Investment Magazine – November 2017 by Conexus Financial

INTELLIGENCE FOR INSTITUTIONAL INVESTORS

ISSUE 144

NOVEMBER 2017

2017

Investment Magazine

CIO SENTIMENT SURVEY Qantas Super and Colonial First State chair ANNE WARD reflects on learning from crises and the need to build trust

Forged in

Puda quiae pos min conem. Nem qui doloriore laut aut ex estem et a comnihicid mod mod minctum

THE FIRE

CIO PROFILE TEAM BUILDING WAS PARAMOUNT FOR DANIEL FARMER IN HIS FIRST MONTHS AS IOOF’S INVESTMENT CHIEF FUTURE FUND PEEK INSIDE THE SOVEREIGN WEALTH FUND’S STRATEGY WITH DEBT AND ALTERNATIVES DIRECTOR CRAIG DANDURAND ROUNDTABLE GROUP INSURANCE AND MENTAL HEALTH LEADERS DISCUSS HOW TO IMPROVE CLAIMS AND UNDERWRITING APRA THE REGULATOR’S DEPUTY CHAIR, HELEN ROWELL, SHARES A ROADMAP FOR CHANGE AND CALLS FOR AN END TO INFIGHTING

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Franklin Templeton Investments Australia Limited (ABN 87 006 972 247) (Australian Financial Services License Holder No. 225328) issues this publication for information purposes only and not investment or financial product advice. This publication is for wholesale/institutional investors, institutional investment consultants and eligible counterparties only, and it is not directed at private individuals. It expresses no views as to the suitability of the services or other matters described herein to the individual circumstances, objectives, financial situation or needs of any recipient. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision. Investments entail risks, the value of investments and the income from them can go down as well as up and investors should be aware they might not get back the full value invested. © 2017 Franklin Templeton Investments. All rights reserved.

CONTENTS NOVEMBER 2017

30 PROFILE

“It’s really about trying to capture those big market risks or opportunities, not day-to-day trading off small moves” – DAN FARMER – CHIEF INVESTMENT OFFICER IOOF

CIO SENTIMENT SURVEY The 2017 Investment Magazine CIO Sentiment Survey reveals Australian funds are sticking by active management and looking for absolute returns.

REMUNERATION Executive recruiter Michael Swinsburg urges industry funds to learn from the banks’ mistakes and develop culturally aligned remuneration programs to lure talent.

LIFESKILLS Digital tools, including online statements and Roger the chat-bot, are helping REST Industry Super drive better member engagement with insurance, Beth Parkin writes.

FUTURE FUND Director, debt and alternatives, Craig Dandurand, offers a glimpse at how the sovereign wealth fund has recalibrated its portfolio.

CHAIR’S SEAT In her 13 years leading the Qantas Super board, professional director Anne Ward has learnt a thing or two about the value of respect, independence and experience.

investmentmagazine.com.au

ADVICE If super funds want to maintain their relevance for older members, they must tackle the challenge of providing affordable financial advice, Sunsuper’s Anne Fuchs says.

AGED CARE HESTA’s Mary Delahunty implores her peers in the super industry to improve interactions with the aged-care sector so more members can access dignity in retirement.

APRA Helen Rowell warns that, amid all the rhetoric, it is important not to lose sight of the fact that the government, regulator and trustees are all ultimately seeking the same thing.

SEX AND MONEY A rash of news headlines highlight the many forms of workplace discrimination women face. Financial services must address its pay gap, Eva Scheerlinck writes.

N O V E M B E R 201 7

\ FROM THE EDITOR

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

EDITOR

Sally Rose DIRECTOR OF INSTITUTIONAL CONTENT

Amanda White

A LETTER from the editor A FEVERED SEARCH FOR ALTERNATIVES

EDITOR-AT-LARGE

Simon Hoyle HEAD OF DESIGN

Kelly Patterson ART DIRECTOR

Suzanne Elworthy SUB-EDITOR

Haki P. Crisden PHOTOGRAPHER

Matt Fatches matt@mattfatches.com.au

HE RUSH TO alternatives is officially on. That was a major theme in the findings from the sixth-annual Investment Magazine CIO Sentiment Survey (see page 6). We asked the investment chiefs of the country’s largest institutional asset owners to tell us what asset classes they plan to allocate more capital to in the year ahead. Among the 38 participating CIOs, hedge funds and liquid alternatives was the most popular answer, with a whopping 47 per cent. Other common responses were infrastructure and other real assets, selected by 29 per cent of CIOs, along with private equity and venture capital, named by 26 per cent. This comes as investors search for ways to diversify their risk away from artificially inflated equity and bond markets. Falling equity markets ranked as the number one concern for CIOs in our 2017 CIO Sentiment Survey, followed by rising interest rates and geopolitical risks. US politics is the potential source of geopolitical risks causing the most jitters, followed by slower growth in China and North Korean aggression. All of these trends are consistent with what IOOF’s recently installed chief investment officer, Dan Farmer, has to say in this month’s CIO Profile (see page 30). “Short-term shocks are very hard to predict,” Farmer says. “But it is really geopolitical risks that we are watching, for their shock factor.”

NOVEMBER 2017

He is putting future overlays on the equity portfolio to guard against volatility risk should US President Trump start a full-blown trade war – or indeed an actual war with North Korea. A more certain risk is the lowreturn outlook across all major asset classes. In response to that, Farmer, like many CIOs in our survey, is looking to pile into alternative assets with an absolute returns profile. On the one hand, it is heartening to see evidence that perhaps the hassle of complying with the Australian Securities and Investments Commission’s Regulatory Guide 97 on disclosing fees and costs isn’t putting funds off investing in those assets they predict will deliver the strongest net returns for clients. On the other hand, it can be a bit eerie when everyone is singing from the same song sheet. For those funds in the early days of beefing up their allocation to alternatives, it is worth reflecting on the journey the Future Fund has been on in recent years (see page 14). The sovereign wealth fund already has nearly 20 per cent of its total portfolio in hedge funds and other alternative risk-premia assets, compared with an average of 7 per cent across the super fund sector. Monitoring whole-of-portfolio risk and putting the squeeze on manager fees has been critical to the Future Fund’s approach.

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INVESTMENT OPERATIONS: SOLVING THE CHALLENGES OF REGULATION, TECHNOLOGY AND DUE DILIGENCE In 2018, the Investment Operations Conference will celebrate its 21st anniversary. We invite you to join us for this one-day event featuring expert speakers from regulators, super funds, technology innovators, fund managers, custodians and other specialists. This year’s theme is “Managing systemic risk: How can technology assist?” This event shines a spotlight on the most pressing issues, including cyber-security, blockchain technology, geopolitical risks, regulatory pressures and operational due diligence. This is the ideal opportunity to get futuristic insights and real-life lessons alongside the middle office of the institutional investor.

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\ CIO SENTIMENT SURVE Y

2017

Investment Magazine

CIO SENTIMENT SURVEY

KEEPING ACTIVE and COUNTING COSTS Active MANAGEMENT and getting tough on FEES were strong trends in the 2017 Investment Magazine CIO SENTIMENT SURVEY, which also found that GEOPOLITICS is still a large source of angst.

In association with Frontier Advisors

By Simon Hoyle + Illustrations Morgana Ancone

NOVEMBER 2017

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CIO SENTIMENT SURVE Y \

DEMOGRAPHICS*

IN CONTRADICTION WITH market chatter about a shift to passive, the 2017 Investment Magazine CIO Sentiment Survey found superannuation fund investment chiefs are sticking by active managers and allocating more money to hedge funds and other liquid alternative strategies, amid fears of a pullback in equity markets. Other key findings revealed chief investment officers are tightening the squeeze on external fund manager fees and insourcing more investment capabilities, as they seek to reduce costs and gain more control in a bid to meet their return targets. The sixth-annual Investment Magazine CIO Sentiment Survey was conducted online over three weeks in October 2017. The survey was open only to the investment chiefs of the 100 largest institutional asset owners in Australia, New Zealand and Papua New Guinea. Thirty-eight investment chiefs completed the survey. All respondents had their identity verified; however, their answers were anonymised. Overwhelmingly, the respondents were from local superannuation funds. The 38 funds represented in the survey’s results control a collective funds under management of $828 billion.

STAYING ACTIVE

*Figures may not total 100% due to rounding.

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The 2017 Investment Magazine CIO Sentiment Survey was produced in association with Frontier Advisors. For Frontier Advisors director of investment strategy Chris Trevillyan, the most striking theme to emerge from the survey was confirmation that Australian CIOs are, by and large, resisting what he believes is a global shift toward smart-beta and passive strategies. “Globally, we’re seeing huge flows into passive managers and smart beta,” Trevillyan said. “That’s one of the biggest trends in the funds management industry.” He pointed to a Boston Consulting Group report, released in July 2017, that showed assets invested in passive strategies worldwide increased threefold between

NOVEMBER 201 7

\ CIO SENTIMENT SURVE Y

MARKET OUTLOOK

2008 and 2016, from $US4 trillion to $US12 trillion, and forecast passively managed assets to hit $US19 trillion ($25 trillion), or 20 per cent of total global FUM, by 2021. But 80 per cent of respondents in the 2017 Investment Magazine CIO Sentiment Survey said they had no plans to allocate more money to passive and smart-beta strategies over the next three years. Trevillyan believes the continued and contrarian preference of Australian CIOs for active management can be explained by idiosyncrasies of the local market that make passive and smart-beta strategies less appealing. “Our market is quite concentrated in the banks and resources,” he said. “These smart-beta strategies can produce some distorted portfolios.”

EQUITIES DIP FEARED

Asked to rank what they considered the biggest risks to their portfolio in the year ahead, the most common response was falling equity markets, which about 41 per cent of participating CIOs nominated as their greatest concern. Another 16 per cent of CIOs named it their second-biggest concern. Overall, the second-largest concern was rising interest rates, followed by geopolitical risks in third place. Rounding out the top five areas of concern were the risks of a corporate credit crisis and ultralow global growth. “How the end of QE [quantitative easing] will impact on earnings growth is my biggest concern,” one CIO said. Another said, “High Australian household debt unwinding is a big risk”. The geopolitical risk that most worried CIOs was US politics, in a repeat from last year. Slower growth in China ranked second, followed by North Korean aggression. Worries about the impact of US President Donald Trump, along with the fallout from Brexit and risks associated with the potential for other member states to leave the European Union, continue to be perceived as sources of significant geopolitical risk to markets. “Most material risks ahead are associated

NOVEMBER 2017

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CIO SENTIMENT SURVE Y \

ASSET ALLOCATION AND CONSULTANTS

with politics,” one CIO said. “Populism ain’t going away any time soon. As a consequence, we are unlikely to see a significant rise in interest rates. The biggest risks are geopolitical, because situations mishandled could lead to war.”

MORE REALISTIC TARGETS

One area where CIOs were more optimistic than a year ago was their ability to meet investment return objectives. More than half the respondents were confident of meeting their balanced fund return target in 2017, with just 5 per cent expecting to miss it and the rest uncertain. One year earlier, a mere 30 per cent of CIOs surveyed were confident of meeting these targets. This renewed confidence may reflect the fact that, over the last few years, most funds have dropped their targets to reflect more realistic expectations in a difficult market. Almost 40 per cent of super funds represented in the survey had lowered the return target on their balanced option over the last year. But this multi-year trend seems to be drawing to a close, with only 10 per cent of CIOs expecting to lower targets in the year ahead. The most common balanced fund return target was to beat inflation, as measured by the consumer price index (CPI), by 3 per cent. This indicates a nominal average target return of about 4.8 per cent.

SEEKING ABSOLUTE RETURNS

In their bid to achieve acceptable returns, CIOs continue to diversify their asset allocation away from local shares and bonds. Of those surveyed, 47 per cent said they plan to allocate a greater proportion of their funds’ assets to hedge funds or other liquid alternative strategies. After liquid alternatives, the two asset classes where CIOs were most eager to deploy capital were emerging-market equities, along with infrastructure and other real assets (the asset class where most CIOs planned to invest a year earlier), both ranked equal third and were selected by 29 per cent.

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NOVEMBER 201 7

\ CIO SENTIMENT SURVE Y

INSOURCING AND MANAGERS

While CIOs see value in hedge funds, they are shying away from other high-fee asset classes. Almost a quarter surveyed said they plan to reduce costs by shifting out of high-fee asset classes, such as private equity and venture capital. “The focus is on net returns,” Trevillyan said. “You could have 5 per cent of your fund in private equity, and it can constitute 40 to 50 per cent of the fee to the fund.” He said most funds were unlikely to get out of private equity completely, but tipped more would reduce their allocation and take a more targeted approach.

NEGOTIATING HARDER

Fee pressure is being felt across all asset classes. A staggering 87 per cent of CIOs surveyed said they plan to reduce costs by negotiating harder with their external managers on fees. Trevillyan said the Australian Securities and Investments Commission’s Regulatory Guide 97 (RG 97) has brought fee pressure to the foreground by requiring funds to disclose more in-depth information about fees and costs. CIOs are “entirely justified” in their strategy to negotiate harder on external fund manager fees, he said. “Fund managers have been earning a lot of money for a long time…They are extremely profitable businesses.” When asked to nominate their preferred management fee structure, CIOs were split. Thirty-two per cent preferred a management fee with a discretionary discount applied by the manager; 26 per cent preferred a flat fee; and 24 per cent preferred a minimum management fee plus performance fee. This highlights that there is no perfect model. “It depends on the manager, on the asset class and just the beliefs of the investor,” Trevillyan said. “Some see performance fees as really aligning members’ and managers’ interests; others say it just means you can be paying very high fees. It shows it is a complicated area and there is no one-size-fits-all.” When CIOs were asked what else they wanted from their managers, responses

NOVEMBER 2017

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CIO SENTIMENT SURVE Y \

MORE INSOURCING AHEAD

Fund managers have been earning a lot of money for a long time…They are extremely profitable businesses revealed an appetite for more access to thought leadership and greater sharing of the research that informs managers’ investment strategies. Typical responses included: “better information”, “collaboration and partnerships”, and “more help with bespoke investment projects”. And, inevitably, they wanted “delivery of alpha commensurate with fees paid”, and for their managers to be “more proactive”. Trevillyan says the trend towards insourcing will change the way funds interact with external fund managers.

The trend for large funds to insource a growing proportion of their investment management is a reflection of “shooting for the best of both worlds – excess return at a lower cost”, Trevillyan said. The survey has found that 91.5 per cent of respondents already had at least some internal investment capabilities at their fund, although roughly one-third of these described their in-house capabilities as “extremely limited”. However, 19.4 per cent of CIOs said they plan to increase their internal capabilities. Trevillyan tipped that more funds were likely to begin building internal investment teams once they reached a certain scale. “You’ve got superannuation funds that are $5 billion to $10 billion to $15 billion, and they’re all getting to a scale where they’re thinking about it,” he said. “There are a lot more funds in that category, whereas before there weren’t as many. You’re getting a lot of funds, medium-sized funds, that are of a scale to consider it. That could be a very, very big theme.” Ñ

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THIS REPORT is sponsored by ASX Ltd

Opportunities REPO in and

SECURITIES LENDING

The DIVERSIFYING FACE of the repo and securities lending market opens up NEW POSSIBILITIES for Australian super funds to put their balance sheets to work. By Alexandra Cain

REFORMS TO INTERNATIONAL banking and financial system regulations since the global financial crisis (GFC) mean the market for ‘repos’ and securities lending, traditionally dominated by central and investment banks, is opening up to alternative lenders – including local superannuation funds. With banks of all kinds now required to hold bigger capital buffers, large, sophisticated pension funds around the globe – including First State Super, an $80 billion default fund for NSW public servants – are stepping into the breach to create a more diverse market for repos and securities lending. Repurchase agreements (repos) are similar to secured loans – with the important distinction that the title to the security passes to the cash provider for the duration of the agreement. Fixed-term repos can be shortterm (often overnight) contracts, but can also be longer-term arrangements. Open repos, those with no fixed maturity date, allow the parties to renegotiate the interest rate daily. Repos play an important role in assisting the smooth functioning of debt markets by promoting liquidity. They are the main instrument the Reserve Bank of Australia uses to undertake its domestic market operations. As Australian Government bond issuance has grown over six-fold since 2009, so too has the market for repos. RBA data shows the gross value of the repo market at June 2017 was $215 billion, about three times bigger than it was in June 2009. As the repo market has grown and come to include more varied participants, there

NOVEMBER 2017

has also been a shift towards tri-party, rather than bilateral settlement. Tri-party also makes it easier for smaller lenders to participate by allowing them to outsource the related settlement operations to a third party. The Australian Securities Exchange (ASX), which offers a comprehensive range of collateral management services, recently hosted its inaugural Collateral Management Forum in Sydney on September 12, 2017, to explore the changing dynamics of the repo and securities lending market.

LOCAL LEADERSHIP

First State Super head of treasury and dealing, Michael Clavin, told the gathering the fund is exploring how to expand returns within its lending portfolio to gain more value from its cash collateral. Changes to the liquidity coverage ratio in recent years have

already prompted First State to adopt a more active approach to its lending book. “We have started working more closely with the agent lender on how term trades work and what we could commit to in regards to terming out some loans,” Clavin said. He explained that First State Super has been comfortable doing term trades and has been entering into term trades within its securities lending program for the last four years, but the rewards associated with those trades are starting to come down as more participants enter the market. “There are trades you can do with cash collateral that tie into what you’re doing on your lending book,” he said. “We’re looking at where it makes sense to trade directly with a counterparty and where it makes sense to use an agent.” He believes this is part of a larger conversation around indemnification for asset owners and agent lenders. “We’re looking at how we continue to remain an attractive lender, extracting as much value from our existing book as we can. We’re exploring pledge arrangements, looking at collateral upgrades and corporate actionrelated lending,” Clavin said.

A MORE INTERNATIONAL MARKET

The RBA’s senior manager of domestic operations, David Olivan, told the ASX Collateral Management Forum of a significant increase in the number of overseas participants in the local repo and securities lending market. Since the GFC, the RBA’s market share has reduced from 50 per cent to 25 per cent, while interbank participation has dropped from 30

MICHAEL CLAVIN Head of treasury and dealing FIRST STATE SUPER

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SP ONSORED CONTENT \

per cent to 20 per cent. The share held by other participants has remained consistent at about 12 per cent to 15 per cent, but the mix of these other participants has become more varied, to include more corporate treasuries, pension funds and insurance companies. Most notable has been the increasing share of offshore players, with the proportion of non-resident participants rising from 9 per cent to 40 per cent since the GFC. Olivan noted how the collateral composition continues to evolve in line with changing market conditions and government bond supply. RBA data shows that, in 2009, about 50 per cent of all collateral traded under repo agreements was government bonds, compared with about 70 per cent today. During the GFC, private securities formed a larger part of the market. Another big change has been the use of collateral management systems to achieve operational efficiencies. “A third of all repos we transact now settle in ASX’s collateral management system,” Olivan said. He explained that automated margin maintenance and post-trading analytics, as well as corporate action management, were among the benefits of using ASX’s collateral management system, freeing up the RBA’s resources.

TRI-PART Y TREND

Westpac executive director of group treasury, Mark Roche, noted that ASX’s tri-party system, and other market structure developments, have encouraged more unleveraged investors to enter the market. This is a positive development, he said. “It’s key for us to have a healthy and big repo market to support liquidity in the

MARK ROCHE Director group treasury WESTPAC

government bond market.” Roche said more competitive pricing in the repo market was making it more attractive to the bank in certain circumstances. “Secured funding rates can trade above unsecured rates, that’s what’s thrown us into this market; it has encouraged unleveraged bond funds to provide cash,” he said. Challenger is another ASX-listed financial services company that repos government securities. Chris Fleming, Challenger’s head of asset and liability management, said that, in the past, the life insurer mostly used swaps as the main hedging instrument for its longterm liabilities but it is increasingly using the repo market. “Moves in bond markets drew us into government securities as a hedging instrument and the tri-party platform is an efficient way to access the market,” Fleming said. “We also see it as a flexible liquiditymanagement tool.” He said ASX’s tri-party platform also delivers operational dividends. “There’s no need to worry about stock substitutions; for a fixed fee, we are able to access an operationally efficient approach to executing hedging strategies.”

A MATURING MARKET

There’s no need to worry about stock substitutions; for a fixed fee, we are able to access an operationally efficient approach to executing hedging strategies Chris Fleming, CHALLENGER

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The local arm of US investment bank JP Morgan is now engaging more with local and global banks and directly entering larger, macroterm trades with banks

through tri-party arrangements. Jenny Cosentino, JP Morgan’s fixed income repo trader, said repos were increasingly important for the bank. “Regulation has played a part in this, as has balance sheet optimisation,” Cosentino said. She noted a need for more secured players in the market to provide the liquidity required to meet new regulations and cover the supply of bonds. “We need to move from vanilla products to a more structured market and learn from offshore experience,” she said. Citigroup is another US-based investment bank with a presence in the local market that is utilising tri-party arrangements in the local repos and securities lending markets. “We’re looking at collateral upgrades, lending corporate bonds, and we are active in the cross-currency space,” Nathan Pederson, a director in Citi’s global markets team, said. Stewart Cowan, executive director at JP Morgan for agency lending, highlighted the increased prevalence of structured transactions, with non-cash collateral trades now accounting for 65 per cent of his book. Whilst engaging in longer termed transactions has been a theme for many years, there is an increasing level of client engagement around managing cash and expanding collateral eligibility profiles to enable revenue to be maximised. For local super funds and other institutional investors, this creates a need to educate risk committees. Pederson commented that, while the Australian market tends to move slowly, things are going in the right direction.

More information on ASX Collateral can be found at asx.com.au/asx-collateral. Subscribe via fisales@asx.com.au to receive the regular ASX Collateral Bulletin for market updates on use of non-cash collateral. NOVEMBER 201 7

\ ABSOLUTE RETURNS

Barbells AND

alpha

THE FUTURE FUND’S alternatives strategy FUTURE FUND director of debt and alternatives, CRAIG DANDURAND, offers a glimpse into how Australia’s $134.5 billion sovereign wealth fund has RECALIBRATED ITS APPROACH to investing in hedge funds and other risk premia assets. By Mark Story + Photo Matt Fatches

WHEN CALIFORNIAN CRAIG Dandurand made the move to Melbourne nearly four years ago to join the Future Fund as director of debt and alternatives, he arrived as the fund’s leadership was embarking upon a rethink about how to structure the portfolio and extract greater value out of managers. The Future Fund’s current portfolio is distinct from the herd in its ‘barbell’ approach to risk: a heavy allocation to cash at one end of the spectrum and a big bet on absolute-return strategies at the other. As at September 30, 2017, the Future Fund had an 18.9 per cent allocation to cash and a 15.4 per cent allocation to hedge funds and other alternative risk premia assets. That compares with averages among local superannuation funds of 6.9 per cent in cash and 10.9 per cent in hedge funds and other alternative risk premia assets, data from SuperRatings shows. Together, the investments in cash, debt and alternatives total $59.4 billion, or 44.2 per cent of the Future Fund’s total portfolio. Having a stash of cash at the ready means the fund is well-positioned to take advantage of buying opportunities, should a market correction occur. In the meantime, a focus on hedge funds and other liquid alternatives is central to the fund’s overall strategy of stripping out beta and focusing on alpha-generating assets. Dandurand reports to Future Fund head of debt and alternatives David George.

NOVEMBER 2017

AMANDA WHITE Director of institutional content and editor WWW.TOP1000FUNDS.COM CRAIG DANDURAND Director of debt and alternatives THE FUTURE FUND

APPETITE FOR ALTERNATIVES

He admits the magnitude of the allocation to hedge funds and liquid alternatives, which the Future Fund refers to simply as alternatives, can throw people off. He says it is about looking beyond other drivers of performance – such as listed equities, credit and property – to add to the overall resilience of the portfolio. The allocation is not just about chasing higher returns – it’s also about managing risk. In fact, Dandurand says the motive behind the alternatives strategy is to focus on return sources that diversify the key risks across the total portfolio. A key element of

that is using macro-directional and multistrategy managers. The Future Fund also has significant exposures to alternative risk premia in the portfolio, which is part insurance and part other things. Dandurand made the preceding comments in a wide-ranging interview with Conexus Financial head of institutional content Amanda White, on stage at the 2017 Investment Magazine Absolute Returns Conference, which was held in Sydney on September 14. During the candid talk, he outlined the fund’s for the role of alternatives within the portfolio, and how the fund is reducing costs and extracting additional

investmentmagazine.com.au

ABSOLUTE RETURNS \

The Future Fund Board of Guardians invests

$159.5 billion

across five public asset funds, the largest of which is Australia’s

$134.5 billion Future Fund.

FUTURE FUND ASSET ALLOCATION ASSET CLASS Australian equities

% 6.0

Global equities Developed markets

16.8

Emerging markets

7.2

Private equity

11.8

Property

6.2

Infrastructure and Timberland

7.9

Debt securities

9.9

Alternative assets

15.4

Cash

18.9

TOTAL

100.0

• All figures as at September 30, 2017. Data may not sum due to rounding.

Source: Future Fund

value by forging stronger relationships with some of the world’s leading hedge funds. Before joining the Future Fund, Dandurand spent 13 years at the California Public Employees’ Retirement System (CalPERS), the largest public pension plan in the United States, as a specialist alternatives portfolio manager. Prior to starting a career in investments, he was a lawyer and banker.

SUM OF THE WHOLE

Future Fund chief investment officer Raphael Arndt espouses a whole-of-portfolio approach that requires the investment team to assess risks and opportunities in the context of how they interact across all asset classes. This is distinct from more traditional strategic asset allocation, in which decisions are made in a more siloed way by those responsible for particular parts of the portfolio.

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For Dandurand, the whole-of-portfolio approach has much appeal. It enables the fund to do more with the alternatives portfolio and simultaneously drive different return streams, rather than looking at things through too narrow an aperture. One of the most important tasks at the Future Fund has been ensuring currency exposures across the total portfolio are managed more efficiently. As a result of these efforts, the altenatives portfolio now has more AUD denominated exposures, reducing the need to hedge. “But [currency] is still a material risk to the fund, given the fact that a large majority of our portfolio is held in non-AUD assets,” Dandurand explains.

ALPHA AND DIVERSIFICATION

Managing currency risk has been part of a larger project to recalibrate the alternatives portfolio to deliver greater diversification. To this end, he has spent the last few years focused on finding “enough genuinely good diversifying things” to sit in the alternatives portfolio. This has enabled the fund to take more meaningful concentrated risk, without imperilling its downside risk profile, he explains. The first step in revamping the alternatives portfolio was to remove managers entrenched in beta strategies. “Unless you’re paying them zero, you probably have no chance of being adequately compensated for the cost of doing business with that manager,” Dandurand said. The Future Fund now gives much greater attention to exploring one-off opportunities with entities that are looking to co-invest. The fund has also identified managers who need some kind of boost at an early stage in order to achieve scale.

This creates the opportunity to build stronger relationships and share ideas. To demonstrate, Dandurand points to how increased collaboration with privateequity managers has gleaned valuable insights for the debt portfolio. “If we’re managing a debt portfolio with an awful lot of money into middlemarket firms and we don’t spend time talking to our [private-equity] guys about what they’re seeing from their side of the balance sheet, then we’re doing ourselves a disservice,” he says. The Future Fund employs about 30 external fund managers in hedge funds and liquid alternatives, including: Arrowgrass Capital Partners and Citadel for multi-strategy and relative value exposures; Elementum Advisors and SouthPeak Investment Management for alternative risk premia; and macrodirectional hedge funds such as Brevan Howard Asset Management and Bridgewater Associates. Dandurand says it’s a challenge for the industry that far too many managers have reached a scale where their incentive to take on enough risk to make the value proposition work well for the investor is gone. One of his priorities has been ensuring all of the Future Fund’s debt and alternatives managers are allocating enough risk, so the value the fund gets for the fees it’s paying for diversification is as high as possible.

FEES IN FOCUS

Of course, he is also focused on negotiating a better deal on fees, but says the emphasis is on making sure managers deliver adequate value. Every manager the Future Fund looks at is run through filters to ensure they are delivering a material degree of alpha generation that is generally diversifying, not just from asset classes, but also from the other betas out there. Nevertheless, there will be times, Dandurand adds, when the fund may have to pay up for a fund it wants, even though it may not be ‘that hot’, based on market filters. Determining how much to pay for talent is “always a question of supply and demand”, he says. But costs matter, especially with an outlook for subdued returns. “If my gross is the same and I paid less in fees, my net is higher, and I like that,” he says.

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\ SP ONSORED CONTENT AN INVESTMENT MAGAZINE ROUNDTABLE, sponsored by AIA AUSTRALIA

DEFAULT GROUP INSURANCE via compulsory superannuation plays a vital role in Australian society, providing a base level of cover for most ordinary working people. One of the best things about group insurance is that it captures many people who would be excluded or priced out of individual policies due to pre-existing conditions. More and more, consumers in the direct life insurance market are finding that a history of seeking treatment or support for their mental health either excludes them from cover or creates obstacles come claim time. As such, group insurance has a more important role than ever in providing cover for super fund members experiencing mental illness. That is true across the spectrum from those with severe and chronic conditions, or families bereaved by suicide, to the estimated 1 in 2 Australians who experience anxiety or depression at some point in their lives. While the system is far from perfect, there is a growing commitment among industry leaders to do better. A recent roundtable hosted by Investment Magazine, with thanks to support from AIA Australia, examined how super funds and their insurers are working to improve their claims and underwriting processes to achieve better mental health outcomes for consumers. The 12 participants included consumer and mental health advocates, alongside representatives from five of the biggest superannuation funds in the country, two of the largest superannuation industry peak bodies, and AIA Australia, the nation’s largest group insurance provider.

HEADFIRST into

REFORM By Sally Rose + Photos Matt Fatches

At the third event in our 2017 ROUNDTABLE series to SUPPORT best practice for mental health in the GROUP INSURANCE SECTOR, 12 experts turned their minds to how to IMPROVE underwriting and claims handling.

CLARIF Y DEFINITIONS

SuperFriend chief executive Margo Lydon highlighted the opportunity for the superannuation and insurance sector to step up for members. “[From] underwriting time – using clear definitions and plain language – right through to how an individual is treated when the rubber hits the road at claim time,” Lydon said. One source of complexity for consumers

Over $1.4b in claims paid during 2016. WWW.AIA.COM

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and their advocates is the inconsistency in the medical definitions used for eligibility across different funds and insurers. The Financial Services Council’s Life Insurance Working Group and the Insurance in Superannuation Industry Working Group are both looking into this. AIA Australia head of group operations Derek Vine said there is “definitely scope” to consider the application of some more standard minimum definitions. All roundtable participants shared this sentiment. By law, superannuation funds are required to include a basic level of group insurance cover in their default products. This includes a combination of death cover plus total and permanent disability (TPD) cover. Funds also may include income protection as a component of their default cover and some do.

RETHINK TPD

One issue of hot debate in the industry at the moment is whether this standard combination of death and TPD cover needs to be reconsidered, or the definition of

TPD recalibrated. Australian Institute of Superannuation Trustees (AIST) senior policy manager David Haynes said rigid TPD definitions were stifling innovation. “The fact that a disability has to be total and permanent for a person to get anything means it becomes a competition between the claimant and the insurer,” he said. “It creates a perverse situation where someone making a claim has to prove that they are totally and permanently disabled, which is in conflict with someone saying ‘I think I want to return to work’ and working with the insurer to achieve that,” he said. “So, I think there needs to be a fundamental reappraisal…there actually needs to be law change.” Sunsuper has responded to this issue by replacing standard TPD cover with a product called TPD Assist. Under this product, claimants typically receive incremental

payments each year rather than a lump sum. “If we can help with rehabilitation or some form of training that then enables people to get back to work in some capacity, then that’s a better outcome for everybody,” Sunsuper executive general manager, customer and technology, Teifi Whatley said. She said the philosophy behind TPD

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

Principal, Berrill & Watson JOSH FEAR

Director, policy and projects, Mental Health Australia FIONA GALBRAITH

Director of policy, Association of Superannuation Funds of Australia JOANNE GRAVES

National rehabilitation manager, AI A Australia DAVID HAYNES

Senior policy manager, Australian Institute of Superannuation Trustees NOEL LACEY

General manager, insurance and complaints, Cbus Super MARGO LYDON

Chief executive, SuperFriend STEPHEN REILLY

Chief operating officer, HESTA Super MIKE ROWLAND

Insurance manager, MTA A Super DEREK VINE

Head of group operations, AI A Australia MICHELLE VOUDOURIS

Product manager, insurance, IOOF TEIFI WHATLEY

Executive general manager, customer and technology, Sunsuper

CHAIRS SALLY ROSE

Editor, Investment Magazine COLIN TATE

Chief executive, Conexus Financial

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guarantee component so claimants are still accumulating retirement savings.

LEARN FROM EXPERIENCE

You’ve got people at their most vulnerable and you are asking them to fill out a very complicated form

insurance would need to be supported by good member communication strategies. “Think about it from the consumer’s point of view…we need to sell the message that it isn’t a big con job,” he said. “This isn’t just about reducing financial impost of insurance, it’s actually about aligning the interest of members and insurers.” Berrill & Watson principal John Berrill, an insurance lawyer, consumer advocate and long-time Superannuation Complaints Tribunal panel member, was generally supportive of allowing more flexibility for group insurers to make instalment payments as an alternative to lump sums where appropriate. However, he would like to see these payments include a superannuation

Assist was informed by the belief that most people are better off if they can eventually be helped back into the workforce. “It’s very early days but we are definitely seeing some successes.” SuperFriend’s Lydon said the traditional TPD model is particularly problematic for people unable to work due to mental illness, given most instances are episodic, rather than permanent. “The design of TPD basically goes against what we’re actually wanting to achieve, and that is to get the person back to wellness,” she said. Association of Superannuation Funds of Australia (ASFA) director of policy Fiona Galbraith agreed the traditional TPD model is “not a good fit” for mental health. “It is certainly interesting to watch how some funds are taking an instalment approach...but having the definition changed to focus on rehabilitation and return to work would be a major step,” Galbraith said.

Super fund executives around the table agreed that best practice underwriting reduced conflicts in the claims process. MTAA Super insurance manager Mike Rowland said the fund has in recent years instituted a trustee committee to review every denied claim or application for additional cover. Insights gleaned from this have led to the fund applying more scrutiny to the finer detail at the underwriting stage, particularly with regard to what might constitute a precluding pre-existing condition. Simplifying paperwork and making communications easier can also make a big difference to members, especially those experiencing mental illness. “You’ve got people who are absolutely at their most vulnerable and you’re asking them to fill out a very complicated form,” HESTA’s Reilly said. “They’re emotionally distressed and you’re asking them to explain rationally what happened a year ago, two years ago, 10 years ago. We are working very hard to simplify that process to make it easier for members and their families, who, don’t forget, are often the ones filling out forms.”

MARGO LYDON SuperFriend

PROTECT INCOME

HESTA chief operating officer Stephen Reilly said that under the current rules including income protection as a component within group insurance was a good idea. “We believe it’s better for the member to get back to wellness and get back to work, and it makes it better for the employer and for society,” Reilly said. “It’s not better for lawyers, no question about that. You’re not dealing with a percentage of a lump sum and I think that’s helpful. In the role of super as a safety net, we think it’s the best answer.” AIST’s Haynes noted that any changes to standard underwriting practices in group

Over $1.4b in claims paid during 2016. WWW.AIA.COM

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TEIFI WHATLEY Sunsuper

DAVID HAYNES AIST

DEREK VINE AIA Australia

can help the industry improve the customer experience for people in the claims process.

REFORM REHAB RULES

Lydon said investing in better training for frontline staff was one simple way some super funds are improving the claims experience for all members, but particularly those experiencing mental illness. “The uptick in staff training conversations with members with empathy, not only the technical capability but the human capability, I think is a tremendous step forward,” she said. IOOF product manager, insurance, Michelle Voudouris said the introduction of a ‘tele-claims’ initiative was “definitely the best thing” the superannuation and wealth-management firm has done to reduce mental stress for claimants. IOOF clients can now complete a TPD claim over the phone with the help of a specially trained claims officer, without having to fill out any forms or sign any documents. It is just one example of how technology

AIA Australia is working on how artificial intelligence can be applied to make the claims process quicker and more consistent. Experiments with IBM’s Watson have shown promising results. Vine is optimistic that the use of AI to automate basic administrative tasks will improve efficiency, creating more time for staff to spend on human interactions with clients. “It’s not a silver bullet, but we are using technology as an enabler and hopefully it can help us trigger the conversations needed to get people the right help earlier.” There was fervent agreement among all those at the roundtable that early intervention and access to rehabilitation improves outcomes. While insurers can fund some elements of occupational rehabilitation, it was a source of frustration for many that the law currently does not allow for group insurers to fund rehabilitation that would affect access to targeted early intervention and medical expenses to facilitate recovery and return to work. AIA Australia national rehabilitation manager Joanne Graves said this needs to change. “I’m a very passionate advocate for the difference rehabilitation can make in the

lives of people on claim,” Graves said. Cbus Super general manager, insurance and complaints, Noel Lacey said it was “just a disgrace” that group insurance was precluded from funding rehabilitation services. ASFA’s Galbraith said changing this would be a “common sense” reform.

WORK TOGETHER

There was also unanimous agreement on the need for more multi-sector collaboration – encompassing the legal fraternity, the medical profession, mental health groups and employers. Mental Health Australia director, policy and projects, Josh Fear noted that the dialogue between the mental health and insurance sectors has already improved markedly over the last five years. “We’ve gone from something antagonistic – or maybe not even a dialogue – to now we’re working together with the industry to deal with some very complex issues that don’t lend themselves to easy answers,” Fear said. Vine said the prevalence of mental illness in the community made working together a priority. “One in two Australians are going to experience mental health issues in their lifetime,” Vine said. “As an insurer, the days of providing pure financial protection are long gone. We have obligations that go way beyond that. Our obligations are to help make a difference in Australia.”

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\ CHAIRâ&#x20AC;&#x2122;S SE AT

C U LT U R E

re sp e c t of

Edited Sally Rose + Photos Nicole Cleary

In this Q&A with Investment Magazine, ANNE WARD, speaking in her capacity as the LONGSTANDING CHAIR of $7 billion corporate superannuation fund QANTAS SUPER, shares her views on bringing out the best in colleagues, ENGAGING WITH MANAGEMENT, and why the fractured sector must stop squabbling and build trust.

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CHAIR’S SE AT \

Q. THIRTEEN YEARS AS CHAIR OF

QANTAS SUPER IS A LONG TENURE. HOW DO YOU STAY ENTHUSED? DO YOU HAVE A SUCCESSION PLAN IN PLACE?

A. Clearly, I am nearing the end of my term and our succession planning is well advanced. However, I find it easy to remain highly engaged and excited about the future for Qantas Super and its members. Q. HOW HAVE YOUR VIEWS ABOUT WHAT MAKES A GOOD CHAIR CHANGED OVER YOUR TIME IN THE ROLE?

A. I have learnt that as chair you can be more effective by speaking last on an issue, not first. It’s always best to reserve judgement and listen carefully as colleagues share their views, as starting with your own view tends to shut down debate. I like to think of the role as similar to that of an orchestral conductor: striving for harmony. The goal is to bring out the best from each director, allowing for some solo performances but not letting those overshadow the accomplishment of the group as a whole. Q. WHAT IS YOUR TOP PIECE OF ADVICE FOR HOW TO CHAIR A CONSTRUCTIVE BOARD MEETING?

A. The most important thing is to foster a culture of openness and respect amongst directors, which allows for robust debate and a constructive challenging of views. With that in place, it comes down to planning the agenda and sequence of items carefully to allow for appropriate attention on the right matters. I like to begin every meeting with a private ‘directors only’ session, which allows for concerns or issues to be aired in a completely open way and can reduce friction during the meeting itself.

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Q. WHO HAVE BEEN YOUR MOST

IMPORTANT MENTORS? WHOM DO YOU TURN TO FOR ADVICE NOW?

A. I have been fortunate to benefit from the advice of many mentors over my career. When I was starting out as a lawyer, I learnt a great deal working with Neil Forsyth QC, who always told me there is no such thing as a dumb question and to keep asking. More recently, I have valued the wisdom of senior directors such as [former Qantas chairman] Margaret Jackson and [former NAB chairman] Graham Kraehe who have taught me much about resilience and pushing on when things get tough. Q. WHAT IS YOUR VIEW OF THE

CURRENT DEBATE AROUND GOVERNANCE AND THE VALUE OF INDEPENDENT DIRECTORS FOR SUPER FUND TRUSTEES?

A. As a professional company director [other roles include Chair of Zoos Victoria and Colonial First State] I have no doubt that independence of mind is a vital trait. I am a believer in the enormous value that truly independent, skilled and well-chosen directors can add to a trustee board. Whilst I respect the attachment some have to the equal representation model, I believe that moving to a model of one-third independent directors, one-third employer-appointed directors and one-third employee-appointed directors would be a significant enhancement. Q. WHAT IS THE MOST VALUABLE PROFESSIONAL DEVELOPMENT OR TRAINING YOU HAVE DONE TO ASSIST YOU IN BECOMING A BETTER CHAIR?

A. In terms of formal training, the best course I have attended was the Australian Institute of Company Directors’ Mastering the Boardroom. It included a realistic simulation of a board and a company in crisis. Participants were thrown in the deep end and had to figure out how to work effectively with a bunch of strangers to handle a corporate meltdown. However, the best teacher is experience. I have learnt more about being a good chair from observing great chairs in action and from chairing a board through a real crisis than from any training program.

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\ CHAIR’S SE AT

Q. HOW DO YOU KEEP YOUR FINGER ON THE PULSE OF WHAT IS HAPPENING WITHIN THE FUND?

A. Like any good board, we take care not to step over the line into management territory. The relationship between the chair and the CEO is critical to ensure that both sides respect the importance of that ‘line in the sand’. However, the board must, of course, monitor management’s performance and, increasingly, the culture of the organisation. At Qantas Super, we create formal and informal opportunities for directors to engage with management to ensure that the board has a multidimensional understanding of how things are going. Q. QANTAS SUPER IS ONE OF ONLY A HANDFUL OF SIGNIFICANT CORPORATE FUNDS LEFT IN THE MARKET; HOW DOES THE BOARD ASSESS THE LONG-TERM BUSINESS CASE FOR THE FUND?

A. As one of Australia’s oldest super funds, Qantas Super has a proud history of protecting and creating value for its members. The board regularly assesses the value proposition of the fund – both to members and to the sponsor, Qantas. Unlike a public offer fund, our business case is not built on growth, but rather a strategy to continue delivering value to members. Q. WHAT INTERESTING PROJECTS IS THE QANTAS SUPER BOARD WORKING ON AT THE MOMENT?

A. In terms of member services, we are developing new online education modules, and an immersive virtual reality project to illustrate the potential future benefits of contributing to super now. In product development, we are building enhanced investment options for retirement. On the investments front, we recently secured some excellent timberland assets, and made a strategic private-equity investment in a premium Australian agricultural venture.

NOVEMBER 2017

I have learnt more about being a good chair from observing great chairs in action and from chairing a board through a real crisis than from any training program

Q. IN YOUR VIEW, WHAT IS THE BIGGEST CHALLENGE FOR THE SUPERANNUATION INDUSTRY TODAY?

A. The super industry is facing a challenge to its social licence to operate. Amid constant reviews, changes to regulation and unrelenting squabbling between different sectors of the industry, Australians are rightly asking whether the current system is delivering for them and the nation. In Canberra, the cost and inefficiencies of the system are being highlighted, whilst the seemingly simple task of agreeing on a legislative definition for the objective of superannuation cannot seem to be achieved. Trust in superannuation is being eroded, and funds must all work harder to build trust and confidence in the system.

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COLUMN \

A GREAT DEAL has been written in recent years about failures of culture within the big banks. Now, as the big four set about selling down their wealth-management and insurance arms, there is an opportunity for the ‘profit-to-member’ superannuation sector to learn from the banks’ failures. In response to evidence of a disconnect between the cultural values the banking sector’s senior leadership articulates and real practice, the Australian Prudential Regulation Authority now demands bank boards show how they are systematically measuring culture, much as an airline must closely monitor safety. Having worked in banking myself, I can attest that measuring culture in a climate focused on short-term performance numbers is a huge challenge. But as APRA chair Wayne Byres said: “Aspirational statements of organisational culture have been no match for the personal incentives that are created for individuals [and] strengthening culture, like strengthening capital, is critical to long-run stability.”

GETTING ALIGNMENT

BY MICHAEL SWINSBURG

Michael Swinsburg is managing partner, Asia-Pacific, at Alexander Hughes Executive Search.

Incentives must build culture, not ruin it Profit-to-member super funds need to develop CULTURALLY ALIGNED remuneration programs to LURE TALENT from the banks without repeating their retail rivals’ mistakes. INCENTIVES AND DISINCENTIVES

The Risk Culture Project, an ongoing Macquarie University study that began in 2014, surveyed 13 business units across three major banks. Professors Elizabeth Sheedy, a former banker, and Barbara Griffin, found bank leaders had been ignorant of their firms’ cultural deficiencies that contributed to bank staff overlooking regulatory breaches. The researchers found avoidance culture – in which employees believe risk breaches will be ignored or excused – to be a problem across the banking sector. Their findings state that bank leaders have an optimistic

investmentmagazine.com.au

view of culture, as they are not told the truth. Additional research from the same team, based on test labs running various profit and risk scenarios, found profit-based incentive programs influenced the attitudes of staff and increased poor behaviour. The researchers also found that longer industry tenure correlated with a reduction in poor behaviour. The Risk Culture Project concluded: “It is difficult to have high rates of risk compliance in the presence of profit-based payments, as these signal the true priorities of the organisation, and staff modify their behaviour accordingly.”

In contrast, well-designed rewards programs can focus employees on customer service, retention, innovation and other longer-term outcomes, over short-term sales revenue. Profit-to-member funds should focus on building their own strongly differentiated culture that rewards talent for superior performance and quality risk management. Rewards don’t have to be only individual or only financial, but out-performance does need to be recognised in organisations that wish to be competitive in financial services. After all, super funds pay their external fund managers performance fees so why shouldn’t they reward their own star performers? Like it or not, incentives are part of the financial services landscape, so we need to make them work. This requires wellstructured roles and strong performance management with clear key performance indicators, along with incentives. All of these components must be aligned with the fund’s culture and expected behaviours. By grappling with these issues, profit-formember super funds can capitalise on the banking sector’s cultural failures – as some funds are already doing.

BUILDING TEAMS

Our executive search and advisory practice has significant experience placing commercial leaders into the profit-for-members sector. Typical examples of feedback from these former bank executives, once in their new roles, include, “Great to have a laser focus on the member” and “Why did it take me so long?” But without the right culture and incentives, employee engagement falls and organisations can say goodbye to our best talent. Being member-centric and having a friendly work environment is not enough. Harvard Business Review regular contributor John Coleman argues that great culture can account for a 20 per cent to 30 per cent differential in corporate performance. Coleman identifies six components to culture: vision, narrative, place, values, practices, and people. Great culture will feed team engagement and attract the best executives with the right attitudes to risk and commercial skills to drive profit-for-member funds in our hypercompetitive and highly regulated world. Those funds that embrace a culture of being fast to fail, learn, adapt, and go again will win out.

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IF SUPERANNUATION FUNDS want to maintain our relevance for members as they enter retirement, then we need to tackle the challenge of providing affordable and appropriate financial advice. Ordinary Australians typically hate talking about money. A lack of financial literacy, along with social taboos around discussing money matters, make many people shy away from important conversations about what they could be doing to build and protect their savings. As a result, when it comes to figuring out how to achieve the retirement lifestyle they want, too many people muddle through alone, not knowing what to do or where to turn for help. This is a cycle we need to break. At any life stage, people should feel empowered to spend their hard-earned income and make financial decisions that will help them live a higher quality life now and in the future. In the advice community, we know the marked difference professional advice can make to people’s lives. In recent years, a growing body of research has shown people who receive professional advice tend to report having greater peace of mind and say advice is worth more than it costs. Now new research supports the idea that people who receive advice will probably retire wealthier as a result.

People who receive professional advice tend to report having greater peace of mind and say advice is worth more than it costs

to demonstrate those couples who receive advice are better off in the long run. Our findings show that not only are advised couples wealthier as a consequence of the advice than if they hadn’t got professional help, but also they’re more likely to achieve their personal lifestyle goals. More than 1000 working Australians were surveyed as part of the research. Of those who had not received financial advice, 42 per cent said they planned to rely on the government-funded age pension. Only 16 per cent of those surveyed who had not seen an adviser expected to have a good standard of living in retirement. In comparison, among those who had received advice, 80 per cent said it gave them more confidence to make financial decisions and 77 per cent said they felt better prepared for retirement. CoreData also modelled the financial impact of common life experiences and milestones to show how financial advice can help fund lifestyle goals such as family holidays, private education and trauma cover. Three case studies included in the report reflect the sorts of day-to-day financial aspirations most advisers would recognise.

REAL-WORLD BENEFITS

One example modelled the impact of financial advice for a couple in their 30s with two young children and projected they would be $239,185 better off at retirement. In the real world, this would mean they could pay down their debts and still afford six additional years of NEW RESEARCH private education for two children and At the Association of Financial enjoy a family holiday every year Advisers annual conference on the until retirement. Gold Coast in October, Sunsuper released BY Ensuring financial security a report titled The Value of Advice. ANNE FUCHS should a family member become The report is based on research conducted seriously unwell is important for by CoreData, commissioned by Sunsuper, many, so the research also looked to find out not only how Australian couples Anne Fuchs is head of advice and at the affordability of trauma felt about the benefits of receiving financial retail distribution at Sunsuper. cover. The modelling found that, advice, but also whether there was evidence with advice, the couple in their 30s could afford trauma cover for 32 years, while a 50-year-old couple could enjoy 10 years of cover. As an advice and adviser community, we have an opportunity to help break down barriers to accessing financial advice. To do so, it’s important we continue to educate people at every life stage and demonstrate how advice contributes to The superannuation industry looks after its members in the sustaining a higher quality of life, accumulation years. Funds must now invest in advice to HELP greater peace of mind, and being PEOPLE IN RETIREMENT make the most of those savings. better prepared for retirement.

The benefits of advice age well NOVEMBER 2017

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BEEF up EXPOSURE to AGRICULTURE

THIS REPORT is sponsored by QIC

Global investors are set to profit from Australia’s rise as the food bowl for Asia, while many local funds are set to miss out. VERTICALLY INTEGRATED AGRIBUSINESSES offer a more diversified exposure to the sector. By Alexandra Cain

DEMAND FROM ASIA for Australian food products is set to continue booming over the coming decades, piquing the interest of global investors in domestic agriculture. Yet many local investors remain shy. It is time to take a fresh look at different ways to access this thematic that is set to drive strong returns. Changing demographics and tastes in developing Asian markets are fuelling growing demand for Australian food. “Growth in Asian markets is a sustainable trend; there’s little doubt in 10 years there are going to be more people with more money eating better in Asia,” says QIC principal of global private capital, Phillip Cummins. Food providence is an emerging issue for consumers driving activity in the farm sector. This is a competitive advantage for Australian producers, with the benefit of geographic isolation and a reputation for being ‘clean and green’. “People are increasingly looking for animals to be raised in a sustainable way. Consumers are becoming increasingly conscious of issues such as the use of antibiotics, environment, animal handling and other inputs…in raising animals,” Cummins says. “We’re seeing this play out in North America and Australia, but developing markets in Asia are also picking it up. That’s an advantage for Australia because we’re well placed to produce food in a very sustainable way.”

A CHALLENGE FOR SUPER FUNDS

But farming is a tough business, highly exposed to the forces of nature and global price volatility. It can also be difficult for institutional investors to find opportunities of appropriate scale. According to the National Farmers’ Federation’s 2016 statistics, just 4.3 per cent of domestic agribusinesses have annual revenues in excess of $2 million. Many investment chiefs also struggle to understand where agribusiness should fit into their portfolio. Is it real estate? Is it infrastructure? Is it private equity? Historically, these factors have made it challenging for the $2.3 trillion local superannuation industry to tap the agribusiness sector’s huge potential. If a fund buys farmland, it might take a passive interest in the management of the asset and lease it to a producer, or own the asset and the production facilities. Business models are emerging where one entity will focus on operations and another will own the asset, with a lease agreement that defines the relationship between the two. Another way to take a position in agribusiness is to buy into large infrastructure assets, such as ports and railways used to send products for export and domestic markets.

QIC’S VISION

The global private capital team at QIC has spent much time in recent years rethinking its approach to agribusiness. Where they have landed is something Cummins describes as

akin to private equity investing. Central to the investment strategy is a controlling 80 per cent stake in North Australian Pastoral Company (NAPCO), acquired in 2016. QIC’s vision is to make NAPCO a demanddriven, vertically integrated beef business. NAPCO already has a degree of supplychain integration, being a breeder and grower of beef across 13 strategically located properties and owner of a feedlot on the Darling Downs in South East Queensland. This offers better risk management, compared with other agribusinesses that focus on only one part of what is a very long supply chain in beef, by producing a diversified income stream. Diversification also helps the business manage price volatility. That is attractive, given agribusinesses are typically price takers, forced to accept the prevailing price depending on market forces. “Having a better handle on the supply chain reduces price volatility, and allows us to build better relationships with other parties along it, which also gives us a better idea of demand,” Cummins says. “This ultimately leads to higher earnings, more stable margins and the ability to invest in the business with a longer-term time horizon.” With more than $500 million in assets and 180 staff, NAPCO is already one of the largest agribusinesses in the country. “We’re probably a bit early to the space but it’s one in which we want to gain exposure. NAPCO is a company we can grow and that’s what we like doing,” Cummins says. While the QIC team is focused on investing in animal protein right now, it is also eying opportunities in other agribusiness subsectors. “Irrigated cropping is one area we’re exploring. Nuts, cotton, dairy, water and horticulture are also interesting,” Cummins says. He admits it is difficult to identify investment-grade agribusiness assets in Australia, although he sees evidence that is changing as the sector matures. Cummins predicts the global interest in Australian agribusinesses will only continue to rise as the sector consolidates, producing a bigger pipeline of assets that are attractive to institutional investors.

QIC, created by the Queensland Government in 1991 to manage the state’s investment portfolio, is now an independent global diversified alternatives manager with $82 billion in funds under management on behalf of over 110 local and international clients, as at 30 September 2017. For more information about QIC, our approach, clients and regulatory framework, please refer to our website: www.qic.com or contact us directly.

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THE INTERACTION OF superannuation with the aged-care sector is a topic that has prompted much discussion for many years. Health and aged-care providers, consumer advocates and policy groups dominate the discussion. Some question whether the aged-care debate is one the superannuation industry should BY weigh in on. To my mind, the answer to that is a resounding yes. MARY DELAHUNTY The Productivity Commission, in its 2011 report Caring for Older Mary Delahunty is the general Australians, outlined a future manager, business development reality of service strain in aged and policy, at HESTA. care. Key findings included that: the number of Australians aged 85 and over is projected to increase from 400,000 in 2010 to 1.8 million (5.1 per cent of the population) by 2050. By 2050, it is forecast, more than 3.5 million older Australians will access aged-care services each year, with about 80 per cent of services delivered in the community.

Super can’t stay silent on aged care If the superannuation industry is truly committed to helping members achieve dignity in retirement, it must improve interactions with the AGED-CARE SYSTEM.

Increases in the public cost of aged care are inevitable, given the growing longevity of older people and the lifetime risk of requiring aged care. It is inevitable that super fund members will interact with the aged-care system in some way. Increasingly, this interaction will be with the complex residential-care system. This means our sector must have meaningful conversations to drive integration with aged care. As a country, we are measured by the benevolence we show our most vulnerable. Dignity in retirement is a right for everyone,

NOVEMBER 2017

not just the lucky ones. Efforts to make this ideal a reality could benefit from some collective thinking from the super industry.

GOOD ADVICE

One area that deserves more focus is the crucial role financial advice has to play in helping members assess their personal needs as they plan for aged care. Specialist aged-care advice can help members make informed decisions for themselves, or their family members, before those decisions are time critical.

At HESTA, we have financial planners who are accredited to provide advice on aged care. Industry Fund Services is developing a program to support funds by providing a pool of accredited financial planners. More broadly, there is an opportunity for the financial planning sector to explore how advisers could be advocates for clients, negotiating on their behalf with aged-care providers.

NEW PRODUCTS

Another area worthy of focus is what role super funds might be able to play in the provision of financial products designed to help members access aged care. This conversation needs to be industry led and should have the broad aim of ensuring that access to quality aged care is not dependent on income. In its recent consultation on developing a framework for Comprehensive Income Products for Retirement (CIPRs), Treasury asked the industry for comment on the possibility of a product that would include some formal interaction with aged care. Notably, this seems to have been posed as a solution for the apparent problem of retirees holding onto their savings. The driver for product development should be equity of access for those with minimal savings. This might mean the industry needs to start seriously considering equity release products, or allowing direct interaction between super drawdowns and payments to aged-care providers.

QUALIT Y CARE

A third important area of focus is the agedcare system itself. If funds accept that most of our members will eventually have to use the aged-care system, then we have an obligation to question whether that system is structured to their advantage. What tax and social security policies are currently discouraging product innovation? Should the super system play a broader advocacy role as reform to government subsidies is contemplated, with its potential impact on the eligibility of our members for pension entitlements? One thing is clear, interaction with the aged-care system is inevitable for the majority of Australians. A sophisticated retirement system such as ours should be able to account for this comprehensively, to deliver equity of access and a fair policy structure.

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Masters Program Executive Education for professionals in the superannuation and financial services industry. FEAL and Melbourne Business School have developed a unique postgraduate program for executives in the superannuation and financial services industry. The flexible program structure comprises 12 residential modules. Executives can undertake individual subjects or combine four or more modules to receive a Grad Cert., Grad Dip. or Masters in Organisational Leadership.

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DIGITAL STATEMENTS AND

a star chat-bot

Digital member statements, live chat agents and Roger the chat-bot have all helped REST INDUSTRY SUPER improve MEMBERS’ ENGAGEMENT with their super and insurance. By Beth Parkin

| General manager, customer service, at REST Industry Super

IN 2016, REST Industry Super launched digital annual member statements. Through data and insights, we learnt what information members want and how they want it, including some valuable revelations into their engagement with insurance. In the first year we offered it, 1.4 million of our 2 million members opted to receive a digital statement. One of the best parts of going digital was that we saved our members $900,000 a year in print costs, recurring year on year. Of course, members can continue receiving paper-based statements if they wish. Our first digital statement was designed to be industry leading – optimised for all devices, visually appealing, easy to read and more interactive, to drive better member outcomes.

HIGHLIGHTING INSURANCE

The digital statement helps members see easily where insurance sits within their superannuation account. It includes an interactive display of personalised insurance benefits and our member centre contact details, should they wish to change their cover, update their personal details, or nominate a beneficiary. Digital distribution also enabled us to

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deliver statements in real time, which means we are now able to track who has received theirs and send reminders to those who didn’t. Detailed reporting and analytics track member interactions, such as the log on time and time spent viewing the statement. Given the relatively young age of REST members, improving digital member services is an obvious priority, but it is not just for young people. In 2016, 85 per cent of our pensioners opted to go digital.

POSITIVE RESPONSE

In the months following the distribution of our first digital statement, we surveyed members about it. They told us they found it easy to log on, navigate and understand the information. Many told us they preferred the digital statement, citing their ability to view and save it easily, as well as their accessibility to further information, as the main reasons. Those are all positive things. But it was also incredibly valuable to find out what areas members wanted us to improve. Some said they still wanted a paper statement. So, we built in an option to print the statement direct from the digital version. Others told us they wanted more information about investment fees and returns, so we built in more hover buttons with explanations.

NEW CHANNELS

More generally, members told us they were confused when it comes to super and insurance – they don’t understand it and they want more help. In an effort to assist our members, we’ve added a direct link to chat with one of our live agents while also introducing more content into our virtual agent, ‘Roger’. We launched Roger the chat-bot in December 2016, and he has been doing a good job answering questions via the website 24/7. Roger has answered 2500 insurance queries so far. Questions like: What insurance do I have? How do I start an insurance claim? How long before I can make an income protection claim? Does the income protection cover pay me if I’m made redundant? How do I reduce or increase my insurance? And how can I cancel my insurance? This combination of Roger and real-life chat agents has been extremely successful for REST, with both channels receiving a consistent customer satisfaction rating of 95 per cent or higher. Our next area of focus, which will further improve our digital relationship with members, is social media. We see social media as an opportunity to continue to connect with our members, educate them on our insurance offering and alleviate any concerns they have relating to their super.

NOVEMBER 201 7

\ CIO PROFILE

the team from Funds SA, where he managed an $11 billion portfolio of domestic and international equities for the South Australian public-sector superannuation fund. “Paul had the right heritage…We really wanted a hands-on person with experience in the day-to-day realities of running a multi-manager fund,” Farmer says.

NEW CONSULTANT

HEN THE IOOF board named Daniel ‘Dan’ Farmer the firm’s incoming chief investment officer earlier this year, ahead of the retirement of long-time CIO Steve Merlicek, it allowed plenty of time to plan for a smooth transition. So, when Farmer officially stepped up to the role on July 1, 2017, he knew what his immediate priorities were: solidify the investment team, appoint a new asset consultant, and progress a technology project to support a whole-of-portfolio approach to risk. Not to mention the allimportant day job of overseeing the portfolio. “The priorities have been pretty clear to me, really, from being told I had the job back in February,” Farmer tells Investment Magazine. “Team is everything, so having the right people around me was the critical starting point.” One of the first things he did was argue for the promotion of strategist and international equities manager Stanley Yeo to the newly created role of deputy CIO. This also took effect on July 1. Yeo’s new title represents a “subtle but important” restructure within the team, the CIO says. “That strategy role is really important because it touches all the different asset classes,” Farmer says. “To my mind, it was important to reflect Stan’s seniority in the team, and I guess make sure he gets buy-in from all the portfolio managers.” Meanwhile, Farmer’s promotion had created a vacancy in the role of portfolio manager, Australian equities. In August, that was filled by Paul Crisci, who joined

NOVEMBER 2017

A recommendation from Yeo helped Crisci nab the job. A few years back, when Yeo was a consultant with Russell Investments, he advised Crisci at Funds SA. In that consultant role, Yeo also advised IOOF, before coming in-house in 2010. With Russell exiting the asset consulting market in Australia this year, IOOF needed to run a tender to appoint a new consultant. Farmer and Yeo worked closely together on this project in the months leading up to officially commencing their new roles. Mercer took over as IOOF’s new asset consultant from the start of the 2017-18 financial year. The firm won the tender thanks to its “strong cultural fit with the team” and “the strength and broad sweep of their research”, Farmer says. Melbourne-based David Stuart is now the lead Mercer consultant working with IOOF. “Advice on dynamic asset allocation and tilting is really the key component of the service we look for from Mercer,” Farmer says. Stuart and his team at Mercer report directly to Farmer, rather than to the IOOF investment committee. Unlike at many super funds, the board designates significant responsibility to the CIO. Farmer’s predecessor, Merlicek, who remains on the IOOF investment committee,

is well-known in the industry for his successful track record built on excellence in asset allocation. Farmer has worked closely with Merlicek for the last 20 years, first at Telstra Super before both moved to IOOF, and is wellpositioned to carry the torch. “Steve and I worked together for 20 years. Back in the ’90s at Telstra Super we were one of the first Aussie super funds to go active [with dynamic asset allocation and tilting],” Farmer recalls. “Then we implemented a similar strategy here at IOOF…So I really have been on the journey with him and feel very comfortable in the transition.”

A DYNAMIC APPROACH

Central to the portfolio management philosophy is that it is the internal investment team’s job to “get those big sweeping moves right” and let the external managers trade and make money off the small moves. “The view I take, and it’s followed on from the view established with Steve, is it’s really when you see markets at pretty big extremes that you take significant moves,” Farmer says. “For a multimanager like us at least…it’s really about trying to capture those big market risks or opportunities, not day-to-day trading off small moves.” Figuring out what the next big moves in markets will be is tricky. “It’s somewhat challenging at the moment, as we don’t see any of the major markets as extremely attractive. It’s really a case of trying to find those niche ideas and being active to generate an attractive return,” Farmer says. “We’re not overly negative but the outlook is not as strong as it has been.” IOOF’s current asset allocation is fairly close to its benchmarks on most major asset classes. “We’re a little bit underweight at Aussie equities in favour of international equities,

It’s really a case of trying to find those niche ideas and being active to generate an attractive return

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CIO PROFILE \

Sweat

b i g s t u ff | THE |

IOOFâ&#x20AC;&#x2122;s new chief investment officer is looking to REDUCE CORRELATED RISK and DIVERSIFY into alternative assets, with an assist from an ambitious software project. Edited by Sally Rose + Photos Mark Dadswell

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NOVEMBER 201 7

\ CIO PROFILE

D a n i e l Fa r m e r IOOF HOLDINGS CHIEF INVESTMENT OFFICER

Appointed July 2017 PREVIOUS ROLES 2010 – 2017 1993 – 2010

IOOF Holdings, portfolio manager, Australian equities Telstra Super, senior executive, investments

QUALIFICATIONS 1996

Master of commerce (honours) from the University of Melbourne

1993

Bachelor of economics (honours) from La Trobe University

IOOF Holdings COMPANY DETAILS MANAGING DIRECTOR: Christopher Kelaher CHAIR: George Venardos BASED: Melbourne OTHER OFFICES: Sydney, Adelaide, Brisbane, Hobart and Auckland FUND TYPE: Retail TOTAL FUMAS: *$147.2 billion ($20.6 billion under management, $126.6 billion under advice and supervision) ASX-LISTED MARKET CAPITALISATION: *$3.3 billion NUMBER OF CLIENTS: *500,000 TOTAL STAFF: *2000 NUMBER OF INVESTMENT STAFF: 10 INVESTMENT PRODUCTS: IOOF MultiSeries, IOOF MultiMix, IOOF WealthBuilder and Shadforth products *Figures as at June 30, 2017

NOVEMBER 2017

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CIO PROFILE \

which has performed very well for us over the last few years,” Farmer says. “We continue to hold that tilt, although I’m reviewing whether we begin closing that up.” Within the equity portfolio, more money is due to flow into emerging-market strategies. In the fixed income portfolio, IOOF has been short on duration for the last few years, another play that has performed well. “We see inflation sort of picking up but only very moderately; it is very hard to see a sharp spike in inflation from here,” Farmer says. “So we’re beginning to add a little bit of duration back into our portfolios, opportunistically via a futures overlay.”

We’ve been reducing our traditional macro strategy hedge funds in favour of more systematic multi-strategy funds

UPPING ALTERNATIVES

The most significant change he expects to make to the portfolio through the back half of 2017 is increasing the allocation to alternatives. As at June 30, the alternatives portfolio – which includes hedge funds, liquid alternatives, private equity and private credit – represented about 8 per cent of IOOF’s total $147.2 billion in funds under management, advice and supervision (FUMAS). “We’ve actually been reducing our traditional macro strategy hedge funds in favour of more systematic multi-strategy funds,” Farmer says. “We see that more systematic multi-strategy approach as giving us a more predictable return outcome.” In building out the alternatives portfolio, Farmer is hunting for new sources of return that are not overtly driven by the direction of equity or bond markets. “It’s going to be really opportunity based… The private debt space is interesting at the moment, with the banks pulling back, so opportunities will probably exist there,” he says. “One of the other areas we are looking to see if we can build is co-investments.” Opportunities to buy into good global private-equity funds at a discount on the secondary market are also being looked at with keen interest. “We’ve also looked at some other niche areas such as agriculture, but are a little bit

worried about valuations at the moment,” Farmer says. “Likewise, we’ve looked at, but backed away from, increasing our allocation to infrastructure due to stretched valuations.” IOOF’s Sydney-based head of alternatives, Ray King, is also working on closing more direct commercial Australian property deals in the $20 million to $50 million range. “The direct property fund we run out of Sydney is a niche strategy, but they’re generating strong yields off those properties and for quite low risk with minimal gearing,” Farmer says. “We don’t need capped rates to fall further, we don’t need valuations to lift, for that to stack up. The running yield of those properties is attractive to us at the moment and we think that’s a relatively conservative and safe place to generate a reasonable return.”

A VIEW TO RISK

As IOOF diversifies and expands it alternatives holdings, it will become more important than ever for the CIO to have a clear view of risk across the total portfolio. That is why Farmer is focused on completing the rollout of a universal portfolio management software system across the whole fund. “We’ve been running it across Aussie equities and international equities on a

IOOF Holdings GROSS RETURNS | As at 30 June 2017 5 YEARS CHANT WEST SURVEY

TRUST

Balanced (41-60%)

IOOF MulitMix Moderate Trust

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RETURN (%PA)

QUARTILE

9.8

1st

standalone basis for quite a long time, and I’ve found it very useful for managing my own portfolio and also for feeding into discussions about asset allocation,” Farmer says. In recent months, the fixed income portfolios have been loaded into the system. Next up will be the more challenging task of incorporating alternatives. Farmer says it is “obviously a challenge” to get all the data required to record some of the fund’s more idiosyncratic alternative assets in the centralised portfolio management system. “But it is a priority for me as CIO,” he says. “It really helps provide a clear view on risk. For instance, having now entered the fixed interest portfolio, we have a much fuller picture of what our currency risks are.” The technology and systems project will also make compliance with the Australian Securities and Investments Commission’s Regulatory Guide 97 (RG 97) easier. Of course, given that most of IOOF’s business comes via advisers and platforms, the asset allocation of individual clients’ portfolios can vary greatly. The $3.3 billion ASX-listed wealth-management firm runs four main investment products: IOOF MultiSeries, IOOF MultiMix, IOOF WealthBuilder and Shadforth products. But the business is set to swell dramatically. In October, IOOF announced it had entered into an agreement with ANZ Banking Group to acquire its OnePath pensions and investments business, and aligned dealer groups, for a cash consideration of $975 million. The plan is to complete the deal within 12 months.

NOVEMBER 201 7

\ COLUMN

APRA implores an end to infighting The REGULATOR clarifies how reforms will affect board composition, the scale test and transparency, for the COMMON GOAL of better member outcomes. THE NATIONAL CONVERSATION around superannuation is always lively, but it has been even more so of late, which is no surprise, given how much there is to talk about. The federal government is advancing legislative bills to reform super fund governance arrangements and improve trustee accountability and member outcomes. To supplement these reforms, the Australian Prudential Regulation Authority has proposed amendments to how we assess the performance of registrable superannuation entities (RSEs). As the rhetoric ramps up in response to all the impending changes, it’s easy to forget that the government, super fund trustees and APRA all share the same ultimate goal: to improve outcomes for fund beneficiaries. Parliament will ultimately determine whether the government’s legislation passes as tabled. Still, it is a good time for APRA to clarify some aspects of how the expected reforms will probably affect trustees and outcomes for beneficiaries.

BOARD REFORM

APRA is on record as supporting the notion that more independent directors on boards can enhance decision-making by providing a broader pool of skills to draw on and promoting diversity of views. There is no reason why this should alter a trustee’s business philosophy or model; nor does this reform target any one industry sector. While some in the industry contend existing arrangements serve their beneficiaries well, that doesn’t mean an injection of independence wouldn’t produce even better decision-making and beneficiary outcomes.

NOVEMBER 2017

outcomes assessment applies to all APRA-regulated super funds, as outlined in APRA’s letter to RSE licensees on August 11, makes sense, given more than 60 per cent of Australians’ super is held in non-MySuper accounts. In the case of both MySuper and Choice products, trustees are expected to compare their product’s performance against ones with similar investment risk profiles. The focus of the process should be on trustees identifying where their product may be underperforming and rectifying any shortcomings.

INCREASED TRANSPARENCY

Proposed changes to reporting standards aimed at giving APRA greater visibility over fund expenditure have been interpreted by some as a crackdown on some types of payments to unions and employer groups. This is not the case. Rather, the powers seek to ensure that all trustees can demonstrate that expense decisions were subject to an appropriately BY robust decision-making process HELEN ROWELL and are in the best interests of beneficiaries. If the introduction of greater Helen Rowell is deputy chair of the Australian Prudential transparency makes some trustees Regulation Authority. baulk at certain amounts or types of expenses, then that may speak for itself about the extent those payments were truly in the best interests of beneficiaries.

BENEFICIARIES FIRST

OUTCOMES TEST

The government has said it will expand the existing scale test for MySuper products into an ‘outcomes test’. APRA recognised several years ago that bigger wasn’t necessarily better when it came to super fund performance, and encouraged trustees to go beyond the minimum scale test assessments to consider a broader range of indicators of performance and sustainability. A range of metrics APRA outlined in a letter to all RSE licensees on August 31 should already be front of mind for most trustees as they seek to optimise beneficiary outcomes and keep their funds sustainable. The pending legislation largely codifies what APRA expects – and many trustees are already doing – in relation to MySuper products. But it will put additional pressure on outliers in terms of performance. Modifying the prudential framework so an

With Australia’s superannuation pie now worth more than $2.3 trillion, it’s inevitable any proposed changes will encounter fierce lobbying from those anxious to protect or expand their slice. All trustees should be mindful of the optics of such a battle, and the damage it could cause to the industry’s reputation if trustees seem primarily focused on themselves. As a principles-based organisation, APRA does not prescribe how trustees should structure their businesses or spend money. These are decisions for trustees and will remain so. But by elevating the robustness and quality of trustee decision-making processes, APRA believes these reforms can deliver what all of us are seeking: better outcomes for fund beneficiaries. Helen Rowell will address the 2018 Investment Magazine Chair Forum.

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INVESTMENT MAGAZINE

CHAIR FORUM

JANUARY 29-31, 2018 RACV HEALESVILLE, VIC

LEADING IN AN AGE OF RADICAL UNCERTAINTY The country’s pre-eminent event specifically for chairs of boards and chairs of investment committees brings together investors to discuss governance and investment best practice. PROGRAM HIGHLIGHTS y The qualities for survival in an era of radical uncertainty – a conversation with formerly jailed foreign correspondent, PETER GRESTE y The regulatory environment and expectations from APRA – HELEN ROWELL y 25 years of mandated super: what’s missing and how to solve it – JOHN BRUMBY, chair, MTAA Super – DAVID KNOX, author of the Melbourne Mercer Global Pension Index – JENNI MACK, director, Sunsuper, former chair of CHOICE – CHAIR: LEIGH SALES, journalist and anchor, 7.30, ABC TV y Investment and corporate governance – Q&A with JIM CRAIG, chair, investment committee, AustralianSuper y Learning from ASX-listed chairs, in partnership with the Australian Institute of Company Directors

chairforum.com.au CONTACT Amanda White

amanda.white@top1000funds.com 02 9227 5710

\ COLUMN

TELEVISION JOURNALIST LISA Wilkinson’s shock departure from the Today show recently reignited public discussion about the gender pay gap. The saga over Wilkinson’s break-up with Channel Nine coincided in the news cycle with the fallout of sexual abuse and harassment allegations against movie producer Harvey Weinstein. Breakfast TV and Hollywood may seem a long way from the world of superannuation, but the message to take is that we need to act decisively and with lasting impact to address imbalances of power and position. This is true whether they exist in the companies we invest in or within our own organisations. Wilkinson’s seven-figure salary and potential future earning power mean her situation is very different from the average female worker. But her fight to achieve parity illustrates a broader problem of blatant pay discrimination in like-for-like roles. Using Australian Bureau of Statistics data for the 2016, the Workplace Gender Equality Agency (WGEA) calculated the national gender pay gap to be 15.3 per cent for full-time employees, a difference of $251.20 a week. WEGA also found the financial services industry had a staggering 29.6 per cent gender pay gap, the biggest of any major sector in the economy.

A PERPLEXING PROBLEM

Why and how this is the case despite the prevalence of so many talented and confident women working in our financial and insurance services sector is as perplexing as it is complex. So, what can be done about it? In instances where women are being paid

less for performing work of the same value, the case for immediate action is clear. Where direct discrimination is not to blame, determining the right course of action is less obvious. Within the superannuation industry, human resources managers routinely point out how challenging it is to achieve and maintain gender balance within highly paid, and male-dominated, investment management and information technology teams. Many trace the problem right back to the low take-up of maths and science subjects among female students in schools and

CHANGE AFOOT

BY EVA SCHEERLINCK

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

Wilkinson and Weinstein sagas calls to action A rash of NEWS HEADLINES highlighting the many forms of DISCRIMINATION women face in the workplace should act as a timely reminder to ACT decisively for change. NOVEMBER 2017

universities. We see evidence of this in the Australian Institute of Superannuation Trustees’ (AIST) long-running super graduate program, where male applicants for graduate investment roles far outnumber females – typically by a ratio of at least 10 to 1. But there are also problems at the top. A recent WGEA report showed that organisations with balanced representation of women in executive leadership roles typically have half the pay gap of organisations with minimal female leadership. On average, the managerial gender pay gap is about 15 per cent at firms where 20 per cent of managers are female, and falls steadily to 8 per cent at companies where 80 per cent of managers are female. AIST recently completed research among our member funds. While the research was not designed to examine pay levels, an analysis of the talent pipeline across the 16 profit-to-member funds involved revealed funds still hiring more men than women for senior positions. AustralianSuper, whose chief executive Ian Silk is a member of the Male Champions of Change, is one fund that has been proactive in trying to tackle the gender pay gap. The fund is committed to eradicating the gap in its investment team, but admits it is difficult to attract women into investment roles. Excluding the investment department, the overall gender pay gap at AustralianSuper sits below the national level, at 10.7 per cent, and, pleasingly, the fund has no gender pay gap in like-for-like roles.

NO EXCUSES

Australia-wide, financial services is the third best-paid sector for women. Other top-paying industries, like mining and technology, are also male-dominated, while female-dominated industries, like teaching or nursing, pay less. But relatively well paid or not, there is simply no excuse for like-for-like gender pay gaps in our sector. Gender diversity brings numerous benefits to an organisation. We must not lose momentum in fighting the grossly unfair systemic discrimination against women, through which not only women – but society and the economy as a whole – suffer.

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14-16 MARCH 2018 CONFERENCE OF MAJOR SUPERANNUATION FUNDS 2018 REGISTER BY TUESDAY 12 DECEMBER TO SECURE EARLY BIRD PRICING

CONFIRMED SPEAKERS

Willis Sparks Eurasia Group (USA)

Jessica Ellerm Zuper

Bronwyn van der Merwe Fjord

Sam Stubbs Simplicity (NZ)

Dr Fiona Kerr University of Adelaide

Simon Cowan Centre for Independent Studies

Kellie Northwood Australian Catalogue Association

Jill Klein Melbourne Business School

FOR MORE DETAILS AND TO SECURE YOUR TICKET VISIT AIST.ASN.AU

\ COLUMN

Tackle social inequality Side by Side Leaders from the financial services industry need to step up to address the growing problem of socioeconomic marginalisation. THE GAPS IN our community, both economic and social, are widening and more people are slipping by the wayside. Those of us who work in the financial services industry might in many ways be far removed from this problem, but we don’t have to look too far to see there are many people struggling. A growing number in our society are socially marginalised, a trap that is hard to escape. At Wayside Chapel, a charity based in Kings Cross, Sydney, we operate at the raw edge of social marginalisation. Wayside’s staff members see vividly what happens to individuals, families and the community at large when marginalisation increases. Our work also offers unique insights into what we as individuals, and as a society, can do to contribute to positive change.

INTERGENERATIONAL TRAP

Wayside doesn’t aim to fix anyone, solve their problems or classify people as well or unwell. Our mission is to create a community without ‘us and them’, under the creed of ‘love over hate’. Big drivers of marginalisation, aside from the obvious financial factors, include poor access to education and health services, and mental health issues. These challenges can lead to intergenerational marginalisation, creating a poverty trap for the socially isolated for generations to come, a trap that just gets harder to escape from. Clearly, the reasons underlying this are complex and cannot be trivialised. Nor is there one easy, quick fix. Perhaps above all, what is needed is a greater appreciation of

the real extent of the problem and a genuine debate about possible solutions. One cannot help but think what we also need is a good injection of common sense, tolerance and understanding, rather than populist one-minute sound grabs that lack substance.

NEW HOPE

In this spirit, Wayside Chapel is delighted to launch a new event called Side by Side, designed to be a meeting of minds to discuss and debate how we can start to move the needle on social inequality. Side by Side presents an opportunity for the financial sector to show leadership and innovation in dealing with social marginalisation. We all know the finance sector plays a crucial role in our overall economic wellbeing. We know the sector includes many individuals who are caring, compassionate and philanthropic, and understand the value of a fair and equitable society. However, fairly or not, our sector is constantly being judged. The harsh reality is that many people view the financial sector with an element of mistrust and see those operating within it as motivated simply by narrow self-interest and greed. There is much to be done in order to rebuild the industry’s image and regain trust within the broader community. Side by Side will bring all of these issues

What is needed is a greater appreciation of the real extent of the problem and a genuine debate about possible solutions

BY IAN MARTIN

Ian Martin is chair of Wayside Chapel. He is also chair of UniSuper and Argo Investments.

into focus and, most importantly, stimulate a conversation about how we can better build a more inclusive society. It will bring people from diverse backgrounds together; those who have much and those who don’t, those from different sectors and those of different ages, those who are housed and those who are not – all meeting to achieve one goal. The financial sector has an abundance of knowledge, skills and levers that can be applied to some of our most pressing social challenges and, working together, we can play a crucial role in helping create a fairer, more equitable and more tolerant society. Side by Side is being made possible by our partners Conexus Financial, the Financial Services Council, PortfolioConstruction Forum and Hattonneale.

If you would like more information about Side by Side, please contact events@thewaysidechapel.com and put Side by Side in the subject line.

NOVEMBER 2017

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A VOLUNTEERING DAY YOU CAN PUT YOUR HEART INTO The Wayside Chapel invites you and your colleagues to spend a day in Kings Cross learning about life on the streets and lending a helping hand to the most vulnerable people in our community. Come to hear about lived experiences of homelessness, learn about local social issues, and cook and serve a lovingly prepared meal. Youâ&#x20AC;&#x2122;ll leave with a different perspective of the people you pass in the street, and a whole lot of love.

an AWAYSIDE day A TEAM EXPERIENCE LIKE NO OTHER

FOR MORE INFORMATION AND BOOKINGS: EMAIL: groupvolunteering@thewaysidechapel.com PHONE: 9581 9101

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Sustainable Income | Capital Growth | Beating Inflation | Meeting Liabilities

For today’s investor

For distribution to institutional and accredited investors. Aviva Investors Pacific Pty Ltd (‘AIPP’, ‘we’, ‘us’, or ‘our’) (ABN 87 153 200 278, AFSL 411458) is the issuer of this advertisement and is wholly responsible for its contents. The Aviva Investors Multi-Strategy Target Income Fund (the “Fund”) is a registered and managed investment scheme un the Corporations Act and is available both wholesale and, via investment platforms, retail investors in Australia. For more information about the Fund objectives and investment policy, please refer tot eh Product Disclosure Statement, which may be obtained from AIPP at Level 50, 120 Collins St, Melbourne VIC 3000, Australia or its website, www.avivainvestors.com.au. No part of this advertisement is intended to constitute advice other than general advice (as defined in section 766B (4) of the Corporations Act), or make a recommendation of any nature. Prospective investors are advised to seek advice from their financial adviser. This advertisement is intended only for use in Australia and should not be replied on in any other jurisdiction. Aviva Investors Pacific Pty Ltd, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investment Commission. Business Address: Level 50, 120 Collins St, Melbourne VIC 3000, Australia. 20170223_03