Investment Magazine - September 2017

INTELLIGENCE FOR INSTITUTIONAL INVESTORS

ISSUE 142

SEPTEMBER 2017

Statewide Super chief investment officer CON MICHALAKIS is on guard against complacency

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Risk comes

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FULL CIRCLE

INNES MCKEAND THE MAN BEHIND AUSTRALIANSUPER’S $60 BILLION EQUITY PORTFOLIO TELLS HOW HE PICKS MANAGERS SMSFs THE TIDE OF OUTFLOWS TO THE DIY SECTOR IS TURNING BACK AS MANY MEMBERS FIND GOING IT ALONE WITHOUT REWARDS FRANK GULLONE THE OUTGOING KINETIC SUPER CHAIR SHARES HOW THE BOARD DECIDED ON A MERGER DEAL WITH SUNSUPER ABSOLUTE RETURNS AMP CAPITAL, SUNSUPER AND MINE WEALTH + WELLBEING TELL HOW THEY ARE TURNING TO ABSOLUTE RETURNS

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CONTENTS SEPTEMBER 2017

10 PROFILE

“Group insurance in superannuation avoids a massive underinsurance problem” – EVA SCHEERLINCK – CHIEF EXECUTIVE AUSTRALIAN INSTITUTE OF SUPERANNUATION TRUSTEES

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CIO PROFILE Nine years after he joined Statewide Super at the height of the GFC, Con Michalakis is concerned markets are too complacent.

SMSFS The tide of outflows to the self-managed super sector is starting to turn back as many members find going it alone less rewarding than expected.

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23

HEAD OF EQUITIES Innes McKeand, the man responsible for AustralianSuper’s $60 billion share portfolio, shares how he picks managers.

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ROUNDTABLE Leaders from the superannuation, group insurance and mental health sectors met to discuss how to identify and support those at risk.

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PTSD Professor Neil Greenberg from King’s College London is working with local super funds to improve how they respond to trauma via group insurance.

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ENDING SLAVERY The Walk Free Foundation wants to work with institutional investors to eradicate slavery from modern supply chains, Fiona David writes.

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COMMUNITY First State Super boss Michael Dwyer sees a multitude of benefits from participating in NSW’s refugee employment support program.

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CHAIR’S SEAT Outgoing Kinetic Super chair Frank Gullone shares how the board weighed the options and voted on a merger deal with Sunsuper.

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ABSOLUTE RETURNS Investment experts from AMP Capital, Sunsuper, and Mine Wealth + Wellbeing outline how they are turning to absolute return strategies.

S E P T E M B E R 201 7

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\ FROM THE EDITOR

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

EDITOR

Sally Rose DIRECTOR OF INSTITUTIONAL CONTENT

Amanda White EDITOR-AT-LARGE

A LETTER from the editor CIPRS: A CASE OF CHICKEN OR EGG

Simon Hoyle HEAD OF DESIGN

Kelly Patterson ART DIRECTOR

Suzanne Elworthy SUB-EDITOR

Haki P. Crisden PHOTOGRAPHER

Matt Fatches matt@mattfatches.com.au

HE GOVERNMENT IS going to stop short of forcing superannuation funds to offer all retiring members a comprehensive income product for retirement (CIPR) anytime soon.

Given that, however, it should at least require all funds to have an appropriate framework in place to improve governance around what pension phase products they offer.

In July, I facilitated a panel at the Financial Services Council’s 2017 Leaders Summit on the topic ‘Retirement Income Products: are we on the right track?’

The timing was perfect, coming just a few days after Treasury closed the consultation on its review into developing a CIPR framework. In light of this, the crowd was understandably keen to hear from Darren Kennedy, of Treasury’s retirement income policy division.

He revealed that his unit had received more than 50 submissions and met with over 100 organisations as part of the review. While it was still early days in sifting through the submissions, he said the overwhelming theme was “a lot of agreement about the need to shift the policy settings to retirement incomes but a lot of disagreement about how to do that”.

I tried to press him on why the terms of reference had specifically shied away from suggesting funds should be forced to offer CIPRs to all retiring members – given that seemed to me a pretty central part of the vision for the proposed regime as outlined in the 2014 Financial System Inquiry.

While stressing he couldn’t speak to the government’s motivations,

SEPTEMBER 2017

Kennedy said that it was difficult to make something mandatory when the underlying products don’t exist.

He also noted that the government needed to be careful about forcing compulsion when for some funds, typically those with very low average account balances, it is unlikely to be in their members’ best interests.

The Actuaries Institute of Australia, Centre for Sustainable Retirement Incomes and the Australian Institute of Superannuation Trustees are among those organisations that have told Treasury all super funds should be required to produce a CIPR framework that outlines how they are making decisions about what retirement income solutions to develop and offer to their members – including whether these should include annuities or other pooled-risk products.

This is at the least a necessary interim step the government should take.

In proposing a CIPR framework, the FSI controversially posited that it could deliver average retirement incomes that were 15 to 30 per cent higher. Kennedy said Treasury had heard from many people who believe that is achievable and met with a number of funds “who are already developing new and innovative solutions”.

So that brings us back to the question of whether funds should eventually be compelled to offer CIPRs. The FSC has suggested a transition period of five years, which seems a reasonable lead time – so long as the new rules aren’t too prescriptive.

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\ CIO PROFILE

ON GUARD

complacency AGAINST

Statewide Super’s CON MICHALAKIS may not have a reputation as a conservative kind of guy but his market outlook is IMBUED WITH CAUTION.

SEPTEMBER 2017

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CIO PROFILE \

By Sally Rose Photo James Elsby

STATEWIDE SUPER CHIEF investment officer Con Michalakis has three framed photographs on his desk. They are of alleged drug smuggler Cassandra Sainsbury, Russian President Vladmir Putin and United States President Donald Trump – with a red “Make America Great Again” cap balanced on the frame. Why, you ask? As a constant reminder of risk.

“I come in every day and look at their faces and it reminds me to always be thinking about risk. Personal risk, geopolitical risk and WTF risk,” he laughs, pointing at Sainsbury, Putin and Trump in that order.

On the day in August 2017 that Investment Magazine visited Statewide’s Adelaide office, Trump was making headlines for stepping up the antagonism towards nuclear warheadenabled North Korean dictator Kim Jong-un.

Despite the many frightening geopolitical risks in play, Michalakis believes the biggest threat to financial markets is simply that investors have become too complacent.

“What worries me now is that the world was pretty messed up in 2008 and 2009, and people say, ‘If you weren’t scared back then you didn’t really understand how bad things were’,” he says. “Well, now, nine years later, we’ve pretty much gone full circle, from

absolute fear at the height of the GFC to, well, it’s not quite exuberance because people are still carrying the scars, but I’ve never seen complacency like this.”

Interest rates are very low, credit spreads are very tight, equity valuations are quite high and volatility is very low. But at the same time, major economies – the US and Australia included – are showing signs of strength as indicated by improving employment data and this is lulling investors into a false sense of safety.

“The problem is that markets are saying, ‘There’s nothing that worries us, we can buy risk assets, gear up and buy shares and property, buy debt, buy all these structured products, buy ETFs and go passive’. I think it’s all a bit too easy,” Michalakis says.

A PERIOD OF REBUILDING

In the two years before the global financial crisis, Michalakis had been living in New York working as a director of marketing and client services for hedge fund Pzena Investment Management.

When he left at the start of August 2008 to take a short holiday before returning to his hometown of Adelaide to take on his current job, it looked like markets were getting back

The Statewide Super team (left-right) SUSANNAH LOCK Quantitative strategist DANIEL DUJMOVIC Cash and fixed income DAVID SMELT Special adviser CON MICHALAKIS Chief investment officer CHRIS WILLIAMS Head of alternatives DAVID OBST Domestic equity and property

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SEPTEMBER 201 7

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\ CIO PROFILE

C O N M I CH A L A K I S STATEWIDE SUPER CHIEF INVESTMENT OFFICER

Appointed: August 2008 PREVIOUS ROLES

2006 – 2008: Pzena Investment Management, director of marketing and client services (New York) 2002 – 2004: Merrill Lynch Investment Managers, head of institutional business (Sydney) 1997 – 2002: Alliance Capital Management, Sydney and London (institutional sales) 1995 – 1996: Watson Wyatt, inaugural Australian practice leader of investment consulting 1993 – 1995: Prudential Portfolio Managers, associate director, Australian equities 1992 – 1993: JP Morgan, futures and options, analyst 1991 – 1992: Prudential, strategic development EDUCATION Bachelor of Mathematical Science from the University of Adelaide Masters of Science, Financial Economics from the University of London Postgraduate Diploma in Financial Strategy from Saïd Business School, Oxford University Graduate Diploma in Applied Finance and Investments, Securities Institute of Australia

STATEWIDE SUPER Chief executive: Richard Nunn Chair: Kenneth Williams Based: Adelaide Total FUM: $7.4 billion Fund type: Public offer Number of members: 142,705 Number of employers: 18,000 Total staff: 100 Investment team staff: 6 PERFORMANCE The Statewide MySuper option, in which 92 per cent of members are invested, has posted an average annual return of 10.59% since inception at July 1, 2013 to June, 30 2017. *as at June 30, 2017

SEPTEMBER 2017

on track after the collapse of Bear Stearns a few months earlier.

Less than a month later when he landed at Statewide, US mortgage brokers Freddie Mac and Frannie Mae were nationalised, and a week later Lehman Brothers was nationalised.

“So here I was, with my first gig running a pension fund and the world had turned pretty ugly,” he recalls.

Statewide head of alternatives and direct investments Chris Williams joined a few months later and the pair bunkered down to spend the next year getting the basics right. JANA was appointed as the fund’s asset consultant. An investment committee was formed, a new investment governance framework was formulated and the strategic asset allocation was reset. Former Sunsuper CIO Jack Gray was brought in as a special adviser to the investment team and stayed seven years, having a huge influence.

In 2008, Statewide Super had around $2 billion in assets and was one of the worst performing superannuation funds in the country. Today, following a 2012 merger with $1.6 billion rival Local Super, Statewide

manages $7.3 billion in assets and is one of the country’s top performers. The fund’s MySuper option has delivered an annual average return of 10.65 per cent since inception on July 1, 2013 to June 30, 2017.

Michalakis says success as a CIO comes down to three things: getting the investment governance structure right, putting the right people into that structure and developing a sound set of investment beliefs.

“Today we’ve got those big important things in place,” he says. “So the focus is on thinking about how to position the portfolio to be resilient, which you can’t really do but you can achieve a little bit at the margin.”

TILTING TO ABSOLUTES

In recent months, Statewide has reduced its equity holdings to run a bit more cash while retaining its preference for active management in local and global shares. It is slightly under-hedged in the Australian dollar.

“At the margin, we’re adding some absolute return strategies,” he says. “Taking the overall equity weight down a bit, not adding too much illiquidity. Just trying to diversify the portfolio.”

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CIO PROFILE \

We’re in for an extended period of low returns and it’s likely to be combined with increased volatility The fund has already done a lot to build its tilt to absolute return strategies over the past five years. When Michalakis joined Statewide it had no allocation to absolute return strategies, while today it sits at around 12 per cent of the portfolio.

Adelaide Airport and Flinders Ports are two direct infrastructure investments, inherited in the Local Super merger, that have performed well and helped diversify the portfolio.

Statewide’s exposure to listed equity markets has been reduced to 50 per cent, split roughly evenly between local and international markets.

“Everyone says go buy a low-cost option, but net of fees we’ve smashed it with active managers, so there’s no reason to change,” Michalakis says, noting that the Australian market in particular, with a benchmark

index dominated by a handful of big banks and miners, is a dangerous index to be passive against. “Our size gives us an advantage because we can be in the small to mid-cap strategies and hire interesting managers.”

But that is not to say that the CIO is not focused on implementing active strategies at the lowest possible cost. In his desk drawer, he keeps a full arm’s-length veterinarian’s plastic glove. It has proved a disarming prop when negotiating with managers over fees on more than one occasion. “I really hate paying high fees,” he says.

Williams says that Michalakis likes to act the joker, on Twitter and in real life, but when it comes down to business he is incredibly focused. Michalakis says of Williams and the rest of the fund’s small investment team: “I don’t manage them, they manage me and

9

I really like that.”

Domestic equity and property manager David Obst and special adviser David Smelt joined the team via the Local Super merger.

More recently Daniel Dujmovic was promoted from the fund’s finance team working across cash and fixed income, while actuary Susannah Lock was recruited from the Responsible Investment Association of Australasia as a quantitative analyst.

Michalakis is certain the team will have their work cut out for them over the next few years.

“No one knows the future,” he says. “But I can say with relative certainty we’re in for an extended period of low returns and it’s likely to be combined with increased volatility, which will certainly test everyone’s behavioural responses.”

The biggest challenge for professional investors today he believes is that the “signalto-noise ratio is the lowest it has ever been”.

In light of this, he thinks it’s an advantage for his team that they’re not based in Collins Street or Martin Place.

“It means we don’t get infiltrated by the herd,” he says.

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SEPTEMBER 201 7 This advertisement was prepared in good faith and we accept no liability for any errors or omissions.

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\ INTERVIE W

Outsider

no LONGER

Six months into her role as CHIEF EXECUTIVE of the Australian Institute of Superannuation Trustees, EVA SCHEERLINCK reflects on what’s keeping her occupied.

SEPTEMBER 2017

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INTERVIE W \

By Sally Rose Photo Matt Fatches

AN EARLIER CAREER as a personal injury lawyer showed Eva Scheerlinck how group insurance via the default superannuation sector can help ordinary people in their times of need, once they realise they have it.

“When I was working as a personal injury lawyer and speaking to people who had been significantly injured in an accident, when you said to them ‘you’ve probably got insurance via your super’, for most people that was the first they’d heard of it,” she says.

Improving the value of group insurance in super is something she has been spending a lot of time thinking about since being appointed chief executive of the Australian Institute of Superannuation Trustees (AIST) in March. Since then she has been leading the organisation’s contribution to the Insurance in Superannuation Industry Working Group.

The group, formed in response to pressure from the government and regulators, is on track to release a draft code of practice for review by November, she says.

Scheerlinck is certain that retaining group insurance coverage as an automatic inclusion in the default super system is in the public’s interest.

“Group insurance in superannuation avoids a massive underinsurance problem,” she says. “I haven’t heard of any other model that could replicate appropriate cover for the majority of working Australians.”

However, she agrees many funds may need to re-think their group insurance design, particularly for younger members with low balances.

The changing nature of the workforce is another threat to the value current group insurance arrangements deliver to many workers.

“If people are not actually an employee, depending on the terms of the insurance cover they might be paying for income protection cover they would not be entitled to claim,” she says.

Scheerlinck says the working group is

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liaising with KPMG to examime the scale of the problem of people paying for policies that they would not be entitled to claim against.

Another issue is people with multiple accounts, when a new default fund is opened on their behalf every time they change jobs.

“Often when people have multiple accounts, there are multiple insurances being taken out and the different funds don’t know what other insurances a person has,” she says. “A lot of work is being done on account consolidation to deal with that problem.”

She would like to see an upgrade to the MyGov portal to allow people to be able to view information about all super accounts held in their name and the various insurances attached to them.

Success in improving group insurance will require a combination of better policy design and claims processes, but also improved member engagement, she says.

LEGAL BACKGROUND

Scheerlinck wound up in the super industry more by accident than design. As a young Arts-Law graduate living in Brisbane in the late 1990s she wanted to be a journalist, but landed her first role as a media adviser to the Australian Plaintiff Lawyers Association.

Later she moved to Melbourne to take a role as a personal injury lawyer with mid-size firm Ryan Carlisle Thomas. Eventually, she re-joined the Plaintiff Lawyers Association moving to Sydney in 2001 as its public affairs manager before being promoted to chief executive in 2003 and leading the organisation through a merger and re-brand to become known as the Australian Lawyers Alliance.

During that period, a formative experience for the young lawyer was advocating for consumers who lost out after the collapse of HIH Insurance.

“In the end, the industry was rewarded, while every Australian lost rights,” she says.

“It made me pretty angry and has kept me committed to continuing to represent the interests of ordinary Australian people.”

In December 2010, then AIST chief executive Fiona Reynolds recruited Scheerlinck to the superannuation peak body to develop its first voluntary governance code.

SEPTEMBER 201 7

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\ INTERVIE W

“Fiona asked me because they particularly wanted someone who didn’t have superannuation industry baggage, an outsider, to come in and have a look at governance arrangements,” she says.

Sharing office space with the Australian Council of Superannuation Investors led to her being mentored by industry stalwarts Michael O’Sullivan and Phil Spathis who instilled in her the ethos of the equal representation, profit-to-member model.

At the Conference of Major Superannuation Funds in 2011 she launched the first version of the governance code.

Five years later at the same conference she was named Tom Garcia’s replacement as chief executive.

GOVERNANCE CODE

So it was an important personal milestone when AIST launched its new compulsory governance code on July 1, 2017. The new code will operate on a voluntary basis this financial year and from next financial year, non-compliance will be grounds for expulsion from AIST. The expanded governance code was produced in response to the Turnbull government’s push to force all super funds to appoint independent directors to one third of their board seats.

The new AIST governance code is modelled on the ASX Corporate Governance Principles and requires trustees to consider 22 factors. It purports to improve the quality of profit-to-member super fund boards’ nomination and selection process, professional training and development, director voting rights, risk management, board renewal, chair appointment, disclosure, transparency and remuneration.

Scheerlinck says AIST has received very little feedback from the government on its alternative governance code.

“They [the government] are intent on re-introducing their governance legislation, even though our code is obviously much

broader than board composition,” she says.

She rejects the suggestion that, in the interests of transparency, AIST should disclose individual funds’ reporting against the governance code. AIST has 62 member funds including industry, government and corporate funds.

“I think funds need to be allowed a transition period,” she says.

Other policy issues that have been keeping the new chief executive busy in her first six months are formulating a response to the Productivity Commission’s review of alternative models for default fund selection and more recently the latest round of reforms to expand the power of the Australian Prudential Regulation Authority (APRA) to shut down underperforming default funds.

She is unhappy APRA’s new outcomes test will only apply to default MySuper products, arguing any extra scrutiny should also apply to Choice products. She is also worried that the broader outcomes test, which is set to supersede the regulator’s scale test, might lose sight of the most important metrics of success.

We’re looking at developing a toolkit in relation to best practice in merger discussions SEPTEMBER 2017

“I’m keen to see how APRA will be weighting different things in the outcomes test,” she says. “The first thing it lists is what products and features a fund offers but that’s just the bells and whistles, which in our view is not as important as net returns.”

She says AIST is looking at updating its guidance on how funds should deal with decisions about mergers.

“I think we need to have the tough conversations,” she says. “The role of the regulator is the role of the regulator, but we do need to have a look at what it is we’re doing as an industry to have the discussion on mergers and assist our members in having those discussions.

We’re looking at developing a toolkit in relation to best practice in merger discussions.”

She is also very concerned about the short timeframe the government has laid out to combine three external dispute resolution bodies for the financial services sector into a single body, to be called the Australian Financial Complaints Authority (AFCA) “The board is yet to be appointed,” she says. “There are no terms of reference, no fee structure has been announced … We need to see all these things first and then see how much transition time is needed. There’s a big book of work the Superannuation Complaints Tribunal is still working through and it’s important to make sure they’re adequately funded to complete that.”

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\ EQUITIES

AUSTRALIANSUPER is already a dominant force in the local EQUITY MARKET and as the fund continues to grow in size and sophistication it is becoming A FORMIDABLE PLAYER in global sharemarkets too.

By Amanda White Photo Nicole Cleary

MANY A FUND manager would like to know what goes on inside Innes McKeand’s head. After all, the $60 billion equities portfolio he oversees is the largest allocation in the country.

With $120 billion in assets, AustralianSuper is the nation’s largest industry fund, and the fastest growing, and the fund’s default option, in which 80 per cent of members’ assets are invested, has an exposure to listed equities of about 55 per cent.

As head of equities McKeand is responsible for that portfolio, of which 26 per cent is invested in Australian shares and 29 per cent in international shares.

He runs the portfolio with an unwavering belief in active management and employs around 30 external managers including an in-house team of 40 – all focused on concentrated portfolios.

“An overweight position, compared to other funds in Australia, reflects our positive view on equities,” McKeand says from the fund’s headquarters in Melbourne. “The macro economic environment is supportive and the global economy is growing well.”

AustralianSuper’s foray into building an in-house team began four years ago and today around 40 per cent of Australian equity holdings and 10 per cent of international equities are managed internally. The aim is to have 50 per cent of total assets run in-house by 2022 and the fund is about half way there.

Despite the hype around the internalisation of investments, McKeand concedes the inhouse team will not do everything and external managers still play an important role in managing the fund’s assets.

“There are limits to our ability to do everything and there will always be managers with greater insight who can do it better,” McKeand says.

The in-house teams run Australian

SEPTEMBER 2017

large caps and small caps, and two new international strategies launched in 2016: a fundamental strategy – run by Christine Montgomery, whose previous experience includes managing money at Fidelity, Franklin Templeton and Martin Currie – and an internal quantitative strategy, headed by Jonathon Tay, that uses machine learning techniques.

“This is a natural area for us to focus on because of the scaleability,” McKeand says, adding that more time and money will be spent on technology to support the data-driven strategy.

The in-house team, he says, has a collaborative culture and the local and international teams lean on each other.

“They’re all looking for good quality companies with intrinsic value and scaleable mandates,” he says.

Tencent, Visa, Microsoft, Baidu, Accenture, Facebook, Time Warner and Oracle.

EXTERNAL MANAGERS

Due to the need to ensure outperforming managers have a chance to move the dial on the total portfolio, the average international equities mandate is $3 billion.

“We do recognise these are large amounts of money and our operational due diligence on managers is a lot more than it used to be,” McKeand says. “We’re paying hundreds of millions of dollars in fees, so we want an active result.”

He looks for managers with concentrated portfolios and differentiated approaches underpinned by strong research.

“We also tend to prefer managers with skin in the game who own or control their own business and tend not to like managers that are, for example, owned by a large bank or insurance company.”

INNES MCKEAND Head of equities, AustralianSuper

LOCAL CLOUT, GLOBAL REACH

Across the entire domestic equities portfolio, AustralianSuper holds around 370 local stocks. Commonwealth Bank is the biggest position, followed by the rest of the big four banks, BHP Billiton, Telstra and Wesfarmers.

The fund engages directly with every local company it invests in across environmental, social, governance (ESG) and other issues.

“We can influence the share price so they listen,” McKeand says. “We say, ‘We’ll engage with you in a thoughtful way’, and now we’re among early phone calls if there’s a capital raising going on.”

Being known as a “shareholder of choice” is a big advantage in the local market, but capacity constraints mean it is inevitable that the relative allocation to global equities will continue to rise.

At the time of writing, a $15 million stake in internet retailer Amazon is the largest holding in the global equities portfolio. Other large holdings are

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EQUITIES \

He argues that one of the key advantages his in-house teams have is that they face less agency risk and feel empowered to take a longer-term view which is aligned with members’ best interests.

But to a large extent, the move to in-source investment management is being driven by a desire to lower costs.

The internal team has outperformed the external managers over the past three years, and also delivered lower costs to members.

“If we could get an equivalent strategy at the equivalent cost externally then we would consider it. In the long run we’ll run internal at a quarter of the cost of external,” he says.

The whole AustralianSuper portfolio, including internal and external mandates, costs 57 basis points to run. Asset class heads have budgets in outperformance, costs and illiquidity buckets.

CHINA THE BIGGEST RISK

On the day of our interview, McKeand had just arrived back from an Asian advisory committee meeting, which the fund holds four times a year in a revolving list of major Asian cities.

“We spend a lot of time talking about China,” he says. “We think China is the biggest risk in the global economy, not the US. The risks are building there; we’re more cautious than we once were.”

The recent inclusion of China A-shares in the MSCI indexes is interesting, he says, but is not having much impact on the portfolio strategy.

“The quality you can get access to is variable among Chinese companies – we don’t want to invest in low quality companies just because they’re in an index,” he says.

AustralianSuper also has a small office in London, where its London property

manager is based. McKeand expects the fund to have offices in most major financial centres within 10 years.

McKeand has been in charge of equities at AustralianSuper since 2011. Before that he was based in the UK in such roles as chief investment officer at AIB Investment Managers and head of investments at the Nestle UK Pension Trust.

He says there is still much to keep him interested and challenged. “We’re still growing and there’s so much more to do,” he says. “We’ll be building the internal framework for a long time.”

This includes building out the quantitative investment strategy and implementing factor-based analysis as a tool for better understanding the portfolio.

“We’re at a significant stage of evolution,” he says. “This is still effectively a greenfield.

We can do a lot of things you wouldn’t get to do in other funds.”

TILTING to the

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WORLD SEPTEMBER 201 7

\ ROUNDTABLE AN INVESTMENT MAGAZINE ROUNDTABLE, sponsored by AIA AUSTRALIA

EARLY

intervention WORKS

A DOZEN LEADERS from the superannuation, group insurance and mental health sectors met to SHARE THEIR INSIGHTS about how to better identify and support AT-RISK CLIENTS. Being out of work, whether due to redundancy or a physical ailment, is a risk factor to developing a secondary MENTAL HEALTH CONDITION such as anxiety or depression.

By Sally Rose Photos Chris Pearce

SALLY LOANE Financial Services Council

MARTIN FAHY Association of Super-annuation Funds of Australia

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A GROWING PROPORTION of people who make a claim on their group insurance due to physical illness or injury are now lodging secondary claims related to their mental health. It shouldn’t be surprising that the experience of being in pain, incapacitated and unable to work can lead to depression, anxiety or other forms of psychological stress.

In light of this, industry leaders are working hard to understand how to better identify and support at-risk claimants.

REST Industry Super chief operating officer Andrew Howard said it was important for super fund trustees to be mindful of the extent to which lodging an insurance claim can in itself be an anxiety-inducing experience.

“We have to look at those things we do in life insurance that make people feel like they don’t have much control or aren’t being communicated with very well,” Howard said.

“Then re-design our processes so they are easier for people to work through.”

Berrill & Watson principal John Berrill, a lawyer who helps people with insurance claims, said the biggest cause of secondary mental health problems he sees in people who are on claim was financial disadvantage as a result of unpaid or late claims.

He is optimistic the Financial Services

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SEPTEMBER 2017

Council’s Life Industry Code of Practice, which came into effect on July 1, 2017, will lead to improvements. An Insurance in Superannuation Industry Working Group is currently adapting the code to the specific environment of group insurance.

The three most significant things the group insurance industry could do to reduce claimants’ anxiety, Berrill said, were making payments on time, reducing the complexity of forms individuals and their doctors need to complete and reducing call centre waiting times.

National Mental Health Commission chief operating and financial officer Kim Eagle said early intervention was critical and urged the industry to work closely with consumers to make sure they were receiving the services and support they needed throughout their claim journey.

GETTING BACK TO WORK

AIA Australia & New Zealand chief executive Damien Mu said the life insurer was working closely with its partner funds to help at risk members.

“We know from our own claims data, and also from independent studies, that the longer somebody is off work the more likely they are to get a secondary illness, which is most likely

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Taking the whole view of the individual really helps better manage the whole problem, not just the physical problem, and I think that’s helped

to be mental health-related,” Mu said.

“The chances of a successful return to work are as much as halved after 70 days off work.”

AIA’s Restore program is an early intervention rehabilitation initiative focused on helping claimants suffering from mental health conditions re-connect with their day-to-day life. “Maybe go to the gym or just a walk around the block, before even starting those conversations about going back to work,” Mu explained.

But regulatory barriers exist that limit the ability of group insurers to pay for claimants to access medical rehabilitation services early in the assessment process.

REST Industry Super is one of AIA’s group insurance clients that has participated in the Restore program, and Howard said it had proved hugely beneficial. “It’s good for the industry and good for people in general if we can add rehab to the services that we provide through group life insurance,” he said.

AIA Australia chief group insurance officer Stephanie Phillips said she hoped the Parliamentary Joint Committee inquiry

into the life insurance industry would consider recommending removing some of the barriers to group insurers paying for medical rehabilitation services early in the claims process.

Phillips said around 43 per cent of AIA Australia’s claims team were allied health workers and this was helping more people get the psychological support they required earlier in their recovery from a physical injury.

“Taking the whole view of the individual really helps better manage the whole problem, not just the physical problem, and I think that’s helped,” she said. “A person may have been the breadwinner in their household and had a physical injury that has reduced their financial ability to look after their family.

That can affect their relationships and their self-esteem. All of those things have to be taken into consideration.”

REDUCING STIGMA

Phillips said early intervention was key, but is often hampered by the fact that on average people delay lodging a mental health claim till two years after they started experiencing

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SEPTEMBER 201 7

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17

\ ROUNDTABLE

DAMIEN MU Chief executive, AIA Australia & New Zealand

the issue. “We need to remove that stigma, of people being too afraid to talk to their employer about their mental health issues and leaving it too long,” she said.

Cbus Super general manager industry partnerships Chris Lockwood echoed this concern. “The greatest risk is what has happened in that time, in those years, before we’ve even spoken to someone,” he said.

Mu agreed more work needs to be done to reduce the stigma that can still linger around lodging a mental health claim.

“There’s been some improvement in reducing the level of stigma,” he said. “But when you look at the statistics and realise that nearly every Australian will experience some sort of mental health issue at one point in their life – then you realise we’ve still got a long way to go to get people feeling comfortable speaking up.”

Stigma is one reason people delay lodging a mental health claim but another complicating factor is that many people receive inappropriate legal advice to delay putting in a claim via their superannuation fund until a workers’ compensation or other claim has been finalised.

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18

Berrill said this was bad advice and that, while the rules that govern how policies intersect can be very complicated, people should be encouraged to notify of their intention to claim as soon as possible.

IOOF Holdings product manager insurance Michelle Voudouris said the fund was training its call centre staff to be better able to identify when someone was talking about taking time off work or being in financial stress, and offering to connect them with a claims person to see if any help was available.

“Obviously that puts a bit of financial stress on the claims experience initially, but it does mean we’re in touch with people sooner rather than later,” she said.

INDUSTRIES IN CRISIS

MTAA Super, an industry superannuation fund for the motor trades, is taking proactive steps to support its members being affected by mass closures in the automotive manufacturing industry.

After Ford shut its Australian manufacturing plants in 2016 MTAA Super saw mental health claims “go through

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STEPHANIE PHILLIPS AIA Australia

CHRIS LOCKWOOD Cbus Super

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ROUNDTABLE \

the roof”, the fund’s executive manager operations Chris Porter said. “We know that in October this year the last two vehicle manufacturers in Australia are going so we’ve tried really hard to work with our partners and do something ahead of that.”

Porter said MTAA had placed allied mental health professionals in work sites that are due to close, and those car factory workers soon to find themselves out of a job are being encouraged to talk through a plan for how they will cope psychologically, as well as financially.

SuperFriend chief executive Margo Lydon said the industry needed more sophisticated data management, to increase the potential for large scale analysis of trends.

“If the sector could work together to collaboratively agree on some basic data sets, then that collective information could be incredibly powerful,” she said.

However, she noted that while better data management could help the industry identify risk trends, it was important to remember that mental illness didn’t discriminate and could strike anyone.

Loss of job security is, however, a common trigger.

That is why Cbus Super now contacts members when superannuation guarantee payments cease being deposited into their account – often a sign that they are out of work – to see if that is something they want to talk to someone about.

Voudouris said IOOF was now flagging statements when super guarantee payments had ceased in a bid to ensure members were aware that it might limit their eligibility to claim on any income protection insurance they were paying for.

A BIGGER POLICY DILEMMA

Mental Health Australia director of policy and projects Josh Fear welcomed the industry’s efforts to reduce stigma, but noted the next step remains difficult.

“What worries me is where someone has identified a person in distress, what is the next step that comes after that?” he said.

“I think one of the many factors that is driving increased claim costs is that we have a mental health system that’s broken.”

Fear said he hoped the insurance sector would prove a powerful voice in a “coalition of interests” with voices from the patient care and advocacy sectors calling for a stronger mental health system.

Association of Superannuation Funds of Australia chief executive Martin Fahy said there were limits to what the group insurance sector could achieve. “There’s a much bigger public policy question that needs to be tackled in terms of the way we resource and address this,” he said.

However, he also said the sector needs to do its best to prepare its response to what would likely be a massive increase in mental health-related claims in the event of an economic recession.

“A 26-year run of uninterrupted positive economic expansion eventually comes to an end,” he warned. “I hope it doesn’t happen, but if we see interest rates go up by 300 basis points, with the level of indebtedness and the stresses that brings we could see a tsunami of claims.”

Financial Services Council chief executive Sally Loane said the industry must learn to do a better job of communicating with the general public about how different types of group life insurance products, such as TPD insurance and income protection policies, work and the benefits they provide.

PA R T I C I PA N T S JOHN BERRILL

Principal, Berrill & Watson KIM EAGLE

Chief operating officer and chief financial officer, National Mental Health Commission MARTIN FAHY

Chief executive, Association of Superannuation Funds of Australia JOSH FEAR

Director, policy and projects, Mental Health Australia ANDREW HOWARD

Chief operating officer, R EST Industry Super SALLY LOANE

Chief executive, Financial Services Council CHRIS LOCKWOOD

General manager, industry partnerships, Cbus Super MARGO LYDON

Chief executive, SuperFriend DAMIEN MU

Chief executive, AI A Australia & New Zealand STEPHANIE PHILLIPS

Chief group insurance offer, AI A Australia CHRIS PORTER

Executive manager, operations, MTA A Super MICHELLE VOUDOURIS

Product manager, insurance, IOOF Holdings

CH A IR SALLY ROSE

Editor, Investment Magazine

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If the sector could work together to collaboratively agree on some basic data sets, then that collective information could be incredibly powerful

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\ FE ATURE

The rivalry between retail and industry funds may make more headlines, but the biggest competitive threat to the non-profit superannuation sector remains the appeal of SELF-MANAGED FUNDS – particularly to members with higher balances. Some of the country’s biggest funds share how they are responding.

IN THE WAKE of harsh losses from the global financial crisis (GFC), Australia’s major superannuation funds saw an exodus of capital, as some of their most valuable members left to set up their own selfmanaged super funds (SMSFs).

That trend has now passed its peak, and a growing number of SMSF owners are returning to prudentially regulated funds.

But the do-it-yourself sector remains a significant competitive threat to even the nation’s biggest and most sophisticated funds.

A growing body of research provides some insight into what motivates people to leave their default super fund and set up an SMSF, as well as the reasons a growing number then retrace their steps.

SMSFs can have between one and four members and are regulated by the Australian Taxation Office (ATO), while larger pooled

By Simon Hoyle

funds are overseen primarily by the Australian Prudential Regulation Authority (APRA). An SMSF is more responsibility, but provides more flexibility.

Analysis by actuarial consulting firm Rice Warner shows that over the past five years, the growth in the number of new SMSFs has slowed. According to the latest ATO data, establishments peaked at 41,000 in 2012, and declined to 31,000 in 2016.

Investment Magazine canvassed a range of experts on what is bringing SMSF owners back to APRA-regulated funds. The consensus is that while some members have executed on a formal plan – using an SMSF for a specific investment purpose such as purchasing business premises or residential property – they are the minority. Most come back because their expectations have been dashed, often because the benefits of an SMSF were overstated or misrepresented by their adviser, usually an accountant.

There is a clear link between the dissatisfaction among returning members and the size of the SMSF they operated. The smaller the fund the less satisfying the experience, which raises questions about the quality of advice they received in setting one up.

Do-it-yourself funds appeal to individuals who think they can do a better job of

The

TURNING

of the SMSF

TIDE SEPTEMBER 2017

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FE ATURE \

managing retirement savings than the big players. The first edition of The SMSF Report, jointly published earlier this year by the SMSF Association and the Commonwealth Bank of Australia, shows that 59 per cent of SMSF owners said they set up their fund to achieve better investment returns, while 39 per cent wanted “to be more agile to take advantage of investment opportunities”, and 43 per cent wanted to cut costs. The emotional appeal of SMSFs to older members with higher balances is a particular challenge for industry funds. The number of individuals who leave industry funds each year to set up SMSFs is dwarfed by the number of members who leave to join retail super funds, but they have a disproportionate impact on the funds they leave behind.

STEMMING THE FLOW

A Rice Warner report found that only 6 per cent of all members who leave industry funds go to SMSFs, but they account for 22.5 per cent of the assets that leave – 3.5 times the value of funds taken by the 42 per cent of members who leave industry funds to go to retail funds.

It is not entirely clear why SMSF

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establishments have fallen from the peak of 2012, but Rice Warner notes that retail, industry and corporate super funds have all made “a significant effort to stem the leakage of assets to SMSFs over the last few years”.

“This includes member direct investment, improved advice models, reduced fees, transition-to-retirement accounts and hugely improved account-based pension offerings,” the Rice Warner report stated.

Anne Fuchs, Sunsuper’s general manager of advice and retail distribution, says the SMSF sector is still the $45 billion not-forprofit fund’s largest source of outflows. “If I think of historical roll-out trends, we had a lot of money go to retail funds, and that trend has pretty well stopped,” she says.

Fuchs says that when Sunsuper analyses rollovers into SMSFs, the quality and the motivation of the advice is sometimes questionable, particularly in relation to fund size. But Fuchs says SMSFs can work well when the right sort of individual sets one up with enough assets and full knowledge of the cost and effort involved.

Fuchs says if a member contacts Sunsuper about setting up an SMSF, the fund’s callcentre staff will explain the responsibilities of being a trustee – including the likely administrative workload and cost – before referring the member to the fund’s national panel of financial advisers. Better-informed members often decide not to leave.

Fuchs says Sunsuper recognises SMSFs meet a need that larger funds can’t satisfy for some members, but it is unlikely to develop new investment offerings to convince those

members to stay.

“There’s a lot to be said, sometimes, for the power in saying no, recognising what you’re great at and what is your core business,” she says.

“We’re not trying to be all things to all people. That’s the power of our proposition.”

MEMBERS RETURNING

Tim Anderson, executive manager of marketing and product for Unisuper, a $58 billion academic sector fund, says his fund did “a lot of research into the benefits of direct investment options a number of years back” to help address the peak in demand for SMSFs just after the GFC. He says the cost to the fund couldn’t be justified, and “under the best-case scenario, we would hope to have retained a maximum of 50 per cent of the outflows to SMSFs”. The fund focused instead on improving general advice, personal financial advice, its contact centre, and its administration and digital channels.

Anderson says that as a result, outflows from Unisuper to SMSFs in 2016–17 were 32 per cent below the 2012 peak, and inflows to Unisuper from SMSFs increased 300 per cent in the last financial year.

Hostplus, the $24 billion industry fund for the sport and hospitality industries, is tackling the SMSF issue in a different way.

The fund’s chief investment officer Sam Sicilia says it is developing options to lure SMSFs to Hostplus, to “invest directly and take advantage of the fund’s investment expertise and scale”.

“SMSFs have discovered that investing money is easy, but making a good return from their investments is very hard,”

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\ FE ATURE

Sicilia says. SMSF trustees will get a better result by “using investment experts and holding them accountable for the service quality and the price paid, rather than DIY”.

“That’s what we do when we use a doctor, dentist, plumber or electrician,” Sicilia says.

“Why is investing for retirement different?”

Analysis by Australia’s largest industry fund, the $110 billion AustralianSuper, suggests that the flow of members back into APRA-regulated funds has reached as much as a third of the number who depart to SMSFs each year.

AVERAGE SMSF RETURN ON ASSETS, BY FUND SIZE, BY YEAR 2011

2012

$1–$50k

−8.51%

>$50k–$100k

−1.51%

FUND SIZE

2013

2014

2015

−18.72%

−17.21%

−12.13%

−16.86%

−9.94%

−5.09%

−2.69%

−6.58%

>$100k–$200k

2.11%

−5.90%

0.86%

1.61%

−0.53%

>$200k–$500k

4.86%

−2.52%

6.39%

5.93%

2.53%

>$500k–$1m

6.36%

−0.41%

9.33%

8.35%

4.60%

>$1m–$2m

7.24%

0.68%

10.65%

9.61%

5.70%

>$2m

9.44%

1.48%

11.59%

11.31%

7.70%

Source: Australian Taxation Office

HARDER THAN IT LOOKS

The analysis shows about 65,000 members leave APRA-regulated funds each year to set up an SMSF, and take $15 billion with them. But the amount being rolled back into APRA-regulated funds has been increasing.

In the 2013–14 financial year (the latest data analysed), rollovers from SMSFs into APRAregulated funds exceeded $5 billion, from 20,000 members.

David Short, AustralianSuper’s head of customer analytics and insights, says that a majority of that fund’s returning members reported a poor SMSF experience.

As that realisation dawns, Short says, members are returning. In the past financial year about $480 million of assets left AustralianSuper headed to SMSFs, but about $405 million came in from SMSF members heading back into the fund.

A May 2016 white paper published by AustralianSuper, When the dream goes sour: SMSF members returning to APRA funds, found that in many cases SMSF members were sold an idea, “typically of geared real estate, usually by their accountant”.

“But most were never able to implement it, often because their balances were too small, something that should have been obvious from the start,” the report states.

“They were left with a small SMSF, stuck in cash, with unsustainable costs.”

Short says that of members who returned to APRA funds after a dissatisfying SMSF experience, 40 per cent had received advice on how and when to set up their SMSF, typically from an accountant rather than a financial planner.

Less than 10 per cent of returning members who had a dissatisfying experience had received any advice at all.

“It suggests that people who are highly financially literate and know what they’re

SEPTEMBER 2017

doing… had a long-term plan and executed that the way they wanted to,” Short says.

Doug McBirnie, a senior actuary with SMSF administration business Accurium, says a drop-off in performance – and hence a lower retirement income – isn’t necessarily a given for members who set up their own fund.

McBirnie says SMSF investment results can be distorted by the impact of establishment fees hitting returns in early years, and by fixed administration and operating costs, which hurt smaller funds disproportionately hard compared to larger funds that can absorb the expense.

For that reason, the Australian Securities and Investments Commission (ASIC) suggests that SMSFs have assets of at least $200,000 from day one – or very shortly after establishment – in order to be viable.

This recommendation is backed up by ATO data.

RIGHT FOR SOME

Whatever the required minimum, it is undeniably important that members leaving APRA-regulated funds to set up SMSFs are fully aware of the potential costs involved.

With full information, and when a sound investment plan is defined and executed well, even the competitors acknowledge that SMSFs are an important part of the full range of retirement savings options.

AustralianSuper’s Short says that if a member is “in a position where an SMSF is genuinely the best option for them in terms of their retirement planning, we are not going to actively try to suggest that’s not a direction they should go”.

Unisuper’s Anderson says SMSFs play an important role “for some members in the right context”.

“In the right scenarios we will recommend them via our financial advice channel.

However, it’s really important that members understand the pros and cons, what they are getting into, the fees they will pay and the level of commitment required to manage one. They definitely don’t suit everyone, and education is critical.”

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A better response to trauma in group insurance For best results for members experiencing traumatic stress, funds and insurers need to encourage healthcare providers to employ the wealth of effective evidence-based treatments.

SUPERANNUATION FUNDS, GROUP insurers, case managers, employers and treating practitioners need to come together to share expertise and information, working collectively to ensure that those on claim receive the best result possible.

During 23 years in the United Kingdom Armed Forces I was deployed, as a psychiatrist and researcher, to a number of hostile environments including Afghanistan and Iraq. Throughout my career, as both practitioner and academic, I have seen time and again the benefits that flow from collective effort to increase the focus on prevention and early intervention.

In June 2017, I took on a new role working with life insurance specialist TAL and its partners, such as First State Super and the NSW Police Force. The experience of supporting these organisations in their efforts to drive best practice management of traumatic stress has given me a tremendous insight into how improvements can be made across the insurance and health landscape in Australia.

Seeking help early always results in less severe and more manageable difficulties for those suffering from traumatic stress disorders. That’s why my first recommendation will always be that employers – especially trauma-exposed organisations such as the emergency services or medical institutions – implement programs to foster the prevention and early detection of traumatic stress.

In the UK, many emergency services organisations make use of TRiM (Trauma Risk Management), a highly researched and structured peer support system that proactively checks on the mental health of trauma-exposed employees and ensures that those in need of professional care get it.

In my experience, many opportunities for

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BY NEIL GREENBERG

Professor Neil Greenberg (BM, BSc, MMedSc, FHEA, MFMLM, DOccMed, MInstLM, MEWI, MFFLM, MD, FRCPsych) is an academic psychiatrist based at King’s College, London, UK.

across the different organisations involved.

The treating doctor, insurer and employer must all work together. By sharing resources, information and expertise, they will be better equipped to explore all the options available to the person on claim.

Case managers should also be on top of best practice treatment and reflect it in their dealings with those suffering traumatic stress. For instance, referring sufferers to multiple specialists for disability assessments is usually counterproductive unless there is a clear need to do so. And should it become clear that someone is not going to return to work quickly – generally recommended as soon as possible – case managers should be able to identify which healthcare providers adhere to established treatment guidelines.

Off piste initial treatment of post traumatic stress disorder (PTSD) is to be avoided.

Australia has excellent PTSD treatment guidelines produced by Phoenix Australia (the Centre for Posttraumatic Mental Health).

Unfortunately, in my experience, not all healthcare professionals make use of them.

Despite the wealth of evidence about effective treatment, some healthcare providers overly rely on medication and fail to use evidence-based psychological interventions – in particular, traumafocused cognitive behavioural therapy (CBT) and eye movement desensitisation and reprocessing (EMDR) – which have proven to improve the health of people with PTSD. Case managers can play an important role for those on claim by encouraging consultation with practitioners who make extensive use of these guidelines.

REDUCING STIGMA

successful early intervention in a claim are missed because programs like TRiM are not in place.

Of course, this is not always the case.

Some trauma-related mental disorders may develop insidiously over long periods of time and can therefore be challenging to identify early on. As such, case managers should be armed to help those suffering from traumatic stress-related illnesses as best they can.

BEST PRACTICE

For someone on claim to get the best result possible, strong communication skills are needed to ensure effective co-ordination

The benefits of such an approach may take a long time to flow through but the effort is certainly worthwhile – not only for people on claim, but for society as a whole. Every person who returns to work or recovers after suffering from a traumatic stress-related illness will change the attitudes of those around them and help to reduce the stigma of poor mental health.

We are a long way from achieving parity of esteem – where depression and PTSD are afforded the same day-to-day professionalism and quality of care as broken limbs – but the more we become accustomed to dealing successfully with mental illness, the closer we get.

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IN ASSOCIATION WITH

LIFESKILLS \

Lessons learnt from

SUPERFRIEND’S

FIRST

decade

SuperFriend recently celebrated its 10TH BIRTHDAY, prompting chief executive Margo Lydon to reflect on what the organisation has achieved so far, and how collaboration will continue to POWER ITS FUTURE.

The 2017 Work in Progress survey results provide some incredibly important national and industry insights for employers and employees.

In October 2015, SuperFriend launched TAKING ACTION, a framework developed with Professor Niki Ellis to help our partners deliver best-practice claims management to members. Safe Work Australia is only months away from incorporating TAKING ACTION into workers compensation schemes in every state and territory. This means all life and workers compensation insurance providers will be working from the same best-practice framework for psychological claims – a major achievement.

LOOKING AHEAD

By Margo Lydon | chief executive, SuperFriend

WE’VE COME SUCH a long way since 2007, when Helen Hewett set up a non-profit organisation dedicated to preventing suicide and supporting workplace mental health and wellbeing through partnerships with the group insurance sector.

When it launched, SuperFriend had one person working half a day each week. Today, we are a team of 19, running an organisation with annual revenue of $4 million. I am proud to say that the growth in SuperFriend’s reach and influence – via the education, training and support programs we deliver with our many partners – has far exceeded our expectations for an organisation of this scale.

SuperFriend has helped thousands of people build confidence and skills through practical, evidence-based wellbeing training programs and other resources.

And thanks to the commitment and support of some truly amazing people, I am optimistic that we will achieve even bigger things in our second decade.

SuperFriend’s 23 partner funds are all from the profit-to-member sector. They give us a reach of 7.5 million Australians, who work for 750,000 employers across every industry in the economy.

Our seven life insurer partners, which all operate within the superannuation industry as group insurance providers, work hard to

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deliver the best wellbeing outcomes for the millions of Australians they insure.

Of course, we could not have achieved anything without collaboration from the mental health sector, both here and overseas. Dozens of research and advocacy organisations have helped us build our expertise in suicide prevention, mental health and wellbeing. There are simply too many of these wonderful organisations to list.

A DECADE OF HIGHLIGHTS

SuperFriend’s workplace diagnostic program, Wellbeing Works, has helped hundreds of employers start assessing wellbeing in their workplace.

In recent years, we’ve undertaken lots of research and delivered insights to influence policies and practices.

One recent game-changing achievement was influencing the Mentally Healthy Workplace Alliance to develop a national framework to foster mentally healthy workplaces in Australia. Based on experiences in Canada, we expect this framework to significantly change the workplace landscape in Australia.

Two more standout examples are our mental illness claims data project, SuperMIND, and a groundbreaking annual national survey called Work in Progress.

Considering all of this, I’m struck that the core reason SuperFriend has been so successful in its first decade is because of how we work. Cross-sector collaboration with like-minded, passionate and talented people has empowered us to make a real difference in suicide prevention and workplace mental health and wellbeing.

Every Australian worker deserves a mentally healthy workplace. Australians who are ill or injured deserve best-practice claims management and the opportunity to return to meaningful work in a mentally healthy workplace, devoid of stigma, bullying and other traumas.

There is still plenty of work to be done to achieve these goals.

More than 3000 lives are sadly lost to suicide every year in this country. I believe elevating the role of workplaces in suicide prevention can play a critical role in addressing this issue.

Employers desperately need assistance to ensure their leaders and managers have the right support, education and guidance to help their staff – not just the one in five Australians who experience mental illness each year, but every Australian in the workplace.

We need to help every Australian improve their mental health so they can thrive in all aspects of life, irrespective of illness.

I look forward with great optimism to the work we will do to reduce suicide, improve wellbeing for all Australian workers and help workplaces thrive.

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\ COLUMN

Men who had been locked up in cages and subjected to abuse including whipping with stingray BY tails were discovered and freed FIONA DAVID from the island of Benjina,

Indonesia, just 650 kilometres Dr Fiona David is the executive director from Australian shores. Many of global research at the Walk Free of these enslaved fishermen came Foundation. She is a lawyer and from neighbouring south-east criminologist.

Asian countries, notably Myanmar, Thailand, Cambodia and Laos.

Thailand’s seafood industry provides only a small glimpse of the lucrative global slavery economy today.

The United States Department of Labor tracks forced labour in products and recently published its updated list of goods produced by forced labour. The list includes more than 100 products, as diverse as bamboo from Myanmar and electronics from Malaysia.

As governments increasingly look to regulate this issue, the nature of the risk becomes more salient. Anti-slavery laws are already in place in the US, the United Kingdom and France, and a Modern Slavery The WALK FREE FOUNDATION is keen to work with Act is being considered in Australia.

The recent case of David v Signal in the US superannuation funds and other institutional investors to is one example of the very real business risks stamp out the use of SLAVERY in international supply chains. that come with not taking responsibility for slavery and worker abuse in supply chains. finding regulatory gaps, corrupt officials or THE IMPORTANCE OF investor due just weaknesses in social systems, and using diligence on matters like environmental INVESTMENT RISK them to take advantage of vulnerable people protection is already well understood and In that case, recruitment agents hired by for their own profit. institutionalised. Now it is time to apply Signal – a US marine services company – Consider the situation of the Thai fishing that discipline to ending modern slavery. were subjecting hundreds of Indian workers industry, which is worth an estimated Earlier this year, billions of dollars were to forced labour. Misconduct included $7.3 billion dollars per year and exports wiped off Fiat’s share price after United withholding workers’ passports, demanding to major clients throughout Europe, Asia States regulators found the company had extortionate recruitment fees and inflicting and America. cheated emissions tests for diesel cars. general abuse such as squalid living According to the Australian Department This is just one example of a business losing conditions and threats of serious harm. of Agriculture, “almost all canned tuna consumer trust, share price and brand value Signal claimed it was misled by the sold in Australia comes from Thailand”. by mismanaging environmental impacts recruiters and was not aware of the offences.

Since April 2015, more than 2000 men in the public spotlight. The Fiat incident The court rejected its arguments and held have been identified and rescued from lives followed a very similar case at Volkswagen, both Signal and the recruitment agent of slavery on Thai fishing vessels, some of and there are countless other examples of responsible. Signal was ordered to pay which were operating in Indonesian waters. companies destroying value in a similar way.

US$14 million ($17.6 million) in Just as investors need to secure against compensation to victims, and settled environmental risks, they need to secure the case for US$20 million ($25.1 million) THE GLOBAL SLAVERY INDEX against abuse of the people who are before later filing for bankruptcy. working for – or in the supply chain of – the The trigger may be concern about increased The Global Slavery Index is an companies they invest in. compliance risk, or simply a moral compass. initiative of the Walk Free Foundation, an international human rights The risk is real. According to the 2016 Either way, investors should be demanding organisation with a mission to end Global Slavery Index, an estimated 45.8 that the companies they invest in have modern slavery in our generation. The million people around the world are engaged anti-slavery policies in place and are making foundation was founded by Andrew and Nicola Forrest and seed-funded in modern slavery. And while many think of serious efforts to roll that policy out across the by their philanthropic vehicle, the slavery as a relic of the past, the unfortunate business. No responsible investor wants to Minderoo Foundation. truth is that today’s criminals are adept at inadvertently support crimes of this gravity.

Investors must stop turning a blind eye to slavery

SEPTEMBER 2017

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BY LOUISE DAVIDSON

Louise Davidson is the chief executive of the Australian Council of Superannuation Investors (ACSI).

Time for the ASX 200 to disclose climate-related risks Australia’s LARGEST LISTED companies should adopt the new BEST PRACTICE FRAMEWORK developed by the Financial Stability Board’s task force on climate-related financial disclosures.

THE AUSTRALIAN COUNCIL of Superannuation Investors recently published the 10th edition of our sustainability report, which assesses disclosure performance within ASX 200 – companies, individually and by sector.

This year, for the first time and in direct response to investor demand, the report assessed climate-related disclosures reported by these companies. The demand for climaterelated disclosure is evident globally. In May, shareholders in ExxonMobil, the world’s biggest publicly listed energy company, voted in favour of requiring the company to disclose its climate change impacts.

Fiduciary investors – including superannuation funds and other institutional investors – are required to maximise long-term investment returns for their beneficiaries. This means fiduciaries need to be able to effectively price climate risk into their investment decisions.

In 2016, 70 of the ASX 200 companies did not make any climate-related disclosures.

Indeed, fewer than half of Australia’s largest listed companies have a climate change policy or an emissions reduction target.

This is unacceptable.

A NEW STANDARD

Improving the level of climate-related disclosure is now a key focus for ACSI. We have identified 16 companies that we will engage with directly on climate change disclosure this year. Some of these companies rank as “leading” for their sustainability

SEPTEMBER 2017

reporting. We will be encouraging all of them to adopt the best practice framework developed by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

The final TCFD framework, published in June 2017, recommends that all companies disclose their governance processes and risk assessments related to climate matters.

For companies with material risks, it suggests incorporating scenario analysis into the business strategy, and establishing and disclosing those metrics and targets.

We believe adopting this standard will improve the availability, reliability and comparability of climate-related disclosures, and should be a consideration for all ASX 200 companies. We anticipate that investors will play close attention to how companies respond to this call to action.

ROOM FOR IMPROVEMENT

Sustainability disclosure that prioritises material risks is vitally important to investors.

Access to information about how companies manage and monitor key risks to their business enables them to make informed investment decisions. Conversely, a lack of relevant data impedes investors’ ability to integrate environmental, social and corporate governance factors into their decision making.

Over the past 10 years, we have observed significant improvements in sustainability disclosure. Almost all of the ASX 200 companies (92 per cent in 2016) now disclose some information relating to sustainability.

Superficially at least, it seems we have nearly won our battle to embed sustainability disclosure within ASX 200 reporting practices. However, the depth of disclosure

by many companies remains sub-optimal, considering that 42 per cent are only achieving a “basic” or “moderate” rating.

For us, the ongoing challenge is to embed greater meaning in companies’ sustainability disclosures. Beyond acknowledging the material sustainability risks they face, we want companies to articulate the steps they are taking to address them.

We can’t deny there are some high performers in the mix. Half of the ASX 200 companies report sustainability matters to a “leading” or “detailed” standard, and 30 have achieved a “leading” rating for four or more years.

REAPING THE REWARDS

So what is it that differentiates these leading companies from the poor performers? It’s difficult to generalise, but there are some commonalities.

We know that larger companies tend to be better at sustainability disclosure than smaller ones. Companies that have a higher exposure to risks also tend to disclose them better. That said, there are poor performers among the biggest and most exposed sectors, and leaders that fit neither of the above descriptions.

Ultimately, companies that get sustainability disclosure right demonstrate two key behaviours: they recognise the potential impact (risk and opportunity) to their business, and they prioritise shareholders’ disclosure needs. This then enables investors to integrate environmental, social and corporate governance in their investment decision making.

Interestingly, there is evidence that investors already put a “price” on quality reporting. Of every dollar invested in the ASX 200, 85 cents goes to companies that report to a “leading” or “detailed” standard.

Investors clearly value companies that do sustainability disclosure well, and regard those that don’t as less attractive.

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SP ONSORED CONTENT

THIS ARTICLE is sponsored by CommInsure

Customisation

IS THE KEY TO GETTING INSURANCE IN SUPER RIGHT

ALL GROUP LIFE insurance providers should work with superannuation funds to create bespoke products tailored to their members’ needs, CommInsure head of life product and strategy Franco Crapis says.

“It’s really about looking at the profile of the members [and] the employment type, and trying to ascertain with the fund what those groups of individuals may need – keeping in mind member equity and trying to ensure that they are not over[insured] or underinsured,” Crapis says.

This comes as the industry moves to address concerns that default group insurance premiums too often erode low account balances.

Crapis says providers must use data and analytics to do more “deep dives” into industry segments to ensure members have the right insurance coverage at various stages of their lives.

A fund with a membership base of mostly younger people – who typically have lower account balances and receive smaller superannuation guarantee payments via their employer each month – has very different insurance needs to a fund catering to mostly older savers with higher balances.

Crapis says better data analysis can help insurance providers understand member behaviour based on industry segments and the nature of their specific workplaces.

In sectors where part-time roles are more common, an insurer’s approach to product design will be shaped by the demographic profile, average account balance, income levels and projected trends in member engagement for that sector, he explains.

Similarly, insurance providers need to consider employment trends such as industries moving towards more casual employment, or a looming spike in unemployment or underemployment.

“We’re using all the available data to help provide insurance coverage tailored

investmentmagazine.com.au

CommInsure is using data analytics to BETTER UNDERSTAND its superannuation fund clients and their members, allowing it to design better value group insurance policies.

to the average fund member,” Crapis says. “We are always looking at ways to get more granular data … we are looking for as many statistics and data points as possible to better understand the insurance requirements of those characteristics.”

All super funds must grapple with how to best provide default insurance at an affordable premium while ensuring adequate coverage. The Insurance in Superannuation Working Group has identified the problem of insurance premiums eroding small balances as an area where industry can drive positive change.

Crapis says CommInsure has used a bell curve analysis of member accounts to address this balance erosion. Typically, insurance coverage will start low, usually with some total and permanent disability or income protection cover. As balances grow and members move into older age brackets, cover often increases, before tapering off as balances outweigh other liabilities.

CommInsure currently works with about a dozen super funds that together manage the retirement savings of more than 1 million Australian workers.

Improving member engagement also plays an important role in delivering better

group insurance outcomes, Crapis notes.

“We are working closely with the funds to come up with ‘trigger points’ to prompt a conversation with members about their cover,” he says. Trigger points include when members contact their fund to report a change of surname because they’ve married, or a change of address because they’ve bought a house.

“These are times when members are active and thinking about their super. So having these discussions at those times and working with the super funds to better engage with members is another way we’re ensuring members have the right coverage.”

At a time when parliamentarians and regulators are assessing the value of group insurance, it is essential funds work closely with their insurers to tailor group policies to fund members’ needs.

Offering insurance through superannuation is a cost-effective way to ensure most Australians have an appropriate base level of cover, Crapis says.

“The better data we get, the more we’re able to customise our products with our super fund partners,” he adds.

SEPTEMBER 201 7

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AS THE CHIEF executive of First State Super, I often consider the impact our investments have in the communities where our members live, work and retire. For those of us working in the institutional investment industry, it can be easy to forget that how we allocate money today determines, to a significant degree, what the world will be like tomorrow.

The same can be said for the importance of investing in the people working within our own organisations. That is something I’ve come to appreciate in greater depth in recent times, through an important personal commitment quite apart from my day job.

For the last 17 years I have been a director of Australia for the United Nations High Commissioner for Refugees, the national partner of the UN Refugee Agency, which has raised more than $170 million over the last decade to help support and care for refugees in hotspots around the globe.

Working with Australia for UNHCR has brought me face to face with the tragedy of loss and displacement caused by conflict and natural disaster. It has also shown me the incredible power of the human spirit, resilience, and the capacity of people to overcome setbacks and rebuild their lives despite the odds.

The responsibility to help became even more apparent to me last year, when I took some leave from First State Super to join Tony Shepherd, Innes Willox, John Denton and a handful of other Australian business leaders on a visit to refugee camps near the Syrian border in Turkey and Lebanon.

PATHS TO EMPLOYMENT

BY MICHAEL DWYER

Michael Dwyer is the chief executive of public offer superannuation fund First State Super.

These countries host a large portion of the estimated 5.5 million people who have had to flee Syria since the civil war began in 2011.

The trip was organised as part of the Friendly Nation Initiative. Its purpose was to raise the profile of the ongoing refugee crisis in the Middle East and help build support for refugees and humanitarian migrants who arrive in Australia from Syria and Iraq.

Refugees bring something special to a workplace FIRST STATE SUPER BOSS Michael Dwyer sees a multitude of benefits from participating in the NSW GOVERNMENT’S Refugee Employment Support Program and encourages other financial services organisations to get involved.

SEPTEMBER 2017

Economic empowerment is a crucial aspect of successful refugee settlement.

In recognition of this, the NSW Government established the Refugee Employment Support Program and asked Peter Shergold to direct the $22 million, four-year initiative to support as many as 7000 refugees and asylum seekers.

Settlement Services International is delivering the Refugee Employment Support Program on behalf of the NSW Government. The program began in May 2017 and in its first two months had already worked with close to 340 people, 40 of whom are now employed. Another 89 participants have enrolled into further study, while 51 are in the process of having their overseas qualifications recognised, and five secured work experience.

First State Super has joined leading organisations such as AMP, Allianz, Australia Post, Clayton Utz, Harvey Norman, Henry Davis York, NRMA, Telstra, Westpac, Transurban and Woolworths to support the initiative. We are working as an employment partner with CareerSeekers, an organisation assisting asylum seekers and refugees seeking professional employment.

CareerSeekers placed First State Super’s first paid intern with us in September 2016.

He was a software engineering graduate of Al-Mansour University College in Baghdad and was such an excellent addition to our technology team that at the end of the 12-week program, we were delighted to offer him a full-time position, which he accepted. We are aiming to introduce two more interns before the end of 2017.

FORGING CHANGE

Our involvement in these initiatives not only supports refugees seeking to get a foothold in the Australian workplace, it also supports First State Super in building a diverse and inclusive workplace that maximises the strengths of everyone who works here.

In addition to trying to shape the business practices of those companies we invest in to foster a better future, institutional investors like us should not overlook the positive changes we can make within our own organisations. The superannuation and financial services industry, like the business community more broadly, can make a difference here at home for people who face the enormous challenge of making their way in a new country.

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\ CHAIR’S SE AT

MAKING THE

BIG calls In July 2017, the board of $3 billion Kinetic Super voted to roll into SUNSUPER, creating the nation’s NINTH-LARGEST industry super fund, with $45 BILLION IN ASSETS. The deal comes as the prudential regulator urges more “sub-scale” funds to look for partners, amid allegations that some trustees are eschewing mergers due to self-interest. In this Q&A with INVESTMENT MAGAZINE, outgoing Kinetic Super chair FRANK GULLONE explains how he and his fellow directors embarked on a plan to put themselves out of a job.

Q. Having just completed the deal with Sunsuper, what advice do you have for other small and mediumsized funds that may be looking for a partner?

A. Our first step was to start with a strategic review of the market and identify potential partners with similar values, vision, member demographics and history of success.

That process included making a list of weighted reference criteria against which we benchmarked these considerations. Through this review process, we came up with a list of 12 potential partner funds. Through a series of meetings – with CEOs, chairs and boards – we narrowed this down to a shortlist of three funds. Then, with a clear focus of what we were looking for and the assistance of external and internal parties, we landed on Sunsuper as the preferred partner. Our

SEPTEMBER 2017

final step was to undertake an extensive due diligence process over a number of months to ensure that each party was satisfied with the potential benefits that a merger could bring to all members.

Q. Why did Sunsuper emerge as the preferred fund to take on Kinetic’s members?

A. Sunsuper was a great fit for Kinetic Super because of the shared focus on member and employer services, not to mention the complementary values, culture, cost structures, investment returns, governance frameworks and internal talent.

The merger will not only leverage scale and capabilities to deliver enhanced member benefits, it will also deliver lower fees and an expanded range of products and services to our members.

Edited by Sally Rose Photos Tim Carrafa

Q. Do you think having independent directors contributed to the board’s ability to think boldly about the fund’s long-term strategy?

A. ‘Independence’ in isolation did not contribute to the board’s ability to think boldly about the fund’s long-term strategy.

Rather, the skills, experience and independent thinking of all directors contributed to their determining the fund’s strategy.

Above all, directors need to have an affinity for understanding the priorities of key stakeholders in the fund, such as members, employers, staff and associations. Collectively, this is what enables all directors, not just independents, to think about the long term and make the right decisions for the fund and its members. Kinetic’s board has a broad skill base and each director has successfully completed the Company Directors Course

investmentmagazine.com.au

CHAIR’S SE AT \

Q. How have your views about what makes a good chair changed since you took the role in 2012?

Q.

stands out in the super fund crowd. As a progressive fund, it is imperative that we constantly evolve to meet the changing needs of our members and the industry. This will continue as we embark on the next phase of our merger with Sunsuper.

through the Australian Institute of Company Directors, as well as various superannuation industry–based courses.

Q. Having only a few years earlier completed a major rebranding exercise, was there some ego to be overcome in recognising that rolling into a larger fund was in the best interests of members?

A. Ego really did not come into the equation.

We felt that members were not engaging with the fund, and the rebranding was one avenue we had to take to become more relevant with our changing and more mobile member demographic. The rebranding proved to be beneficial, as members loved it and felt it was more modern than the previous branding.

Many members commented then, and still do today, on how the brand is fresh and

investmentmagazine.com.au

A. Over the last five years I think that the role of the chair has become more blurred and complex. My sense is that a good chair needs to be more strategic and able to orchestrate outcomes by working with people at all levels in the organisation.

A good chair also needs to know how to motivate and develop the CEO. The chair–CEO relationship will make or break organisational success. No matter what role you fill as a leader, it is important to surround yourself with great people. A chair does not have all the answers, but in relying on great people to provide insight, opinion and care, you tend to land on the best answer given the circumstances in front of you. A good chair needs to listen; be pragmatic and principlesdriven; and ultimately keep the best interest of members in their sights.

Q. What is your top tip for how to facilitate a constructive board meeting?

Q. What’s next for you personally?

In the immediate future, I will continue to focus on ensuring a successful transition.

But early on in the review of a merger, the entire Kinetic board – me included – agreed to give up our Kinetic Super board roles if we could successfully find a merger partner.

We did not want to stand in the way of a successful merger and what it could bring to members in the form of new or additional benefits. For me personally, I will be looking to join another board and continue my strategic consulting work.

A. There are quite a number of elements that go into making a board meeting constructive.

At a base level, determining the agenda, priorities and length of discussion is a core factor. Keeping the board discussions focused on strategic and policy matters – as well as allowing a productive debate for critical issues – is just as important too. As a former CEO, I feel it is important that the CEO is clear on the decisions being made. The chair needs to work with the board and executive management to ensure a clear strategic focus is maintained at all times.

Q. What is the most valuable professional education or development program you have experienced that has helped you as a trustee?

Q. The Kinetic Super board had a 50:50 gender split. What do you make of the fact that ASX 200 companies are on average still struggling to reach 30 per cent female representation on their boards?

A. My involvement in financial services started in 1982, and since then I have really benefited from a blend of exposures and interactions. I have been fortunate to work with some great people and in some great organisations. The standout development programs for me have been undertaking a three-month residential advanced management program at the Harvard Business School in the 1990s, and more recently the Company Directors Course in Australia. These programs really taught me how to be a better leader.

A. I can’t speak on behalf of other companies, but as a progressive fund, we at Kinetic Super believe in fostering an inclusive and diverse workplace where all contributions are valued. We have found that diversity, not only from a gender perspective, but also in other forms – such as ethnicity and age – can add enormous value to decision making as long as the individuals have the right mix of skills, experiences and training to begin with. Boards do need to more closely reflect the society in which we operate.

SEPTEMBER 201 7

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BY EVA SCHEERLINCK

Eva Scheerlinck is the chief executive of the Australian Institute of Superannuation Trustees.

She was formerly a practising lawyer.

WHAT A DIFFERENCE a year makes. At the Australian Institute of Superannuation Trustees Superannuation Investment Conference in September 2016, few dared imagine the double-digit returns the average balanced super fund would achieve in the financial year ended June 30, 2017.

With global markets on heightened alert over Trump and Brexit, the general consensus was that investment returns would edge lower and stay there for some time. A survey of conference delegates revealed that 70 per cent feared their fund would underperform against its stated return objective.

So it was a wonderful outcome for super fund members when these fears proved unfounded.

Once again, it was profit-to-member funds that dominated the performance league tables – not only for the past 12 months but, more importantly, over the longer seven- and 10-year terms.

Rating agencies noted that many of the funds that excelled went against the trend that saw passive index-based strategies become increasingly popular, instead maintaining a higher allocation to unlisted assets.

SEPTEMBER 2017

Real disruption requires more than just a fresh image In a challenging market, SUPER FUND PROVIDERS need a lot more than slick marketing to deliver LONG-TERM risk-adjusted returns to their members.

In view of this, it is interesting to reflect on the recent emergence of super start-ups – the so-called “disruptors”.

With catchy brand names like Spaceship, GROW and Human Super, these new funds are aimed at a niche market of mostly millennials.

Sassy young female execs or bearded hipsters are spruiking a narrative that is all about controlling your super, ethical investing and an edgy customer experience.

These start-ups typically have a huge social media presence – they host breakfast events, they provide giveaways and one even boasts a waiting list.

It’s a business model that seems to be paying off for the providers, at least for now.

And while it is far too early to even secondguess the long-term outcome for signed-up members, a closer look at some of the new offerings reveals some red flags.

FEES MATTER

As several commentators have already noted, many of the new entrants have patchy disclosure records and very high fees that seem hard to justify given their mostly passive investment strategies. And beyond the flashy marketing, the investment options on offer are often not all that unique.

Then there is the question of scale.

While government and the regulators are pushing for tighter rules with the view to driving mergers between traditional small and medium-sized MySuper funds, a startup fund by its very nature cannot offer any economies of scale.

Of course, new entrants to super should be allowed time to grow, and the emergence of this new style of fund has already delivered some positives. Many traditional

players are now rethinking how they engage with millennials and putting a greater focus on social media. Some may even consider the disruption serious enough that they launch new products to specifically target millennials.

TRUTH IN LABELLING

It is also worth noting the most successful funds aren’t necessarily those with the cheapest products, just as those that win the most disclosure awards don’t always deliver the best investment returns. Doubtless these new funds have some members who are willing to pay more to have a social impact or to invest in companies that protect the environment, for example. But investing with great passion won’t necessarily deliver the promised social good or the best retirement outcome.

This is why good disclosure is so important in a compulsory super system. At the very least, it should include meaningful and digestible information about who runs the fund, where and how their super is invested, what the fees and charges are. And this information should be easily comparable with similar offerings from other funds.

Regulators also have a responsibility to ensure that what these new entrants offer is consistent with their marketing promises.

When a fund claims to be investing ethically, are the investments in fact ethical? If a fund promises to invest in tech start-ups, is that where a reasonable portion of its investments ends up?

Consumers deserve good outcomes.

And while competition can shake up the system and bring down some windfall gains, the promise of something new needs to meet the reality – transparently.

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IDEAS EXCHANGE SERIES

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

With outcomes from the Insurance in Superannuation Working Group looming, this one day event is specifically designed to cover the key areas that CEOs, trustee directors and insurance professionals need to be across.

TOPICS INCLUDE:

ideas exchange

• Update on the Insurance Code of Conduct – what to expect • Member communication – insights from the good practice guide including terminology, definitions and timing • Account balance erosion & multiple cover – how to ensure your members’ needs are best met • Claims handling – timeframes, assistance programs, recommendations and more • Insights from the outside – lessons from the introduction of an insurance code of conduct within other industries.

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

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Culture, ethics and decision making – insights to expand your role Handling volatility – how to keep a long term perspective in a short-term marketplace APRA briefing – find out what’s on the regulator’s radar Making of mergers – explore recent case studies and research on merger negotiations Remuneration – how can your fund attract top talent with appropriate remuneration Cyber security – a jargon-free briefing on key issues trustees should be across.

This one-day event is specifically targeted to meet the needs of in-house legal counsel, compliance and risk staff and super fund trustees working in profit-to-member super funds.

TOPICS INCLUDE:

ideas exchange

• Ethics – practical strategies to provide useful business advice without compromising ethical obligations • Risk culture – leading research insights into measuring risk culture • Technology – how the latest innovations can impact your fund legally • ASIC and ATO briefing – hear the latest issues on the regulator’s landscape • Disclosure – how to make it work better for members • Professional skills – techniques to handle persuasion, influence, resilience and more.

Note: Take advantage of our special offer when you buy a ticket for both the Governance and Legal & Compliance events.

Visit

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\ ABSOLUTE RETURNS

A GROWING NUMBER of superannuation funds are shifting from traditional hedge funds to more liquid risk premia, alternative beta and multi-asset strategies as many absolute return–style managers have not met their requests for lower fees, more transparency and greater liquidity.

Cambridge Associates head of Australia and New Zealand Travis Schoenleber says that with banks no longer lending the way they used to, super funds are exploring private credit, including direct lending and opportunities offshore.

Schoenleber advises super funds on their absolute returns strategies.

He says private credit is becoming a more attractive alternative because of its better outcomes, lower fees, higher transparency and limited default risk compared with more traditional hedge fund offerings. “Private credit can provide a nice coupon of 300 to 400 basis points above cash, plus an additional upside ticker,” he says.

However, because the big end of town struggles to get sufficient scale in private credit, the pendulum is swinging back to small and medium-sized funds, he notes.

IDIOSYNCRATIC POSITIONS

Robert Graham-Smith, a senior investment analyst at Mine Wealth + Wellbeing, expects to get better returns and diversification benefits from investing more of the industry fund’s $10 billion in assets in liquid alternatives. The fund is interested in multi-asset managers with a greater focus on idiosyncratic positions, as opposed to classic allocators.

These are expected to compete more effectively with hedge funds for capital because of a more attractive liquidity profile and lower fees. Graham-Smith is currently looking at managers that invest in a range of products across various markets with the potential for attractive CPI-plus return profiles over the medium term.

Part of the balancing act, he adds, is determining how a portfolio manager is likely to handle distressed market conditions, and working out the role of a multi-asset fund strategy in a portfolio.

The Mine Wealth + Wellbeing investment team views any potential allocation as a competition for capital across the liquid absolute return part of the portfolio – in effect

SEPTEMBER 2017

argument FLOATING THE

for

LIQUID ALTERNATIVE STRATEGIES

Some of the country’s leading super funds are RESHAPING THEIR HEDGE FUND STRATEGIES as they move from selecting individual securities towards a macro-oriented futures-based approach.

By Mark Story

weighing up the diversification, return and risk characteristics for fees charged by hedge funds, other multi-asset products and alternative risk premia offers.

He cites long “core” European government bonds (Germany, Netherlands, Finland) versus short “peripheral” European government bonds (Italy, Spain, Portugal, Greece) as an example of a potential trade at the more idiosyncratic end of the spectrum.

While this investment could be executed via any number of instruments and time frames, he says this is just one example of a holding that some multi-asset funds, global macro hedge funds and global bond managers all could potentially own.

“Our focus is more on seizing opportunities as they surface based on their merits,” he says. “It all comes down to what they can deliver from a portfolio construction perspective, relative to the overall fund and other potential investments.”

investmentmagazine.com.au

ABSOLUTE RETURNS \

“Rather than waiting for opportunities to be marketed to you here in Australia, you need to get a lot closer to managers overseas,” says Tomlinson. “By maintaining relationships with credit managers, in areas such as direct lending, distressed, reinsurance, and asset-backed, we’re better positioned to capitalise on future opportunities.”

What’s mirrored Tomlinson’s decision to ramp up the direct approach over the past five years is a greater interest in co-investments and managers with highconviction, idiosyncratic positions that are willing to take additional capital from Sunsuper on more favourable terms.

Interestingly, he’s also moving away from more liquid hedge funds and developing a specialist credit program that offers better opportunities and better alignment, such as lower fees. “There are also opportunities in developed markets to earn good returns in bank replacement credit strategies,” Tomlinson says. “These include asset-backed lending in real estate and infrastructure, among other areas.”

TAILORED SOLUTIONS

RETAINING CONTROL

Like Graham-Smith, Bruce Tomlinson, portfolio manager for hedge funds and alternative strategies at Sunsuper, also claims there’s no substitute for actively researching global market opportunities. He credits retaining control of strategy and manager selection for much of the fund’s 30 per cent reduction in fees for alternative investments over the past five years, and a 12.3 per cent net return in the 12 months to June 30 for the Sunsuper Balanced Option.

“I’m a strong believer in the direct approach, and working assets hard through active management,” says Tomlinson. “This approach has seen us make 25-plus new investments in the last year, including nine co-investments, and over 15 fund allocations, commitments or redemptions.”

With about 5 per cent of its $45 billion in funds under management invested in hedge funds and alternative strategies, Sunsuper now has the resources to do the global research itself, he says. This means it’s less reliant on the more limited world view of domestic consultants.

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AMP Capital’s head of alpha strategies, Dr Alistair Rew, says that while identifying true alpha clearly remains essential, it’s important not to underestimate the value of client engagement, tailored solutions or the heightened role of data and technology in helping to deliver these things.

From a cost perspective, Rew sees the “commoditisation of alpha” as a great outcome that frees up the budget to track down more active management opportunities. However, he says that when it comes to achieving solid returns and managing risks, it’s equally important to combine greater computing power, speed and storage capacity with the skill sets of investment teams.

“With technology having levelled the playing field, over shorter-term investment horizons funds will need to find alternative ways to generate alpha, which is becoming more demanding,” Rew says.

The trick, adds Rew, is for super funds to reintegrate four key building blocks – stock selection, risk management, portfolio management, and technology and data – to create unconstrained, benchmark-unaware

strategies that help meet a wider range of client needs.

“Better analysis of richer datasets will enable funds to reach more tailored client outcomes, whether it’s around greater process transparency, absolute capital growth, reduced volatility and downside protection, social investing or whatever is important to the client.”

Much of this new thinking is reflected in the AMP Capital Global Equity Fund, launched this year, which targets doubledigit annualised absolute returns across a market cycle. “We’ve taken a highconviction approach, investing in a small number of exceptional companies with outstanding prospects that have dependable and persistent cash-backed returns on capital,” Rew says.

UNPROVEN STRATEGY

While it’s encouraging to see institutional investors deploying more multiasset, alternative beta and risk premia strategies, Schoenleber cautions that these strategies didn’t exist during the global financial crisis, and as such remain largely unproven.

Similarly, with global credit spreads having come down considerably, he says private credit strategies may be at risk during a liquidity crisis or in a significant global downturn. “With returns from active management better over the past six to 12 months than they’ve been over the past three to five years, there’s clearly less reliance on central bank policy to add value.”

Samuel Mann, a partner with Longreach Alternatives, echoes these concerns. He says some super fund managers are trading liquidity risk for uncomfortable levels of leverage. “I’m a little worried about [leverage] apathy, especially when it comes to risk premia or alternative beta,” he says.

“Given the difficulty allocating capital, it’s clearly tough being on an investment committee right now.”

The experts quoted in this article will speak at the 2017 Investment Magazine Absolute Returns Conference in Sydney on September 14. For details visit the event website or contact Emma Brodie via emma.brodie@ conexusf.com.au or +61 2 9227 5708.

SEPTEMBER 201 7

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GENERATING THE BEST possible retirement outcomes drives everything superannuation funds should do for their members. This means more than just targeting strong returns year on year.

It’s about using our long-term investment capacity to deliver sustained value. For our members today, for their retirement tomorrow, and for the world their children and grandchildren will inherit.

It’s for this reason that Cbus Super became the first Australian super fund to support the development of a new Sustainable Development Investments framework (SDI framework) – an ambitious approach to responsible investing that aligns with the United Nations Sustainable Development Goals (SDGs).

The SDI framework identifies 13 of the 17 SDGs where institutional investors can make a difference.

BY We know that our ability to deliver ALEXANDRA WEST the best long-term outcomes for

members depends on a sustainable global financial system. To this end, Alexandra West is the head we have been actively considering of portfolio strategy and innovation how we can invest in a way that at Cbus Super. contributes to the SDGs – either through active ownership or the allocation of capital – while meeting our financial risk and return requirements.

Investing in the development of quality, reliable, sustainable and resilient infrastructure – and upgrading or retrofitting existing infrastructure – are ways we can contribute to the industry, innovation and

Embracing the UNSDGs to invest for the future

A commitment to the UNITED NATIONS Sustainable Development Goals is shaping new infrastructure investment opportunities for CBUS SUPER, and the fund hopes its peers will come on board too.

The 17 SDGs, which more than 150 world leaders adopted in 2015, came into force the following year as a global action plan unrivalled in scope and ambition. They cover everything from innovation in infrastructure to sustainable cities and clean energy, to ending poverty.

While it was governments that signed up to the goals, actually achieving them is a shared responsibility for the business and finance sectors.

Pension funds are coming together globally to develop a coherent set of scalable investment opportunities that can direct longterm capital towards achieving these goals.

Leading Netherlands-based pension funds APG and PGGM – which combined have more than €650 billion ($956.2 billion) in assets under management – developed the SDI framework, and Cbus Super is delighted to have been asked to contribute to its evolution.

SEPTEMBER 2017

infrastructure goal.

Cbus already invests over 10 per cent of the more than $40 billion in funds we manage in infrastructure such as airports, seaports, toll roads and energy infrastructure.

INFRASTRUCTURE ALERT

Our future investment strategy will focus on developing quality greenfield infrastructure in Australia, ensuring assets are sustainable through a longer-term investment lens.

Through our wholly owned property arm Cbus Property, we are already a leading provider of high-quality commercial and residential developments that contribute to making cities more sustainable.

An area where we hope Cbus can make a difference is in affordable housing.

A dignified retirement includes having somewhere affordable to live, so the debate about housing affordability is central to the wellbeing of Cbus members.

That is why we are actively looking for opportunities to invest in the affordable housing market. We see a role for pension funds to provide much-needed capital to help boost the supply of affordable housing.

The investments we make into the built environment directly benefit our members’ and employers’ industries. Combined, our work in this area contributes to the goals of building sustainable cities and communities, and providing decent work and economic growth.

Cbus is also committed to investing in the transition to a low-carbon economy. We will be looking at how we invest as a catalyst for change to help bring forward businesses and technologies that can help the world adapt to climate change.

We have a responsibility to help the companies we invest in make the necessary changes to be successful in a carbonconstrained world. We will continue to advocate for a just and orderly transition for the industry and its jobs so we can invest with certainty over the longer term.

The SDGs represent a clear turning point in responsible investing, and create an opportunity for super funds like Cbus to do our part while ensuring we deliver great retirement outcomes for our members.

We know there is much more to be done, and we encourage all funds to join us.

investmentmagazine.com.au

The

9th Annual

SYMPOSIUM

Fiduciary Investors

Symposium

November 13-15, 2017

RACV, Healesville, VIC Radical uncertainty: unknown consequences lurking in the shadows It is imperative that asset owners remain current in this changing and complex climate, to better meet their fiduciary responsibility. Stay informed by attending the 9th Fiduciary Investors Symposium to experience the latest thinking, expert opinions, thought leadership and unrivalled networking opportunities.

Hear from three CIOs on their investment outlook and asset allocation and operational challenges in our opening panel.

OPENING PANEL

STEWART BRENTNALL Chief investment officer, TCorp

GRAEME RUSSELL Chief investment officer, Media Super

DANIEL FARMER Chief investment officer, IOOF

REGISTER NOW fiduciaryinvestors.com.au OR CONTACT Emma Brodie | emma.brodie@conexusfinancial.com.au | 02 9227 5708

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