 End of US President Trump’s first 100 days, symbolic as early benchmark. June 11-18 French legislative election. Swing to far-right populist parties seen in other recent European elections may be repeated. August 27 – October 22 Window for German federal election. Chancellor Angela Merkel expected to remain, but pressure from populist groups will probably reduce the extent of her mandate on issues such as immigration. June – July Possible early election in Italy. July 7-8 G20 Summit in Hamburg, Germany. September Slated Catalonia independence referendum. Second half of year, TBC 19th National Congress of the Communist Party of China; twice-a-decade leadership reshuffle in top governing bodies. Xi Jinping expected to remain as general secretary, but uncertainty over most other positions. Late in year UK early election possible. Source: Deutsche Bank, Bloomberg, various

Trump will do in the international realm, with his considerable power to reshape global trade policy. “The question is whether we will see elements of protectionism, trade retaliation, or tariffs,” Hogg says. “Those … are unambiguously negative for the growth of trade and also for investor sentiment.” Hogg also cautions investors not to forget that structural headwinds remain in the background – such as baby boomers reaching retirement age and ongoing public and private debt.

CHINA’S TRANSITION LOOMS

In this stressed environment, China is emerging as the new global responsible citizen, supporting free trade and the Paris agreement on climate change. With this in mind, Frontier Advisors director of capital markets and asset allocation, Chris Trevillyan, thinks that of all the geopolitical risks visible on the horizon, the one with the greatest potential to cause serious disruption for investors is the 19th National Congress of the Communist Party of China, slated for the second half of 2017. The five-yearly congress marks a transition of leadership in the top ranks of China’s ruling Communist Party. In 2017, President Xi Jinping is almost certain to retain the top party spot of general secretary. However, there is much uncertainty over the other leadership positions. “That could well be the most influential event, but it is the most opaque, so you don’t necessarily know in advance – or even afterwards – what has happened,” Trevillyan says. “Investors will have to wait to see how it plays out.” The worry is that a desire to appear strong will lead China to take an even more aggressive stance in its territorial dispute with the US in the South China Sea, potentially sparking a war. Trevillyan’s top piece of advice for institutional investors is to embrace portfolio diversification. Sunsuper listed shares manager Greg Barnes is also cautious about South China Sea fallout. The power struggle between Australia’s two largest trading partners could have big repercussions domestically, Barnes says. However, he is confident that Sunsuper’s $36 billion portfolio is well-positioned for these risks. “We are in quite a reasonable period of market performance for equities, but it’s really about having a broadly diversified portfolio that can withstand the hiccups that invariably happen,” he says. An allocation to high-quality unlisted assets, which have in recent times delivered both stronger returns and lower volatility than equity markets, is something Barnes tips to continue to pay off in 2017. “[With] that kind of portfolio structuring, if there is a bump, we probably don’t go down as much; then we get back to compounding more quickly when the markets recover,” he says. Ñ

FEBRUARY 2017

\ COLUMN

IN THIS LOW growth, low yield environment – marked also by increased social and BY political instability – institutional ADRIAN ORR investors with a long-term mindset bring much-needed discipline and ___ patience to financial markets. Adrian Orr is the chief executive of Sovereign wealth funds are one such New Zealand Super and the chair of class of investor; as defined by their International Forum of Sovereign Wealth public ownership and their pursuit of Funds (IFSWF). He was previously long-term investment returns to fulfil deputy governor of the Reserve specified macroeconomic purposes such Bank of New Zealand. as intergenerational wealth transfers and fiscal stabilisation. The International Forum of Sovereign Wealth Funds (IFSWF) aims to enhance transparency over the activities of member sovereign wealth funds and to serve as a platform for collaboration and knowledge sharing between them. The forum has 30 members from all corners of the globe. The single, most fundamental component of IFSWF membership is a commitment to transparency, accountability and good governance, as expressed by the Santiago Principles – a set of best practice guidelines for sovereign wealth funds. valuable reputational capital, bolstering a Each member starts implementing the fund’s strategic positioning. principles from a different place, depending Inevitably, commercially oriented investors, on their history and legacy structures. known to operate transparently and in We understand that what the evolution looks compliance with the regulatory standards like may not be the same for every member. of host countries, will see themselves bumped Nevertheless, the objective is the same. to the front of the queue. Members aspire to establish the best When the New Zealand Superannuation governance, accountability, and operational Fund partnered with Infratil to acquire methods to fulfil their mandate to the RetireAustralia in 2014, it was the fund’s highest possible standards for their ultimate experience, access to capital and long-term stakeholders: the people of their countries. outlook that recommended it to management. There is much that other (non-sovereign) Good governance is essential to sound funds can learn from these principles, portfolio management. especially in regards to transparency and The economic benefits are manifold: more good governance. Stronger governance builds consumer support of the businesses invested

What super funds can learn from the Santiago Principles There are lessons for the local superannuation industry in how an international collective of sovereign wealth funds is working together TO IMPROVE THEIR TRANSPARENCY AND GOVERNANCE STANDARDS. FEBRUARY 2017

in, less legal and regulatory risk, more dynamic companies, potential excess returns from investing early in the life cycle of assets, less conflict between asset owners and asset management, and the potential to leverage long investment horizons to exploit longterm trends – such as resource sustainability – which may not be fully priced in markets influenced by shorter-term investors. At the end of last year, the IFSWF released 12 case studies demonstrating how its members have sought to implement the Santiago Principles. Australia’s Future Fund described how the Santiago Principles guide continuous disclosure of the thinking behind investment decisions. A statement on behalf of the Chilean government outlined how the Santiago Principles are guiding its thinking on whether it is appropriate to delegate proxy voting to external fund managers. China’s Investment Corporation revealed it has hosted more than a thousand groups of guests at its Beijing headquarters as part of its commitment to improve transparency in line with the Santiago Principles. In the last year, IFSWF’s London-based secretariat has expanded and online platforms have been developed to facilitate member wide discussion. Workshops and meetings were hosted in Azerbaijan and Auckland. We’ve established partnerships with the Bocconi University’s Sovereign Investment Lab, Milan, and the Fletcher School at Tufts University, Boston. In the past few months, we have also formed ties with the Commonwealth Secretariat and the Hedge Funds Standards Board, to complement relationships in place with the International Monetary Fund, World Bank and OECD. This focus on building partnerships, underscored by a shared commitment to the Santiago Principles, has given rise to an expansive network of relationships. One by-product has been co-investment by member funds. An example is Wessal Capital, a joint venture that brings together five sovereign wealth funds: Ithmar Capital, Aabar Investments, the Kuwait Investment Authority, the Public Investment Fund of Saudi Arabia and Qatar Holding. The venture focuses on structural projects that will support continued economic and social development in Morocco. Such ventures are a natural outcome of common purpose, shared endowments and reduced potential for principal-agent conflict. Ñ

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2017 FUND EXECUTIVE FORUM

Strategic Decision Making R E G I S T R AT I O N S N O W O P E N : Wednesday 8 March Forum Dinner (FEAL members and guests)

Thursday 9 March Fund Executive Forum (FEAL members only)

S H E R ATO N O N T H E PA R K , SYDNEY

SESSIONS INCLUDE Why do we make the decisions we do? How do our brains work? Dr Carsten Murawski, Decision Neuroscience Laboratory

Decision making in critical situations

Individual financial decision making

Greg Mullins, Former Commissioner Fire & Rescue NSW

Professor Susan Thorp, Sydney University

FORUM DINNER Guest Speaker Major General John Cantwell AM

SUPPORTED BY

For more information contact FEAL on (02) 9299 6648 or visit:

www.feal.asn.au

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