INTELLIGENCE FOR INSTITUTIONAL INVESTORS
ISSUE 157
FEBRUARY 2019
Continuity leads
SUCCESS TelstraSuper chair David Leggo talks about the power that comes from cultivating a loyal membership
CIO PROFILE
PRODUCTIVITY COMMISSION
SUPERANNUATION AWARDS
LIFE INSURANCE
LUCRF Super’s Leigh Gavin zeroes in on a challenging 2019
Pension expert says focus on the retirement phase is lacking
Spotlight on CIO of the Year nominees
Inside Rest’s $750 million tender
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THIS ISSUE \
CONTENTS FEBRUARY 2019
FE AT UR ES
06
25
CHAIR’S SEAT
LIFESKILLS
TelstraSuper chair David Leggo on the the long-standing relationship the corporate fund has maintained with its members.
With key reform legislation languishing, the industry now has another chance to transform on its own, Retender’s Ilan Leas writes.
11
26
CUSTODY MATTERS
ALTERNATIVE ASSETS
Post-accumulation phase options are challenging approaches to lifecycle products.
Just what impact will a downturn in the venture capital economy have on Australia, AVCAL chief executive Yasser El-Ansary asks.
16 LIFE INSURANCE Amidst challenging times for the sector, Rest is running the biggest tender in the market. Here is the inside story.
18 SUPERANNUATION AWARDS A spotlight on the CIO of the Year nominees and their take on a volatile 2019.
22 PRODUCTIVITY COMMISSION
12
A leading superannuation expert says the accumulation phase is taking too much of the focus.
CIO PROFILE
“The Australian economy has gone for 27 years without a recession, which does make you worry that the next one could be a doozy, especially if combined with a housing downturn.” LEIGH GAVIN | CIO | LUCRF SUPER
O PINI O N
28 REGULATION The corporate watchdog has done well with its proposed changes to fee disclosure for super funds and managed funds, Chant West’s Ian Fryer says.
30 POLICY AIST chief executive Eva Scheerlinck says the Productivity Commission’s ‘best in show’ plan is a blunt tool for a nuanced job.
03
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\ FROM THE EDITOR
EDITORIAL EDITOR
Alice Uribe
ALICE URIBE / alice.uribe@conexusfinancial.com.au
DIRECTOR OF INSTITUTIONAL CONTENT
Amanda White
SENIOR JOURNALIST
Elizabeth Fry
A LETTER from the editor
S
ACTING HEAD OF DESIGN
Suzanne Elworthy SUB-EDITOR
Haki P. Crisden PHOTOGRAPHER
Matt Fatches
STRENGTH ADAPTS TO CHANGE
matt@mattfatches.com.au CHIEF EXECUTIVE
Colin Tate
INCE I TOOK on the role of editor of this publication last year I have been writing about the power of embracing change and the positive results that can come from being open to it. As I sat down to write this column, with commissioner Kenneth Hayne’s final report looming, I started thinking about the way the financial services sector had already begun to transform itself, even without the big stick that may come from the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. We’ve already seen a variety of mea culpas from the bosses of our big banks, who also accepted some massive pay cuts as a result of their companies’ less than stellar outings at the royal commission. Many in the sector are also digesting the very real possibility that Australian retirement savers may have a shortlist of 10 superannuation funds to help them choose where to put their retirement money, thanks to the final report of the Productivity Commission. The jury is still out as to whether this will be a good outcome for members or the $2.7 trillion, and growing, system as a whole. Professor David Blake, director of the Pensions Institute at Cass Business School in London, says the concept could be an “iterative improvement”. See the story on page 22. What hasn’t changed is the super sector’s top brass turning inwards
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with renewed focus on their members – particularly those going into the important retirement phase of their lives. Amanda White, our head of institutional content, spoke with TelstraSuper chair David Leggo for our regular Chair’s Seat interview, on page 6. He said the fund’s ability to tailor its services to the needs of retirement savers was a “key advantage”. I spoke to LUCRF Super CIO Leigh Gavin (interview on page 12), who discussed how he had been part of a strategy to change the structure of the fund’s investments to better address its specific needs. At Conexus Financial, the publisher of this magazine, we have also been actively involved in a process of transformation. In small groups, we have been working through some of our key business pressure points and coming up with solutions. What struck me was that even before we had finished the process, we had already made some great improvements. On a personal note, I’d also like to welcome a new addition to the Investment Magazine crew. Elizabeth Fry has now joined as senior journalist, with her vast experience in financial services no doubt bringing some exciting changes to the content we love producing for you each day online, in our monthly print title and across our stable of events. Happy reading! Alice
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ADVISORY BOARD MEMBERS Debbie Alliston, head of multi-asset portfolio management, AMP | Richard Boyfield, partner (superannuation and insurance), Mercer | Richard Brandweiner, chief executive, Pendal Group | Peter Curtis, head of investment operations, AustralianSuper | Joanna Davison, chief executive, FEAL | Michael Dundon, chief executive, VicSuper | Kristian Fok, CIO, Cbus Super | Martin Goss, head of investment, Australia, Willis Towers Watson | Damian Graham, CIO, First State Super | Allison Hill, director of investments, QIC | Graeme Mather, head of distribution, Schroders | Andrew Polson, chief executive, Frontier | Graeme Russell, chief executive, Media Super | Eva Scheerlinck, chief executive, AIST | Anne Ward, chair, Qantas Super and Colonial First State | Nigel Wilkin-Smith, director, portfolio strategy, Future Fund
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RA18/1105/01102019
06
\ CHAIR’S SE AT
success
By Amanda White + Photos Nicole Cleary
CONTINUITY BREEDS David Leggo, chair of corporate super fund TelstraSuper, talks about the power that comes from cultivating a loyal membership.
Q | YOU HAVE BEEN A CHAIR OF TELSTRASUPER SINCE 2010, WHAT DO YOU THINK ARE THE BENEFITS OF THAT CONTINUIT Y TO THE BOARD AND ITS DECISIONMAKING? A | A big benefit is simply the
understanding of our corporate history and how we evolved to become the fund we are today. This allows for continuity of decision-making and facilitates long-term thinking. I’ve benefited from the ability to truly focus on the long term, which has allowed me to gain a solid understanding of what our members need. Whilst every fund changes directors over time, continuity of tenure has given me the opportunity to truly get to know the directors and their skill sets and experience. This, in turn, allows us to ensure we have all the relevant skills at the table, and plan future board appointments according to the formal principles we have in place. As chair of the investment committee since 2010, I do think there are significant benefits in the investments space – particularly in seeing through our longterm investment strategies.
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CHAIR’S SE AT \
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FEBRUARY 2019
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08
\ CHAIR’S SE AT
PERFORMANCE TO 31 DECEMBER 2018 (Net of investment fees and tax)
Assets under management $20.4 billion Number of members 99,010 1 YEAR (%) 3 YEARS (% pa) 5 YEARS (% pa) 7 YEARS (% pa) 10 YEARS (% pa) 15 YEARS (% pa)
TelstraSuper Growth
-1.0
6.0
6.8
10.1
Chant West ‘High Growth’ Median
-0.2
TelstraSuper Balanced
-0.2
6.8
7.0
5.5
6.4
0.8
6.2
TelstraSuper Conservative
1.5
Chant West ‘Conservative’ Median
1.6
Chant West ‘Growth’ Median
9.3
7.7
9.8
8.7
7.3
9.2
8.5
7.5
6.5
8.7
7.9
7.0
4.7
5.4
6.8
6.6
6.3
4.2
4.6
5.7
5.8
5.7
Note: Chant West median returns are interim.
Q | AS ONE OF ONLY A HANDFUL OF CORPORATE SUPER FUNDS LEFT IN AUSTRALIA , WHAT DO YOU BELIEVE IS YOUR CORE OFFERING TO MEMBERS AND HOW ARE THEY BEST SERVED BY A CORPORATE FUND? A | We know our membership extremely
well and they see us as their super fund. We also have close relationships with our key employers in the Telstra family and we learn valuable insights from them. There are many subtle differences among Telstra Group employees; we have everyone from office workers in Melbourne to technicians installing cable in outback Australia as our members. These insights and close relationships allow us to implement tailored services. For example, we are currently running a member education program directly through Telstra Corporation – it is specifically built for Telstra around the topics its staff wishes to learn about. Many of our members have also now left employment with Telstra but happily remain with us through to retirement, where they then take up the many advantages of our retirement products. Our ability to know our members and tailor our services to meet their particular needs is a key advantage.
system, we’re also very aware that, ultimately, members wear the cost of regulations, so we need to find the right balance. Transparency and good governance are vital, but so is effective communication to members so they don’t feel disillusioned with the system. Legislative and regulatory change are quite often complex and additional to our normal business plan activity, so it’s vital that funds are given appropriate time to implement these changes. TelstraSuper will always advocate for what’s best for our membership.
Q | WHAT IS YOUR VIEW OF ALL THE LEGISL ATIVE CHANGES AND TINKERING TO SUPER? HOW HAS IT IMPACTED YOUR FUND? A | We’re always ready for a level of
Q | WHAT IS THE MOST IMPORTANT CONVERSATION YOU WILL BE HAVING AROUND THE BOARD TABLE IN 2019? A | Perhaps surprisingly, I do not think
legislative change and, while we’re supportive of changes to improve the
the royal commission and Productivity Commission reports will be the topics of the
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only important discussions we have at our board table this coming year. Their content and recommendations will clearly inform and direct a part of our strategic thinking; however, we can’t be distracted from our long-term strategy. We’ll be spending time enhancing and refining our medium-term and long-term strategies, looking for further opportunity to progress and enhance the operation of the fund. The board has been very conscious of ensuring we consider the fund’s likely position in the medium and long term, and of making decisions today that will also enhance the operation in 10 years’ time. Key elements of this discussion will include digital services, financial planning, investment management and even comprehensive income products for retirement (CIPRs) should they look like eventuating.
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CHAIR’S SE AT \
The fund has been in operation for 29 years, as of this year, and even with over $20 billion in funds under management and around 100,000 members, we are continuously working to improve the operations and services we provide to members. Q | HOW WOULD YOU DESCRIBE YOUR REL ATIONSHIP WITH CHIEF EXECUTIVE CHRIS DAVIES, CIO GRAEME MILLER AND THE REST OF THE EXECUTIVE TEAM? A | I feel I have strong working
relationships with Chris Davies and the team at the fund. We have an open and honest relationship and catch up regularly, which allows us to focus on diverse aspects of the fund. I believe culture is set from the top down and the TelstraSuper executive team consistently sets a strong membersfirst culture for the business. This is a critical factor for the success of the fund and ensures our members are at the centre of everything we do. In my case, I also chair the investment committee and the financial planning board, which gives me further opportunities to engage with and have exposure to a wider group of Chris’s senior staff. Q | WHAT IS YOUR BEST PIECE OF ADVICE FOR HOW TO CHAIR A CONSTRUCTIVE BOARD MEETING? A | It’s most important to recognise the
value of diversity of thought and opinion and find ways to bring out the best in each director. While diversity may seem like a buzzword today, what is critical is that we cover a spectrum of different points of view to make truly informed decisions. You need to be encouraging and diplomatic and facilitate the conversation rather than rule it, and allow board members to express themselves freely within a well-defined framework around specific objectives.
We know our membership extremely well and they see us as their super fund. We also have close relationships with our key employers in the Telstra family and we learn valuable insights from them investmentmagazine.com.au
Q | HOW HAVE YOUR VIEWS ABOUT WHAT MAKES A GOOD CHAIR CHANGED OVER THE YEARS? A | I recall 30 years ago observing a chair
(not in the superannuation arena) who was domineering, rude, dismissive and altogether a very unpleasant individual. I determined then that if I was ever given the opportunity, I would be a very different chair to him. Now, even as a chair for many years, I still continuously refine how I manage my duties and the board. I take time after each meeting to reflect on how it went, where I could improve the structure of discussion and how we can get better outcomes. No matter how long you do it, there are always subtle improvements you can make in such things as your style, and even your tone of voice, that will make a difference. Q | WHO ARE YOUR MOST IMPORTANT MENTORS AND WHO DO YOU TURN TO FOR ADVICE NOW? A | Back in the early 1990s, as a young
naïve director of my first fund, I probably owed much of my grounding in superannuation to the then-CEO of the Civil Aviation Authority Fund, Denis Carroll. Denis was – and still is – well respected throughout the industry for his thoughtful advice and counsel, which as a new director I thankfully absorbed. I also had a friend who was a chair and we would often have confidential discussions about our experiences in meetings and discuss how we learned from those experiences. Unfortunately, he has now passed away and I do miss those discussions. As a chair, I believe it is vitally important that relationships with senior staff and the CEO are kept at the correct level. That does not mean you do not learn and gain insights from your dealings with people on a regular basis. Chris Davies and I meet on a very regular basis and I hope we both gain from our interactions and discussions. The TelstraSuper chief legal counsel and company secretary and I have had many conversations over the years, both of us with the same philosophical intent of continuing to improve the governance of the board and the fund.
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\ SP ONSORED CONTENT
Blockchain innovation in the post trade world The use of blockchain innovation, or distributed ledger technology, is set to transform capital markets across the world in the coming years. Head of Custody Product for BNP Paribas Securities Services Australia and New Zealand, Mark Wootton, believes the way to win over blockchain sceptics is simply to let them use it to gain a better appreciation of its potential applications. THIS REPORT IS sponsored by BNP PARIBAS
BLOCKCHAIN HAS BEEN touted as a way of revolutionising capital markets. Today, we are seeing blockchain innovation, or distributed ledger technology (DLT), gathering momentum, with the first steps towards its implementation being taken across the Asia Pacific region. The technology has been lauded as a way of addressing the inherent structural inefficiencies of markets, as well as providing efficient and adaptable security measures. Within its post-trade asset servicing solutions business, BNP Paribas has made significant investments in joint ventures with fintechs involved in blockchain, such as taking a stake in Digital Asset Holdings at the start of 2016. In Australia, a decision was made that took some market watchers by surprise; the Australian Securities Exchange (ASX) announced in December 2017 the replacement of its Clearing House Electronic Sub-register System (CHESS) with a DLT solution. BNP Paribas has been working with the ASX on this venture; they are planning to switch on the world’s first industrial-scale DLT by April 2021.
In Asia, the Hong Kong Exchange announced plans to develop a blockchain platform for post-trade allocation and processing of trades for its Stock Connect programme with mainland China. In addition, several Stock Exchanges in South East Asia, including Singapore, are reviewing DLTs capabilities and its application. In continental Europe, the Euronext exchange will move the SME market to a new blockchain market infrastructure. This project is hosted in a joint venture between the exchange and large European banks. But there are sceptics. According to Mr. Wootton, winning over the sceptics comes down to demonstrating that the technology is so much more than just a settlement platform: “There are a few players who are yet to catch up to the potential benefits of the technology and its impact beyond the settlement process. “Naturally we are seeing early adopters and others who are taking a conservative approach, but once the market sees the potential of the value-added services and those proofof-concepts move into production,
organisations will also realise it [DLT] is so much more than a settlement platform.” The uncertainty associated with revolutionary technology, particularly for organisations trying to understand the costs and impacts of these changes, is an issue that the industry is grappling with. Mr. Wootton said that could be countered by organisations spending time to further understand the technology and its flexibility, in turn highlighting its security benefits. “To truly understand the power of the technology you need to get close, have a play around and see what it’s capable of” he said. “In addition, in our current environment where every organisation is concerned about cyber-security, DLT can be a part of the longer term security solution.” However, with any new technology comes regulation and DLT is a challenging area in this regard. The ASX engaged [local regulators] early in the review process, and as a result we have seen an increase in DLT specialists looking into the technology aspects of such solutions. For Mr. Wootton, any questions over the implementation of blockchain comes down to one simple fact; “There are many uses of this technology that will likely see winners and losers in the long run. Those that are able to adapt and bring forward new products and offerings are well placed to meet their clients’ wants and needs.” Digital technologies are changing the way we work. BNP Paribas sees blockchain technology as a positive move and has been evaluating the potential of DLT since 2011 by taking part in industry initiatives and working with fintechs specialising in DLT. The advancements in the post trade landscape will no doubt provide challenges, but it will also present opportunities in this changing world.
Disclaimer: BNP Paribas Securities Services is incorporated in France as a partnership limited by shares and is authorised and supervised by the ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the AMF (Autorité des Marchés Financiers). BNP Paribas Securities Services ARBN 149 440 291 (AFSL No: 402467) is registered in Australia as a foreign company under the Corporations Act 2001(Cth) and is a foreign ADI within the meaning of s 5(1) of the Banking Act 1959. The information contained within this document (‘information’) is believed to be reliable however BNP Paribas Securities Services does not warrant its completeness or accuracy. Opinions and estimates contained herein constitute BNP Paribas Securities Services’ judgment and are subject to change without notice. BNP Paribas Securities Services shall not be liable for any errors, omissions or opinions contained within this document. The information contained in this document is confidential and may not be reproduced in any form without the express written consent of BNP Paribas Securities Services.
FEBRUARY 2019
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CUSTODY MAT TERS \
FRONTIER ADVISORS RECENTLY wrote about default lifecycle strategies in MySuper options, noting that June 2018 data from the Australian Prudential Regulation Authority shows lifecycle strategies account for about 30 per cent of all MySuper products in the market and 35 per cent of total MySuper assets. Frontier noted in a report in The Frontier Line that the “main weakness in a default lifecycle strategy lies in its blunt mass customisation approach”, and “the belief that a default product can be created which is suitable for all members, regardless of individual circumstances, is itself flawed.” The blunt approaches of lifecycle product design extend to administration and custody, said David Carruthers, principal consultant, head of member solutions at Frontier Advisors.
TWO WAYS TO DO IT “There are two ways that funds can implement lifecycle strategy,” Carruthers says. “It’s not exclusively this way, but it’s split – industry funds do it one way, retail funds do it another way. In industry funds, young members will go into the default fund and then when they turn 60 or whatever age they determine, they’ll physically move the assets from the balanced fund to the conservative fund. “From an administrative point of view, it’s easier to say, everyone who turned 60 this year, we’ll move them on one date. From a custody perspective, that’s also easier – but it’s a blunt way. It doesn’t take into consideration where the market is. If you turned 60 in December 2018, the market had dropped, and if you’d moved assets then, you would have missed the uptick that’s happened since then.” The other approach, seen in retail funds, is that when members join a lifecycle option, they are placed in a fund that reflects their year of birth. “The way the retail funds do it, for their own reasons, when you join the retail fund, they’ll put you in a single fund that typically reflects your age or your year of birth,” Carruthers explains. “Somebody might join a fund which is called, 1990-95. They’ll stay in that fund for the rest of their career in superannuation, and the
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MOR E
TAILORING A BET T ER
FIT
Post-accumulation phase options are focusing superannuation fund attention, challenging administrative and custodial approaches to lifecycle products. By Rachel Alembakis
asset allocation for that fund will slowly change over time. That makes it somewhat easier, potentially, from an admin point of view. People aren’t moving from fund to fund, there are no custody implications, but the asset allocation is changing all the time and you also need a lot of funds.”
BOTH APPROACHES FL AWED The challenge to both of these approaches is that they don’t take into account critical information about members, such as account balances and work patterns that may necessitate a more tailored asset allocation approach. “At the moment, we’re a few steps away from having the administrative tools to do that sort of thing, both in terms of working out what should happen for each member, and then in working it out on a memberby-member basis,” Carruthers notes.
Another challenge on the horizon for fund administration is that as members move from the accumulation phase into the stage where they start to use their funds for income, the assets in fund options will have to be redistributed. “When you move from, say, balanced to conserve, you sell high-growth asserts like queries, and buy defensive assets like bonds,” Carruthers says. “The issue comes about that you’ll also be selling less-liquid assets like property, infrastructure, private equity, etc. Because they’re less liquid, the fund itself won’t necessarily sell those assets, but redistribute them somehow. That’s OK for a fund that’s expanding and having more members join the balanced fund than leave the balanced fund, but if it’s a fund that’s got negative cash flow, that creates challenges.”
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\ CIO PROFILE
Industry-fund pioneer LUCRF Super has a portfolio and a negotiation philosophy shaped by the challenging finances of its membership. That reality stays top of mind for CIO Leigh Gavin as he ponders a difficult outlook for the year ahead.
LEIGH GAVIN, THE CIO at the country’s first industry fund, LUCRF Super, admits the job he has held since 2016 is about to get much harder. Poor market performance in the final months of the last calendar year has pulled annual returns from balanced options down towards zero and several factors have experts fearful of volatility ahead. “When I started at LUCRF Super, some people were thanking me for the strong absolute returns in 2016-17, and I said, ‘Don’t thank me. If you want to thank anyone, thank Donald Trump, although he’ll probably muck it up between now and November 2020,’ ” he says. Back in December 2016, Australian superannuation funds across the board were buoyant as Trump’s unexpected win in the US presidential election pumped up the sharemarket. Analysis by SuperRatings for November 2016 shows the median balanced option fund returned 1.2 per cent for that month, reversing a negative 1 per cent return in the previous month. But by November 2018, SuperRatings data had revealed that returns of -0.6 per cent in November for members invested in the median balanced option – following -3.1 per cent in October – had brought calendar-year returns to just 1.8 per cent. “It’s definitely harder, and it’s about to get a lot harder,” Gavin notes. “We noticed through our contact centres and seminars
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in November 2018 there were a lot more enquiries from members about circa -3 per cent returns, year-to-date. This just shows you we’ve had an elongated period of really good going.”
MEMBER AT TENTION If there is one thing that Gavin, who joined $6 billion LUCRF after 14 years at Frontier Advisors, is attuned to, it’s the members. “I loved my time at Frontier,” he says. “I had a lot of really good mentors there…who taught me a lot about not only investments but just working with funds, especially industry funds...and the sense of purpose that comes from working with these funds. “So I guess it was somewhat inevitable that I was going to end up at a fund like LUCRF.” Gavin’s family background also makes him likely to be ideologically aligned with a profit-to-member fund. His grandmother, in Gavin’s own words, was a “single mother from Glasgow”. “She came out here in 1952 with my dad when he was 12,” he says. “She worked at the Heinz cannery factory in Dandenong all through the ’50s, ’60s, ’70s and into the ’80s, and Dad was a carpenter and cabinetmaker by trade,” he says. “I think for a lot of investment personnel who work within industry funds, or work with industry funds, many of us are not third-generation stockbrokers.”
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CIO PROFILE \
WORTH the
RI S K By Alice Uribe + Photos Adam Yip
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\ CIO PROFILE
INDUSTRY FUND PIONEER As LUCRF celebrates its 40th anniversary, Gavin says the fund has had an “enviable record as an industry pioneer and establishing what are now industry norms for Australian definedcontribution funds”. Super belonging to many, not a privileged few, was one of the founding tenets of LUCRF, which was established in December 1978 by Greg Sword and predominantly represents those in the warehousing, pharmaceutical, food and agricultural processing sectors, Gavin says. At establishment, LUCRF members’ funds were invested broadly along the lines of the 70/30 growth/defensive assets model. That split is now the industry norm; at the time, however, that was not the case. “Most funds at the time, predominantly defined-benefit funds, were invested 50/50
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or even 30/70,” Gavin recalls. “People told Greg he was mad.” Another of Sword’s guiding principles was that LUCRF should be fully portable between jobs, something that is increasingly relevant with the rise of the “gig economy”. “This sounds obvious now but was less obvious in 1978,” Gavin says. Fast forward to 2019 and the typical LUCRF member – there are 160,000 of them – is increasingly in outsourced or casualised labour. “They’re increasingly vulnerable, increasingly from non-English speaking backgrounds. And it’s tough for them to get superannuation, as they may have multiple employers,” Gavin says. The typical LUCRF member is 38 and has an average balance of $33,000 in accumulation. Even within LUCRF’s roughly $600 million in pension assets, the average balance is only $175,000.
That membership profile drives the fund’s environmental, social and governance (ESG) priorities. “For some time, LUCRF’s focus has been on the ‘S’ issues, which is an area that has generally not got the same airtime as the ‘E’ and ‘G’ issues.” Gavin says. But that is now changing. “The recent introduction of the Modern Slavery Act in Australia means the issue is likely to garner more traction in 2019,” Gavin explains. “Modern slavery is not an ethereal concept for us. We have LUCRF members who are subjected to modern slavery, and who work in the supply chain of some of our largest ASX companies. We also have a focus on active ownership, rather than divestment.”
A CHALLENGE LUCRF’s member profile has also given Gavin an interesting challenge when it
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CIO PROFILE \
There is still too much money that goes to agents in the system, rather than the principals in the system – that is, the members – and fund manager profit margins are still too high
comes to managing the portfolio, and he is keenly aware of members’ needs when going into a fee negotiation. “That’s a hobbyhorse of mine, as many people know. There is still too much money that goes to agents in the system, rather than the principals in the system – that is the members – and fund manager profit margins are still too high,” he says. Due to LUCRF’s size, Gavin says, the fund will “generally never write the biggest mandates in the industry”. “The way we try to get around it is to try to be nimble and help seed either new managers or new strategies from established managers,” he explains. “We’re lucky we have an investment committee that recognises the need to t ake on enough risk. “A lot of these things are uncomfortable at the time. Being the first or second client for a new manager is not comfortable, but
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generally speaking, it’s worked out pretty well.” LUCRF’s portfolio is, unsurprisingly, also linked to how much risk it requires. “My observation for some time has been that the financial services sector seems to spend a lot of time devising products seemingly for other members of the financial services sector,” Gavin says. “So how we think about risk [is critical] along with how we think about a superannuation balance that, for most of our members, will need to be paired with at least a partial age pension. But that doesn’t mean it’s a one-way bet on growth assets.” In 2015, LUCRF chief executive Charlie Donnelly and independent director Judith Smith began working with the investment team and investment committee to re-envision LUCRF’s portfolio based on the fund’s demographics, taking into consideration that one of the biggest risks to members was “not taking enough risk”. That led the fund to add 7 per cent to listed equities in 2015-16, Gavin says.
THE RIGHT AMOUNT OF RISK Once Gavin joined, in 2016, LUCRF continued to add “a little more risk to the portfolio, but only at the margin”, he says. The fund also began developing a dynamic asset allocation philosophy and process. “We had to spend a fair bit of time before we started making tilts to the portfolio on a quarterly basis. This included asking, ‘What’s our philosophy, what’s our process and what’s our reference portfolio?’ And, probably most importantly, ‘How are we going to measure this?’ ” he explains. Infrastructure now forms about 5 per cent of the fund, compared with as
much as 13 per cent for some peers. “With respect to liquid alternatives, that was about 16 per cent before I started and now it’s about 12 per cent,” Gavin says. “Our fund, unlike most industry funds, has expressed its preference for alternatives in terms of liquid alternatives, rather than infrastructure and private equity. That has hurt, as anything with duration has done well over the last decade. Conversely, anything without duration (like most liquid alternatives) has been left behind.” Another asset class Gavin speaks passionately about is private equity, although he describes its current fee model as “warped”. “It is just a classic case of being a model that doesn’t work in favour of the buyer – and in this case the buyer is our industry fund members,” he says. “There’s a heap of dry powder around in the world of private equity at the moment. I’ve got concerns about the amount of money raised versus the amount of opportunities out there. We may do it again but it will probably not be in the traditional model either.” Despite an outlook for 2019 that is indeed “more challenging than usual”, he adds that “most of the traditional economic indicators that we look at are still broadly positive”. “Equities could still earn high singledigit or even low double-digit returns in 2019, particularly given the falls of late 2018, but the unwinding of quantitative easing will probably lead to continued volatility in 2019, as there is no historical parallel for this unwind,” Gavin says. “The Australian economy has gone for 27 years without a recession, which does make you worry that the next one could be a doozy, especially if combined with a housing downturn. “The role of industry funds in helping with that transition is going to be important…in helping finance the economy…stepping in and plugging the liquidity gaps, and earning a compelling return for members in the process.”
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\ LIFE INSURANCE
REST HEAD OF insurance Natalie Binns says the industry superannuation fund has thrown out the rule book for its first openmarket tender in 14 years, focusing on the people behind the insurers not “longwinded” documents. “We actually invited all the insurers to come in and meet, because we wanted to see who they are, what they stood for, what their views were,” Binns tells Investment Magazine. “Not just on life insurance but around customer experience, how they work with their customers. “This goes to my background, because I used to respond to tenders, so I said if I ever…got to write tenders, I would do things differently, rather than doing a whole load of documents to and from, and doing all these long-winded Excel responses in Word documents.” AIA Australia has been Rest’s group insurance provider for 14 years, and while the fund has conducted smaller tenders, Binns says she has been “given a blank piece of paper” to imagine the future of group insurance at Rest.
CHALLENGING TIMES Binns estimates that Rest’s tender is worth $750 million and is the biggest currently on the market. It comes at a challenging time for group insurance. In December, Parliament failed to pass the controversial Protecting Your Super bill, which was introduced in this year’s budget. The industry was united in criticism of some elements of the bill, particularly the July 1, 2019, start date, which many felt would not allow time to negotiate revised insurance contracts. The Productivity Commission, in its final report on the $2.7 trillion super sector, called for an independent public inquiry into the role of default life insurance and praised the Federal Government’s moves, first introduced in last year’s budget, to overhaul the sector. “In some ways, we’re blessed that we’re going through quite a big tender process, and a real evaluation of the products and what we offer,” Binns says. “I think, what the budget changes are trying to achieve, we’ll get some of that done. We’re planning some pretty wholesale changes around the default cover.”
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INSIDE REST’s
750 INSURANCE $
million
TENDER
Amidst a challenging time for the $6 billion group insurance industry, Rest is running the biggest tender in the market. By Alice Uribe
Industry commentators say some funds may have put their tenders on ice to wait for resolution of the superannuation reforms. Tasplan was the most recent fund to t ender, awarding its $20 million contract to MetLife in November, switching over from CommInsure.
Binns would not say which insurers had been involved in the tender process so far, but indicated that most big players were participating.
STATE OF THE INDUSTRY Data from DEXX&R shows that as at
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LIFE INSURANCE \
September 30, 2018, AIA remains the largest group insurance player, with $1.9 billion of total in-force superannuation premiums, but its position will be strengthened when its acquisition of CommInsure is complete. TAL is the second-largest group life insurer, with a $1.7 billion share. MetLife increased by 11.8 per cent, to $721 million, and OnePath increased by 5.7 per cent to $417 million. The group risk market is dominated by premiums received for the provision of default cover for super funds. After three years of strong growth in premium inflows, largely the result of premium re-pricing, group risk inflows have now plateaued, DEXX&R shows. Binns says she wants to see “more simplicity” around insurance, and is asking prospective partners to show how they are providing this. “If someone reads a letter, or their annual statement, and if it says for some reason they don’t have cover, how would
you put that in plain language?” Binns asks. “They [life insurers] don’t tend to cover casuals, they probably like to cover people who’ve got a permanent contract to work 15 hours a week...We always have [covered casuals]. We want to continue to do so and we want to look at how we can redefine default cover to get even closer to individual personalised circumstances.”
A DIFFERENT KIND OF TENDER Rest’s tender process began with a first-round meet-and-greet in May, where selected insurers sent teams of representatives – including the chief executive and members of the digital experience and claims teams – who came into the boardroom and connected “in any way they wanted”, Binns says. “They all did something a little bit different,” she recalls. “It really brought a flavour for who they are, where they’re at on their journey.” This was followed by a second round in August, where those who made the cut met
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with Rest chief executive Vicki Doyle, who started in May. In October, Rest sent out invitations to those who were successful enough to head into the third stage. “In this round, we’re actually getting them to do more of the formal, detailed, deep dive,” Binns explains. “If they’ve said that they’ve got really strong technology, well show us your technology or what you have built. Can we come in and have a look at it? Tell us more about your claims system.” Rest’s tender team “mulled over” responses in December; the successful insurance partner is to be named early this year. Binns says it is a “massive decision” to consider moving insurers. “We want to make this a very thorough, detailed process,” she says. “There is no favouritism for the incumbent in this process…Everyone who’s been a part of the process has the same opportunity. It’s for us to find the best partner who can give the best experience for the fund.”
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\ 2019 CONEXUS FINANCIAL SUPERANNUATION AWARDS
Superannuation 2019
SPOTLIGHT –o n– C I O s
The seventh-annual Conexus Financial Superannuation Awards received a record number of entries in innovation and technology categories, in a year marked by controversy and change across the entire financial services sector. By Alice Uribe
AT THIS INCENDIARY moment, recognising excellence in the industry and encouraging super funds to raise the bar in all aspects of their operations become all the more essential. The awards, to be announced at a black-tie event on February 28, 2019, at the Ivy Ballroom, Sydney, focus on honouring funds offering products and services that lead to better retirement outcomes for members. The Chief Investment Officer of the Year nominees espouse these values. Here are their takes on the biggest challenges – and opportunities – for institutional investors.
CON MICHALAKIS Statewide Super
Investment Magazine: What was the most challenging moment of last year? Con Michalakis: I think the most challenging time was the last few months – October, November and December. The markets have sold off and it’s been tough. It’s hard for members. We are a longterm pension fund, a long-term super fund, but the short-term numbers have been tough recently. For the first time in 10 years, probably, you’re getting a significant drawdown in markets. So this was the year when equities wouldn’t make you money and bonds have been volatile. It’s the most
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challenging year for asset returns since 1994. It’s going to test the resilience of your members invested for the long term and it tests your team. To be perfectly frank, so far, everyone’s been great. There’s been no switching. Members are there for the long term, especially the younger ones. But for older members, those in retirement who have seen really good markets over the years and are now in the drawdown phase, this is the most challenging environment they’ve seen in 10 years. IM: How do you meet the challenge of explaining that to members? CM: We had really good tailwinds after the GFC. People make good money being invested long term. Now, interest rates are going up around the world; liquidity is being drained out of the system, particularly with quantitative tightening. We might see a negative return over the next year or so now, with all the headwinds – higher rates, geopolitical troubles, trade issues, high valuations, low volatility. I think the next three or five years will test
resilience. It will test your investment strategy. It’ll test your ability to think long term. It will test some of the members, too. Have they taken on too much risk? Have they taken too little risk? You address that with member engagement. IM: Do you feel a sense of trepidation going into this sort of new phase? I haven’t seen fear or panic. It’s almost been a controlled selldown. But I think this will test, at the margin, those who don’t have that resilience. You’re always surprised who has it and who doesn’t. It can test your members, it can test your board, it can test your investment committee, your team and your asset consultant. But we’ve been doing this a long time now. We saw the GFC. We’ve experienced this, so we are kind of set up for it. What we say is, ‘Stay diversified, look for pockets that can add value, think longer term. You can’t pick these things. In a sense, you have to ride it out. If you’ve got the right structure, you’ll have the cash part working but not the growth assets.
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2019 CONEXUS FINANCIAL SUPERANNUATION AWARDS \
JONATHAN ARMITAGE MLC
Investment Magazine: What was your greatest success in 2018 and was your most challenging moment of 2018? Jonathan Armitage: This continues to be a challenging investment environment; however, there has been a shift in behaviour over the last year. We have been challenged by the conundrum of everrising asset prices but shrinking return potential and rising risk. But over the last year, the fragilities in the global investment environment have become more evident, making it easier for investors to understand our defensive positioning. One of the greatest successes continues to be the stability and continuity of our investment teams. IM: Market volatility may mean a higher probability of negative returns in the next few years. How will you meet the challenge of explaining this to members? JA: Risk has been progressively rising as markets have, over the last six to seven years, delivered returns well in excess of long-term averages. We have been explaining to clients that a key driver [has been] ultra-accommodative monetary policy and that to the extent that these policy settings are not sustainable, market valuations may not be sustainable. With monetary policy now reversing,
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we are unsurprised to see a rise in market volatility. Over time, we have been preparing investors for this possibility. However, communicating clearly and effectively, particularly about the nature of risk, perhaps remains our industry’s biggest challenge. IM: Performance vs fees – why are we so focused on fees when performance is what the member wants? JA: There are a number of potential points here. Lower fees are a known benefit and an easy sell. Identifying alpha is hard and, therefore, a much tougher sell. There can be an element of career risk also, where an investment paper proposing a fee reduction is captured as an immediate win, with performance consequences unknown for some time. Continual fee focus is healthy; however, it should not be at the expense of long-term performance or risk management. The low volatility and strong absolute returns of markets over the last 10 years have offered less opportunity for active management to demonstrate value. This has led some to extrapolate from the past and question the value of active management. A difficult investment environment will highlight skilful managers and remind many of the value such skill can add. IM: What are your expectations for 2019, given the release of Commissioner Kenneth Hayne’s final report in February? JA: Our expectation for 2019 is primarily focused on potential market outcomes and the opportunities to generate returns in a sufficiently risk-controlled manner. We see the potential for a clearer regime shift to emerge in a more limited liquidity environment, with ongoing consequences for volatility and returns.
SAM SICILIA Hostplus
Investment Magazine: What has been your greatest success and most challenging moment of 2018? Sam Sicilia: The last 12 months presented us with many successes and challenges. Certainly, continuing to deliver industryleading investment returns to our members has been a key highlight. Deepening our relationships with venture-capital managers, and investment in Australian innovation, has been another highlight. Along the way, we reached a milestone by crossing the $1 billion commitment to venture capital level, making Hostplus Australia’s largest VC investor, proudly supporting an innovation ecosystem that will benefit Australia’s economy over the long term. On the flipside, the uncertainty surrounding the [Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry] was a challenge. However, it also presented our fund with an opportunity to reflect and refocus on how we serve our members. IM: Market volatility may mean a higher probability of negative returns in the next few years. How will you meet the challenge of explaining this to members? SS: In times of market volatility, we understand some members may be
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\ 2019 CONEXUS FINANCIAL SUPERANNUATION AWARDS
concerned about recent performance and projected future returns. At the same time, we also have a great opportunity to remind members that while markets can be volatile over the short term, they are often stable and predictable over the long term. Investment markets are difficult, if not impossible, to predict. We believe market volatility further enforces the importance of maintaining a robust, fully diversified investment portfolio where the risk is spread across multiple asset classes, industries, sectors and fund managers. IM: What risk metrics are being reported to asset owners and what would you like to see reported as an owner/investor? SS: There continues to be much conversation around the issue of referring to growth and defensive asset splits as a measure of risk. Whilst these historical definitions are still used by research houses to very simply classify investment options, they are outdated, binary and miss the key point. Diversification reduces risk. IM: How important is it for your fund that your asset managers factor climate change into their decisions? SS: Climate change is one component of Hostplus’ environmental, social and governance (ESG) considerations; however, it is one of the largest economic challenges facing investors today – physically, socially and legally. As we operate an outsourced investments model, our investment managers play a key role in incorporating ESG opportunities and risks, including climate change, into our investment decision-making processes. It’s important to note that these risks and opportunities are complex – often global in nature – and addressing them effectively frequently entails collaborative approaches.
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CHRIS WEST WA Super
Investment Magazine: Why are we so focused on fees when performance is what the member wants? Chis West: Financial services, in particular superannuation, suffers from great asymmetry, in both knowledge and information, between the consumer evaluating the product and the product provider. The difficulty members have comparing apples to apples drives a focus on what is simpler to measure, meaning fees. Fees are disclosed and comparable, whereas future performance is unknown and incomparable. The media and consumers try to estimate future performance by looking at past performance but there are so many variables making that complex, especially when comparing funds over different time periods. IM: What was your greatest success and most challenging moment of 2018? CW: In terms of success, I am most proud of establishing our research partnership with Curtin University. This was a creative spark that has meant we can access cross-disciplinary thinking from a leading university whilst also providing industry-relevant and meaningful topics to their students and academics for research purposes.
w
The release of the Productivity Commission report and the subsequent intense media focus on fund returns was a very challenging period. We found that by equipping employees with the right information, we were better able to understand and reassure members concerned with the constant ‘media noise’ and what it meant for their superannuation. IM: Market volatility may mean a higher probability of negative returns in the next few years. How will you meet the challenge of explaining this to members? CW: At WA Super, we have been communicating our expectations of lower forward-looking returns, higher downside risk and more uncertainty for a few years now. In 2016, we lowered our return objectives for our diversified options and we continue to develop and communicate a narrative around our views and the importance of members getting advice to help them manage the discomfort with volatility of performance. IM: There has been a growing community concern about incentives, especially among listed companies generally. What, in your view, is best practice at present for companies in which you have investments? CW: Incentives will drive behaviour to produce a set of results. Often, those results are purely financial and the risks taken to get those results are known only much later. Those results can also be ‘gamed’. Incentives should be based upon a range of factors measuring employee culture and satisfaction, customer satisfaction, management of risk and the impact on society and the environment.
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Superannuation 2019
| FEBRUARY 28, 2019 | IVY BALLROOM, Sydney, NSW |
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\ PRODUCTIVIT Y COMMISSION
TIME TO RETIRE
Cstagnation IPR The Productivity Commission was widely slammed for standing by its proposal that fund members choose from a simple list of 10 ‘best-in-show’ products but a leading superannuation expert says lack of focus on the retirement phase is the real problem. By Elizabeth Fry
PROFESSOR DAVID BLAKE, director of the Pensions Institute at Cass Business School in London, is scathing of a system that obliges workers to save for the future but hasn’t done enough, he says, to help them protect their savings in retirement. In an exclusive interview with Investment Magazine, he is also highly critical of the Productivity Commission’s recommendation – made in its final report into the efficiency and competitiveness of the superannuation system, released in January – that there be a separate independent inquiry into the broader role of super in funding retirement incomes. Rather, the pensions expert wants to see a royal commission-type look into the lack of progress since the David Murrayled financial system inquiry, which recommended that all funds offer a regular and stable income stream, longevity risk management and flexibility. “You have already had an inquiry that established what needed to be done,” Blake says. “You now need an inquiry into why nothing has happened.”
FEBRUARY 2019
FOR MORE ON RETIREMENT, BE SURE TO ATTEND THE INVESTMENT MAGAZINE RETIREMENT CONFERENCE IN SYDNEY ON MARCH 19-20. retirementconference.com.au
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PRODUCTIVIT Y COMMISSION \
NEW PATH TO COMPETITION
SUPER FUNDS MUST DO MORE
CIPR STAGNATION Blake is critical of Australia’s failure to settle on a comprehensive income product for retirement (CIPR) to reduce longevity risk. “Decumulation only works if you buy a deferred annuity – otherwise people risk running out of money before they die,” he says. Certainly, as the Productivity Commission points out, the government’s retirement income covenant – which will require funds to offer a risk-pool product to members when they retire – has been beset by design challenges. Implementation has been delayed until 2022. The PC’s report states that trustees do not always want to offer these products and that the government should abandon the covenant if the flaws cannot be “sufficiently remediated” by the deferred date. “It looks as though the CIPR product will be voluntary – and no one voluntarily buys annuities. I think the take-up will be low,” Blake argues. “This suggests that the industry is hostile to the product and is looking for excuses to trash it. If it is, then [the product] has been subject to regulatory capture by the industry. “They are happy to keep people invested in equity-type products for as long as possible in order to extract maximum fees.” Blake points out that once a customer moves into an annuity-type product, two things happen: the investments switch to bond and bond-type investments, which have lower returns and hence lower implicit fees, and there is a new risk – longevity risk – which is not easy to hedge against in the absence of longevity bonds issued by the government. Also, he says, you would move from an investment management regulatory framework to an insurance industry regulatory framework, which has much more onerous capital requirements.
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KPMG wealth partner and former union boss Paul Howes tells Investment Magazine that industry funds have so far been weak on the issue of retirement and creating sustainable longevity products. He, too, would like to see an immediate focus on decumulation. KPMG superannuation advisory partner Adam Gee adds: “We believe it remains critical for super fund trustees to develop a range of retirement products that will suit the varying needs of members and are disappointed with the PC’s suggestion that this could be abandoned.” In 2015, the UK Government scrapped the rules that forced pension savings to be spent on annuities to provide guaranteed incomes for life. Blake says this was a huge mistake. “The UK had the world’s biggest annuities market and the finance minister decided for political reasons that people didn’t need to annuitise. That market collapsed overnight,” he says.
AN ‘ITERATIVE IMPROVEMENT’ The PC’s controversial recommendation – one amongst 31 in its final report – to create a shortlist of the nation’s top 10 super funds was labelled an “iterative improvement” by Blake, who also warned policymakers against being blind to the dangers of such a scheme. While the ‘best-in-show’ proposal has already been lambasted by major players who say it would concentrate the market and undermine competition, Blake says it’s a solid step, in principle, towards boosting returns for some fund members. He cautions, however, that there is a danger that the industry will pressure the regulator into promoting the selected funds for the wrong reasons. Still, broadly speaking, Blake supports the proposal and further argues that the financial regulator should play the role of the ‘intelligent consumer’ and remove individuals from high-cost funds that perform badly.
In his view, Australia needs a new approach, since the current super system assumes competition that doesn’t exist. “A whole range of behavioural biases and inertia dominate behaviour, which means consumers don’t behave in a way that a simple competitive model would predict,” Blake explains. “This is why so many people keep their money in poorperforming funds.” Things are no better in the UK or the US. “Competition only works when consumers understand the products they’re buying, and the problem is they don’t, anywhere,” Blake says. “So, applying a competitive model to super is faulty. Even when you have a lot of apparently competing providers, there is an implicit oligopoly. “Providers almost collude in not competing, so you do need a different model to ensure the customer is getting value.” As for Blake’s further concerns about the best-in-show proposal, they range from spotty performance to how well the process is monitored and whether the policy encourages innovation. The danger is that as more money piles into the winning default funds, the manager will simply scale up the investment, which will bid up the price of stock already held, which will lower returns. “If you have default funds investing in best-performing local equities, they will soon become the least-performing equities, because you are still scaling up the investment,” Blake explains. “Australia will end up with a diseconomies-of-scale problem sooner or later.” He notes that Australia’s home bias in asset allocation remains an issue for the savings industry. Current figures show that in a typical portfolio split, 70/30 between equities and bonds, half of that equities allocation will be in local stocks. In a globally diversified portfolio, only 4 per cent of funds should be invested in Australia. The PC’s draft report had found that, between 2015 and 2016, profit-to-member funds returned 6.8 per cent to their members, while retail funds returned only 4.9 per cent. The final report revealed 77 per cent of 5 million underperforming super accounts were in retail funds.
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In your members’ moment of need, we’re here. In 2018 alone, we paid $1.4 billion in claims to Group members and Retail clients. Because we’re here for your members when they need it.
LIFESKILLS \
A SECOND CHANCE TO PROTECT SUPER With key reform legislation held up in Parliament, the industry now has another chance to transform on its own without waiting for a government mandate.
ILAN LEAS MANAGING DIRECTOR | RETENDER
CONTROVERSIAL LIFE INSURANCE legislation in the Senate last year would have stripped more than $1 trillion in cover from some super fund members whilst raising premiums for others but the proposed law has stalled. This presents super funds and insurers with breathing space to deliver what they proposed should be implemented instead. The Senate bill, named the Protecting Your Super Package, mandated that funds could no longer provide automatic insurance on an opt-out basis to any member whose account balance was below $6000 or who had an inactive account (meaning no contributions had been received) for 13 months or more, nor to new members joining under age 25. Industry stakeholders, including regulators and consumer groups, raised serious concerns about this law removing insurance from younger, lower-income
investmentmagazine.com.au
and higher-risk members – predominantly women. At Retender, we estimated this would lead to more than $1 trillion of cover disappearing overnight, and also highlighted that members keeping their cover could face a significant increase to their premiums where some groups were being subsidised by others. With nearly all members negatively affected due to removed cover or higher prices, the insurance component of Protecting your Super might
insurance. But it now appears the bill has been shelved, possibly until after the election. This creates an opportunity to switch focus, from lobbying for further changes to the bill to delivering alternative changes to members. Funds and insurers will need to consider the impacts of both the Hayne royal commission final report and the recent Productivity Commission report, which was not only fairly scathing of the superannuation sector but endorsed some of the Protecting
Funds and insurers will need to consider the impacts of the royal commission final report and the recent Productivity Commission report, which was fairly scathing of the superannuation sector have done the opposite in terms of protecting consumers. Added to this was the challenge of implementing these changes by July 1, 2019, a deadline some commentators described as reckless. Labor proposed a number of carve-out amendments, in particular one to allow the Australian Prudential Regulation Authority to exclude funds, or cohorts of members within funds, with a demonstrated need for
Your Super proposals whilst calling for a public inquiry into the sector and the role of default insurance. Three areas the industry should focus on: • Reconsider any benefit design changes required. The expanded window provides an opportunity to rethink the structure of group insurance arrangements. • Ensure competition is re-introduced into
the process. Under Protecting Your Super, funds would barely have enough time to get one price from their existing insurer and implement changes. A process that only gets one price from an insurer wouldn’t pass the best-interests test. However, different views about the future require an arm’s-length independent assessment of the appropriateness of the cost of these changes to members. • Figure out the life insurance value proposition. The life insurance industry has lost nearly all trust in recent years, receiving a very public wake-up call that exposed failures to meet community expectations. The temporary reprieve on the launch of legislation provides an opportunity to re-engage with consumers to demonstrate the insurance value proposition. The bill may rear its head again, particularly if the industry doesn’t make changes voluntarily, but rather than being forced to adopt a government position, funds can now deliver the best suggestions that emerged during the Protecting Your Super debate. We are in a moment of unprecedented system-wide change, and there is no excuse for not taking the opportunity it presents to transform for the best interests of members. LIFESKILLS Lifeskills is a regular section in Investment Magazine. Each month, we publish an independent column from an industry leader with insights into best practice in the group insurance sector. This page is produced with thanks to advertising support from AIA Australia.
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A LT E R N AT I V E A S S E T S
EYES ON VENTURE CAPITAL WOES Just what impact a downturn in the world’s largest economy will have on Australia is increasingly being asked by some inside and outside the VC sector.
YASSER EL-ANSARY CHIEF EXECUTIVE | THE AUSTRALIAN PRIVATE EQUITY AND VENTURE CAPITAL ASSOCIATION LIMITED (AVCAL)
AFTER STRUGGLING FOR several years in the wake of the tech wreck, Australia’s venture-capital sector has blossomed as a wave of technological innovation has surged around the world. Total assets under management by venture firms have more than doubled since 2015, reaching $6.9 billion at December 2017, the latest Preqin data published in AVCAL’s 2018 Yearbook shows. Alongside that growth in AUM have been unprecedented levels of investment activity, which reached a record $962 million across 135 deals in 2017. Over the 12 months ended March 2018, VC funds tracked by Cambridge Associates
quoted pooled returns to investors (net of fees, expenses and carried interest) of 26 per cent, the latest data compiled from the Australian market shows. After-fee returns for three- and fiveyear periods are impressive as well. When the inevitable economic slowdown hits the US, a look at history can give
around the world (measured by number of funding rounds and amounts raised), a study titled “Venture Capital and the Financial Crisis”, from The Oxford Handbook of Venture Capital, shows. Australia’s economic and trade relationship with China is widely acknowledged as the major relevant point of difference from the US.
Major Australian institutional investors such as Hostplus and the Future Fund have been working to increase their allocations in the early-stage investment ecosystem some indication about what to expect. The 2008-09 GFC began in the US and quickly spread to many markets around the world. While the GFC was one of the largest and most dispersed downturns in history, it had a particularly significant impact on US venture capital – more so than on other VC markets
FEBRUARY 2019
During the GFC, the Chinese economy continued to grow, underpinned by its own massive stimulus package, which drove ongoing demand for Australian commodities. That isn’t to say the Australian VC industry was unaffected. Fewer new investments were made, the flow of funds into VC firms tightened
and IPO exit opportunities diminished – all directly attributable to the economic slowdown and the focus on reducing exposure to risk. Fast forward a decade, and the Australian VC industry is as strong today as it ever has been. And that’s precisely what you would expect – technology is reshaping whole industries and business models are being permanently altered as a result of innovation and data. Much is made of Australia’s geographic isolation, but that same challenge presents unique opportunities to foster original ideas and innovations that find new markets and customers all over the world. A growing number of VC-backed businesses are generating profits while successful expats are routinely returning home to Australia and re-investing in other businesses, bringing the value of their experience. Meanwhile, major Australian institutional investors, such as Hostplus and the Future Fund, have been working to increase their allocations in the earlystage investment ecosystem domestically and offshore for some time now. The fact that large sophisticated investors like these are adopting such strategies provides an insight into the opportunities that fast-growth businesses with new and emerging technologies present. So, while a US recession in coming years will have an impact on the Australian economy, the unique features of the domestic market will undoubtedly play a role in shielding us from some of the implications of a downturn. Only time will tell precisely how we navigate our way through when the moment comes.
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REGUL ATION
ASIC’s RG 97 CHANGES ‘VERY SENSIBLE’ The corporate watchdog has done well with its proposed changes to fee disclosure for super funds and managed funds.
IAN FRYER HEAD OF RESEARCH | CHANT WEST
ASIC’s core objective in its review of RG 97 is to assist consumers in making confident and informed decisions through a disclosure regime that is practicable for industry. Its proposals have largely achieved this. The changes will greatly simplify fee disclosure requirements for funds and make for fee comparisons that are much more clear – always a good thing. ASIC has heard the industry’s concerns and taken on almost all the recommendations of the external expert it appointed to scrutinise the report. One simple but significant change was to show just
one number for investment fees and costs and another for administration fees and costs. The current distinction between investment fees and indirect costs doesn’t provide any useful information and can confuse consumers and lead to wrong decisions. ASIC has also removed all the ‘made-up costs’ that everyone was calculating in different ways. These included property operating costs and implicit transaction costs, such as bid/ask spreads on certain types of transactions. It was a huge job for funds to source or calculate these costs and for no benefit whatsoever. These costs were never part of the headline fees but some adviser groups, in the absence of clear guidance from ASIC, included them when comparing products, which greatly distorted fee comparisons and affected some client recommendations.
Borrowing costs have also been removed from comparisons, as they relate to interest costs rather than the expense of providing a service.
PROPERT Y CHANGES The removal of property operating costs will take away one of the great inequities of the current RG 97 regime, as they applied only to unlisted property. It meant you could invest in a property through an unlisted vehicle and the same property through a listed vehicle and you would be required to show different fees and costs for each. While there are still some differences in the treatment of listed and unlisted property, the removal of property operating costs gets rid of the main problem.
BIGGEST ISSUE The biggest issue with the current regime is the different
Overall, ASIC should be applauded for taking on the strong criticism from industry over a seriously flawed disclosure regime and fixing it up
FEBRUARY 2019
treatment of superannuation products and managed funds, as managed funds are currently required to show lower investment fees and costs than a super fund for the same investment because they don’t include transaction costs. This is a real problem. Superannuation platform products (super wraps) invest in managed funds, so they disclose lower fees and costs than other super products for the same investment – this is clearly not fair. The current regime also complicates disclosure for institutions with both super funds and managed funds, as they need to calculate different fees and costs for the same investment. ASIC’s solution is to disclose investment fees and costs separately from transaction costs in the fee template for both super funds and managed funds. Transaction costs typically include explicit items, such as brokerage and stamp duty. This will mean that the investment fees and costs for all investment options, whether they are in traditional super funds, super wraps or managed funds, should be pretty much the same. ASIC does not propose to take the next step and require platforms to disclose the total cost of product for each option on a platform, although this will be the subject of further consultation with industry. While there are practical issues related to the number of options available on a platform, I would argue it is reasonable to disclose the total cost of product for these somewhere, even though that may not be in the Product Disclosure Statement.
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A VOLUNTEERING DAY YOU CAN PUT YOUR HEART INTO The Wayside Chapel invites you and your colleagues to spend a day in Kings Cross learning about life on the streets and lending a helping hand to the most vulnerable people in our community. Come to hear about lived experiences of homelessness, learn about local social issues, and cook and serve a lovingly prepared meal. You’ll leave with a different perspective of the people you pass in the street, and a whole lot of love.
an AWAYSIDE day A TEAM EXPERIENCE LIKE NO OTHER
FOR MORE INFORMATION AND BOOKINGS: EMAIL: groupvolunteering@thewaysidechapel.com PHONE: 9581 9101
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POLICY
‘BEST IN SHOW’ A BLUNT TOOL While the evidence-based approach the Productivity Commission took in its analysis of superannuation is laudable, its final recommendations are a mixed bag.
EVA SCHEERLINCK CHIEF EXECUTIVE | AUSTRALIAN INSTITUTE OF SUPERANNUATION TRUSTEES
IT’S DISAPPOINTING THAT the Productivity Commission’s thinking around the default fund selection process didn’t advance from the interim report it released more than 20 months ago, despite widespread criticism. AIST was pleased with the report’s forensic analysis of the profit-to-member sector and why it outperforms. Using an additional year of data, the final report concluded that, on average, for the 11 years to 2018, profit-to-member funds outperformed retail funds by about 2 per cent a year. That’s a significant boost to the retirement outcomes
of millions of Australian workers in profit-to-member funds – many of whom are on below-average wages. Many of the report’s recommendations concerning the regulators are equally sound. Few could disagree with the commission’s assessment that the Australian Prudential Regulation Authority and ASIC need to increase their focus on misconduct and take a more proactive, tougher approach. Another worthy recommendation is for ASIC to have a greater focus on the appropriateness of products. There is plenty of evidence to show that many super products underperform because they weren’t designed with members’ best interests in mind. The commission’s recommendation to clarify the meaning of best-interests duty is also sensible. In assessing whether trustees have breached their duty to members, the regulators must consider whether the net returns members receive from a certain product are reasonable and appropriate when compared with what most other members are receiving. But what is arguably the commission’s central recommendation – limiting
FEBRUARY 2019
the number of default funds to a best-in-show list of 10 – is a blunt mechanism that is fraught with complexity. Such a mechanism would remove many high-quality funds from the default system, disadvantaging millions of members in these funds. Also, picking 10 winners from a list of high-performing
undertake an appropriate assessment of the top 10? Another issue is that bestin-show focuses on funds for new entrants, stopping short of helping those stuck in poor-performing funds. The vast majority of new members of the workforce, in our award-based default model, are already in a high-performing, industryappropriate fund. The commission states that, of the 29 underperforming default funds, about half are industry and almost a third are retail. But because the retail funds tend to be larger, they account for 77 per cent of the member accounts in underperforming funds. AIST agrees with the commission that there is no place for underperforming funds in the default system, whatever type of fund they
Such a mechanism would remove many high-quality funds from the default system, disadvantaging millions of members in these funds.
funds that could easily stretch to 50 funds instead is a dangerous path. As has been apparent before, it is possible to go from being the number one fund to number 20 or 30 over time. In some years, there might be little difference in performance between fund number one and fund number 20. Given these issues, how will the best-inshow selection committee
are. In a compulsory super system, we must do our utmost to protect consumers and provide a default system that is a genuine safety net. But picking a very short list of winners is not the answer. Empowering the regulators to act on the underperformers, while at the same time re-starting the existing, yet stalled, Fair Work Commission selection process makes a lot more sense.
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Get across the latest challenges and opportunities facing the superannuation industry at this year’s Conference of Major Superannuation Funds (CMSF). GOLD COAST 13 – 15 MARCH 2019 Royal Commission Productivity Commission Indigenous superannuation Advice solutions post Royal Commission Innovation in funds Future trends in customer service
Join us as we hear from
Larry Beeferman
Jane Caro
Rahki Kumar
Ian Silk
Harvard Law School
State Street Global Advisors
Social commentator – Advertising expert
AustralianSuper
Adele Ferguson
The Age, Sydney Morning Herald, Australian Financial Review
Shundrawn A. Thomas Northern Trust Asset Management (USA)
Alex Joiner IFM Investors
Rekha Unnithan
CFA, CIMA – Nuveen (USA)
View the full program and register now at aist.asn.au/cmsf
2019 FUND EXECUTIVE FORUM
Organisational Health How to maintain a healthy organisation amidst change and growth.
R E G I S T R AT I O N S NOW OPEN
Wednesday 6 & Thursday 7 March 2019 Sheraton Grand Sydney Hyde Park 161 Elizabeth Street SPEAKER
Matthew Tottenham, KPMG “What can super funds learn from the APRA Prudential Inquiry into CBA?”
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For more information contact FEAL on (02) 9261 5155 or visit:
www.feal.asn.au