Investment Magazine Dec17-Jan18_Issue 145

INTELLIGENCE FOR INSTITUTIONAL INVESTORS

ISSUE 145

DEC 2017 – JAN 2018

Active and

DETERMINED CareSuper chief investment officer SUZANNE BRANTON has a long-term plan for the fund’s success

PRI IN PERSON LEADING GLOBAL PENSION FUNDS, INCLUDING GPIF AND ABP, SHARE THEIR ESG STRATEGIES CHAIR’S SEAT QSUPER’S KARL MORRIS ON TAKING THE FUND PUBLIC OFFER AND BOARD LEADERSHIP PROFESSIONALISM AUSTRALIANSUPER’S MARK DELANEY AND CFSGAM’S MARK LAZBERGER MUSE ON THE FUTURE OF THE INDUSTRY HONOUR ROLL FULL LIST OF FINALISTS IN THE 2018 CONEXUS FINANCIAL SUPERANNUATION AWARDS

MANY DESTINATIONS, ONE FIXED INCOME MANAGER In a world of uncertainty, investing in fixed income requires a different approach. As one of the world’s largest global fixed income managers with over 170 investment professionals and more than 30 years’ fixed income investing experience, Franklin Templeton Investments delivers a range of solutions ready to help investors reach their fixed income destination.

Learn more at franklintempleton.com.au/fixedincome

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 DEC 2017 – JAN 2018

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CHAIR’S SEAT

“The key to helping a board get big decisions right is making them in a considered and consensus way” – KARL MORRIS – CHAIR | QSUPER

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CIO PROFILE CareSuper chief investment officer Suzanne Branton is keeping a close watch for signs of a turning point in markets as the interest rate cycle turns.

PRI IN PERSON Leading global pension funds – including GPIF, AP2, ABP, CalSTRS and CalPERS – shared their ESG strategies at a gathering in Berlin.

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ROUNDTABLE At a recent roundtable hosted by Investment Magazine, in partnership with BlackRock, nine experts discussed how they are rethinking implementation strategies.

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ESG The Future Fund and First State Super are among leading asset owners initiating a new dialogue with managers about environmental, social and governance risks in private markets.

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ENGAGEMENT ESSSuper has applied behavioural finance theory to make a game of retirement planning, with its new digital tool AssistMe, fund chief executive Mark Puli explains.

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ETHICS The CFA Australia Investment Conference 2017 shone a light on the important role individuals’ values play in creating fair and efficient markets.

SHORTLIST All the winners in the 2018 Conexus Financial Superannuation Awards will be announced at a gala dinner in March. Ahead of that, check out the full list of finalists.

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PROFESSIONALISM AustralianSuper’s Mark Delaney and CFSGAM’s Mark Lazberger muse on the future of the industry, unprecedented market conditions and new technologies.

CSRI The Committee for Sustainable Retirement Incomes has been heartened by Minister Kelly O’Dwyer’s support of its calls for retirement income frameworks, Patricia Pascuzzo writes.

D E C 201 7 – JA N 201 8

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\ 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 STANDOFF OVER RG 97 REVIEW

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 AUSTRALIAN SECURITIES and Investments Commission’s deeply unpopular ‘RG 97’ rules are destined to preoccupy superannuation regulatory compliance teams for a third year running in 2018.

A collective sigh of relief could be heard in November when ASIC announced a review of the regime just weeks after it had come into effect.

For a brief moment, some pondered if swathes of the much-maligned Regulatory Guide 97: Disclosing Fees and Costs in PDSs and Periodic Statements might be headed for the dustbin.

But it is hard to imagine how, after so much signalling and argy-bargy, the regulator could step back from the new rules in any meaningful way without losing face.

The review will probably lead only to yet another extension on the deadline for compliance, plus a few minor tweaks (mostly likely around the most problematic areas of disclosure, such as reporting property management costs).

That is a shame, because RG 97 is a classic case of good reform intentions gone horribly pear-shaped.

Its aim was to usher in a period of greater transparency for consumers, an idea that is very hard to argue with in principle. But the practical realities are far more complex.

For one thing, it is a pretty well accepted fact that making financial institutions produce longer reports that no one outside their compliance department reads is a lousy way to engage consumers. Especially given

DEC 2017 – JAN 2018

various studies suggest nearly half of all Australians don’t even know where their superannuation is or how much they have – let alone whether they are in the right investment option and have an appropriate level of insurance cover.

Fees matter. A lot. But not as much as net returns, so massive data dumps on the make-up of fees and costs are not particularly informative.

Inconsistent application of the requirements is another problem.

ASIC, like the government, has insisted that RG 97 is designed to apply evenly across the industry and retail fund sectors – but it is unfathomable how this can be true when products sold via (bank-owned) platforms are exempt.

Fixing this is the most important thing ASIC could do if it truly wishes to make it easier for the general public to compare the value for money investment fees represent across the super industry.

Despite there being much ASIC could have done to better manage the design and consultation of RG 97, industry players are not without blame in this debacle. It has been frustrating to see many funds take a disingenuous approach, crying ‘it’s all too hard’.

Yes, RG 97 will make some investment strategies appear more expensive. If the management and trustees of a fund believe that strategy is in the best interests of members, then they are simply going to have to find a way to explain that.

CHIEF EXECUTIVE

Colin Tate

ADVERTISING BUSINESS DEVELOPMENT MANAGER

Karlee Samuels

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

Sean Scallan

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

Elizabeth Notman

elizabeth.notman@conexusfinancial.com.au (02) 9227 5718 CLIENT RELATIONSHIP MANAGER (EVENTS)

Bree Napier

bree.napier@conexusfinancial.com.au (02) 9227 5705, 0451 946 311

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Exclusive Media Partner of

ADVISORY BOARD MEMBERS Graeme Arnott, chief operating officer, First State Super | Richard Brandweiner, partner, Leapfrog Investments | Peter Curtis, head of investment operations, AustralianSuper | Joanna Davison, chief executive, FEAL | Kristian Fok, executive manager for investment strategy, Cbus | Damian Graham, chief investment officer, First State Super | Sheridan Lee, principal, Shed Enterprises | Geoff Lloyd, managing director, Perpetual | Graeme Mather, head of distribution, product and marketing, Schroders | Damien Mu, chief executive, AIA Australia | Mary Murphy, chief digital officer, First State Super

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\ CIO PROFILE

Determined

last

to

Nearly two years after taking on the role of chief investment officer at CareSuper, SUZANNE BRANTON is building out her team and settling in for the long haul.

By Sally Rose + Photos Nicole Cleary

DEC 2017 – JAN 2018

investmentmagazine.com.au

CIO PROFILE \

EVERY WORKDAY MORNING at 9, the CareSuper investment team gathers for its daily meeting. The ritual is a legacy of chief investment officer Suzanne Branton’s years in the world of investment banking, although in her days as a young money manager at the Goldman Sachs-owned JBWere Asset Management, the morning meeting started at 7.

“It was one of the challenging things I did very early in my career, and I think it taught me a lot, having to present to a couple of hundred people first thing in the morning,” Branton recalls.

Even though the CareSuper investment team numbers fewer than 10 people, the discipline still has enormous value.

“We are a fully fledged investment team and investment issues are the first topic of discussion every day,” Branton says. “Not in the context of something that happened last night…but [regarding] how our strategy is evolving.”

Team members talk about the managers they are meeting with and what they want from them.

“It’s a way to have all of those things known and monitored by the team…I’m not ever going to be splitting off sub-meetings. We deliver members a whole-of-fund return, so let’s have a whole-of-fund commitment to what it is we’re doing.”

Branton has recently implemented a program to deepen the integration of environmental, social and governance (ESG) risk management across the fund.

“The expansion of our ESG work has been about integrating the consideration of those factors more deeply into the research we’re doing on managers and their strategies as a whole, as we’re looking at them, and investigating them, and reviewing them,” she says.

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DEC 2017 – JAN 2018

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S uz a n n e B ra n t o n CARESUPER CHIEF INVESTMENT OFFICER

TEAM BUILDER

Developing a cohesive, collaborative team with a shared investment philosophy has been her greatest achievement since she left her previous role as a senior investment manager at Equip Super to join CareSuper as CIO nearly two years ago, Branton says.

Investment team members each bring an area of specialisation but must make decisions according to a whole-of-portfolio approach.

“There’s no capital allocation to individual people. You can still have specialisation and specialist skills, as long as you don’t make investment decisions in a siloed way.”

At the time of writing, a ninth member of the CareSuper investment team was due to be announced, and the CIO was foreshadowing more hires in 2018.

CareSuper is a Melbourne-based public offer industry super fund with origins in servicing clerical and administrative workers.

Virtually the entire $13.1 billion portfolio is managed externally and, especially in light of Branton’s previous experience running money directly, the question often arises whether CareSuper is set to join the growing roster of industry funds that have insourced part of their asset management.

The answer is no – at least not anytime soon.

“We do some things like cash and term deposits internally, but predominantly it’s all externally managed,” Branton says. “How that will go over time, we shall see. But at the moment, there’s no immediate plan to change from that.”

For a fund of CareSuper’s scale, outsourced investment management is the most efficient model, she argues.

“We’re not constrained in what we’re trying to achieve and what we do by what’s available to us. Probably because we are able to…invest in things that are niche, capacity constrained, opportunistic and concentrated.

Because we’re able to both do and find all those things, the efficiencies that would come from managing some bulk assets internally aren’t immediate.”

The day may come, however, when Branton will have to consider the needs of a fund with much greater scale.

After all, when asked how long she plans

Appointed February 2015 PREVIOUS ROLES 2006-15 1998–06

1993–98

Equip Super, senior portfolio manager JBWere Asset Management and Goldman Sachs Asset Management, investment strategist JBWere, economist

QUALIFICATIONS Fellow of the Financial Services Institute of Australasia

to stay in her role, Branton answers: “A long time. It will take me to the box, I think…

It gives me a great amount of pleasure and satisfaction to do what we do.”

ORIGINS IN ECONOMICS

Branton began her career in what she describes as “the murky world” of economics, which she says has left her with a lingering “interest in all things macro”.

“I’ve always been a person that is particularly interested in trying to identify major turning points and when conditions are really changing in a sustained way, as opposed to the things that come and go on a month-to-month basis,” Branton says.

When asked if global markets are on the cusp of such a turning point as the US Federal Reserve’s interest rate tightening cycle gathers steam, Branton is circumspect.

“What I would say is these things never are clear at the time,” she says. “It does feel to me as though we’re at the tail end of an interest rate cycle where [they’ve] just continuously fallen over multiple years. It feels like that is most likely done and we’re coming into something else, where interest rates can go both up and down.”

The prospect of a return to more market volatility is something Branton would cautiously welcome.

“I’m always cautious about welcoming volatility; a part of me does but welcoming volatility is welcoming the potential for poorer outcomes for our members, which we never want,” she says. “But volatility that we can recover from, where the medium-term outlook is still constructive for our members – yes, that would be good.”

DEC 2017 – JAN 2018

Graduate diploma of applied finance and investment, Securities Institute of Australia Bachelor of economics (honours), Monash University

CareSuper Chief executive: Julie Lander Chair: Catherine ‘Cate’ Wood Based: Melbourne Fund type: Public offer industry fund Total FUM: *$13.1 billion Contributing employers: *66,717 Number of members: *247,402 Average account balance: *$52,662 Total staff: 86 Number of investment staff: 9 *As at June 30, 2017

HISTORICAL PERFORMANCE *As at June 30, 2017

9.6 10.0 6.0

11.7

11.1

8.2

8.9

10.5

7.6

4.8

10 YEARS 7 YEARS

5 YEARS

3 YEARS

1 YEAR

(% PA)

CareSuper balanced (MySuper) option Median return SOURCE: SuperRatings Fund Crediting Rate Survey – SR50 Balanced (60-76) Index, June 2017.

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CIO PROFILE \

RISKS AND ADJUSTMENTS

While not an immediate worry, it is never far from Branton’s mind that the biggest risk to the CareSuper portfolio today is the level of interest rate sensitivity inherent across the investment program that has been built up over a decade of extraordinarily loose global monetary policy.

“It doesn’t look as though that is going to be tested by the long end at the moment,” she says. “If anything, yields just don’t seem [like they’re] going to move up very far. But the most comprehensive risk that I think about, that would affect the investment program as a whole, is really that interest rate sensitivity that is now embedded in a lot of the asset classes we invest in.”

And that’s despite the fund now having a low allocation to fixed income markets.

Reducing that exposure was one of the first things Branton implemented when she arrived at CareSuper two years ago.

Not only are many listed companies now in a position where their balance sheets are interest rate sensitive, but also the valuations in infrastructure, real estate and infrastructure markets are now typically more stretched and interest rate sensitive.

“The question in my mind is to what extent is the valuation of our investments and their ability to deliver return in the future dependent on a low-volume environment,” Branton says. “Mind you, there aren’t any particular signs that environment is about to change dramatically any time soon.”

One thing is for sure, the market outlook for the next 25 years looks different to the one in which the superannuation industry has been operating since Australia’s compulsory system was introduced in 1992.

It was around then that Branton started running superannuation money, and she suspects memories of working through a string of financial market crises over that time shape her approach, even if only subconsciously.

Early in her career as a money manager, the 1994 bond crash hit, followed by the Asian crisis of 1997, then came the dotcom bust in 2001, before the global financial crisis seven years later. They have all been formative experiences.

“I distinctly remember, as though it was yesterday, the bond crash in 1994,” Branton says. “Maybe that’s a help, maybe it’s a hindrance in some ways, to have such a long memory…But I think it makes you cautious and it helps [you] have a long-term

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DEC 2017 – JAN 2018

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\ CIO PROFILE

perspective when you’ve worked through those sorts of events.”

Branton is now approaching opportunities in listed equity markets “with a great degree of caution”, but notes she is less negative on the outlook for shares than many.

DOWNSIDE PROTECTION

“It will be challenging to get decent returns from here in just about anything, to be honest,” she says. “We’re going to need every single source of return we can possibly get.”

She is certain the answer lies in a disciplined approach to active management with a focus on net returns and portfolio diversification.

The fund has recently expanded its alternatives program. Like many of their peers, Branton and her team have been spending much time in recent months researching credit managers and absolute return-style managers.

“A lot of the credit work is orientated to a shorter duration, but it’s also about finding sources of return managed very actively,” she says.

The fund still maintains “an opportunistic private equity program” that focuses on looking for good deals, including secondary offers, mostly from US and European managers.

“It is more of a case-by-case thing as deals come up…We don’t feel compelled to be cornered into vintages or strategies that don’t appear to have strong return potential,” Branton says.

CareSuper’s allocation to alternatives, including infrastructure assets, now sits at about 30 per cent of the total portfolio.

The fund’s ‘home bias’ to Australian listed equity markets has been reduced under Branton’s watch since early 2015.

That’s partly due to the fact it makes sense to have a higher allocation to global shares to reflect the overall market structure, but it’s also a reflection of a subdued outlook for the domestic market.

To complement the highly active approach of the CareSuper strategy, the fund also has a program of downside protection.

“Across the investment program, everything is probably more active than the average,” Branton explains. “And our asset allocation is active as well. We’re up at one end of the active scale, and so we also focus a lot on downside protection. We deliberately build a defensive portfolio, not a neutral portfolio. So, as you would expect, we have a skewed performance profile that favours more difficult market conditions.”

In this way, the downside protection program is more fundamental than derivatives driven.

A focus on active and bespoke managers also means needing to be prepared to pay higher investment management fees, and that’s OK. “Our members retire on net returns, they don’t retire on what fees they’ve saved,” Branton says. “For us, it’s about value for money. We are prepared to invest in more complex strategies and things that are capacity constrained, but we endeavour to do that very carefully and prudently, and with a great deal of consideration.”

I don’t settle for OK, or it’s all fine, or that’s acceptable.

I don’t settle for that, and I never have. But people expect you to settle. They do. People still expect women to settle for what’s fine, or what’s been delivered

DEC 2017 – JAN 2018

GOVERNANCE UPGRADES

Soon after she joined the fund, CareSuper upgraded its investment review committee to a fully fledged investment committee with delegated powers.

This change, with the support of a program of director education and development, has fostered a stronger investment governance framework.

“You could ask any of our directors would we invest in a particular manager or strategy and they’d be able to tell you straight away,” Branton says.

She credits chair Catherine ‘Cate’ Wood and chief executive Julie Lander for their longstanding support of trustee education.

JANA is the fund’s asset consultant, with the account led by Steven Carew.

Managing these and other important relationships is a key part of the role for Branton, who believes investing is “part art, part science” and says one of her strengths is an ability to grapple with the intangibles.

“I’ve always been a big believer in character strengths and character traits, and the extent to which they frame the person’s work and what they do, and their career, and why they do what they do,” she says. “I think character traits are a really important part of people’s career and career development.”

And her defining character trait?

“Determination. I’m a very determined person.”

There is less overt sexism for her determined nature to contend with in the industry today, thankfully, than when she embarked on her career, but unconscious biases still feed into gendered expectations about how women are supposed to behave.

“I don’t settle for OK, or it’s all fine, or that’s acceptable. I don’t settle for that, and I never have,” Branton says. “But people expect you to settle. They do. This is my personal view.

This is one of the things I don’t think has changed. People still expect that women are going to settle for what’s fine, or what’s OK, or what they’ve been delivered.”

Branton mostly shrugs it all off, but it still rattles to be perceived as difficult in circumstances where male CIOs behaving similarly are more likely to be characterised as “strong, decisive, good businessmen”.

Fund managers who take this tone in fee negotiations should expect pushback.

“I absolutely fight for every dollar,” Branton says. “Every dollar, I fight for.

And I never settle. I never settle for anything less than what our members deserve.”

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COLUMN \

A force that transforms

component, but also an impact component.

As corporations redefine their purpose and not-for-profits (NFPs) adjust their attitude towards the financial measurement of outcomes, there is a growing awareness that all investments have an impact, be it positive or negative. This requires an ability to measure, report on and value impact – increasingly in monetary terms.

Focusing on longer-term characteristics opens up opportunities for deploying capital in exciting new ways that create social and environmental value.

IMPACT INVESTMENT is disrupting capital allocation in financial markets and reforming the not-for-profit sector.

THE RESPONSE TO the global financial crisis has created an explosion of debtinduced liquidity. This has resulted in inflated traditional asset values, causing stretched valuations and increasing concern about the market’s ability to deal with unexpected events.

Rising global political instability and populism are only exacerbating the perceived risk.

This is not a new phenomenon. Booms and recessions in the 1890s and 1930s led to policy intervention, including the breaking up of major corporations, increased taxation of monopoly businesses and stronger anti-trust legislation.

So how is the market responding this time around?

Impact investing is one tool helping to transform the way investors think about crosssector collaboration. Through impact investing, new opportunities are being identified within sectors operating in environmental and social areas, which have not previously been considered rich with potential.

MEASURING IMPACT

The rising interest in impact investing can be partially explained by a maturing of the way financial performance is measured.

Until the middle of last century, the sole measure of corporate performance was financial return. During the 1960s and 1970s, measurement of financial risks, through means such as capital asset pricing models and a focus on risk-adjusted returns, became increasingly important in the emergence of asset allocation theory and portfolio diversification.

BY CHRISTOPHER THORN

Christopher Thorn is the impact investment, social finance and philanthropy leader at EY Oceania.

This decade, we have seen further evolution, with companies being urged to consider financial impact alongside financial risk and financial return. Initially, this was seen in the form of triple-bottom line and environmental social and governance reporting, and was undertaken for corporate social responsibility and reputational reasons.

Now, measurement of environmental and social factors has become more sophisticated and this is helping facilitate how capital is allocated. Already, many organisations’ investment strategies are starting to consider not just the financial return and risk

Policymakers are considering new solutions to address the externalities that traditional allocation of capital creates investmentmagazine.com.au

EVIDENCE OF DISRUPTION

Evidence already exists that these types of impact investments do also generate appropriate risk-adjusted market returns.

The Goodstart Early Learning deal is one example that demonstrates the potential to build on networks across Australian corporate, government and philanthropic sectors when inspired by a compelling goal to invest for social impact.

Momentum is building from all sectors, with institutional investors responding to stakeholders’ demands that more purpose and impact be built into capital allocation and investment decisions.

ANZ Banking Group is just one case study of a traditional financial institution making an effort to transform itself into a purposeled organisation, giving increasing consideration to the social impact of its business practices. Given the significance of its footprint across Australia, ANZ doesn’t have the luxury of not getting involved in social and environmental challenges. It must take actions that have a positive impact.

NFP SECTOR EVOLVING

Government has traditionally seen the not-for-profit sector as the vehicle to fund community needs when there has been a perception of market failure. Now, NFPs are also facing massive disruption and reform.

Policymakers are considering new solutions to address the externalities that traditional allocation of capital creates, as can be seen in the emergence of pay-for-outcomes and social bonds.

Impact investment plays an important role in facilitating this confluence of corporate, government and philanthropic capital streams.

Through it, we have the opportunity to create social outcomes alongside market risk-adjusted returns that are measurable.

DEC 2017 – JAN 2018

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\ SP ONSORED CONTENT AN INVESTMENT MAGAZINE ROUNDTABLE, sponsored by BLACKROCK

REGULATORY CHANGES AND a desire for more efficient ways to implement strategies have prompted growing use of exchange-traded products, which institutional investors are embracing as alternatives to more traditional tools, such as futures and options.

Once investment chiefs and portfolio managers have decided on a strategy, the next decision is which of the many vehicles available is the most appropriate instrument for the particular situation or market conditions. In recent years, exchange-traded funds (ETFs) have entered this mix for consideration.

How asset owners and managers approach these decisions was the focus at a recent Investment Magazine roundtable, held in partnership with BlackRock, on the topic: Lowering Implementation Costs and Regulatory Risks.

The ETF market’s expansion rate is particularly rapid in fixed income assets.

BlackRock’s data shows about 52 per cent of all institutions that use ETFs have replaced a derivative with one in the last year. There is US$4.5 trillion ($6 trillion) in the ETF market, a figure that is expected to rise to at least US$5 trillion by 2020.

In fixed income alone, the ETF market has grown to US$700 billion since it opened in 2002.

“This has been driven by regulatory change, which has caused bank balance sheets to shrink. Now, they’re not warehousing risk and so that liquidity has moved into the ETF market,” said Katie Petering, BlackRock director, head of asset manager sales, iShares Australia, who was one of the nine experts participating in the roundtable.

For Deutsche Bank head of Australian ETF trading and inventory management Glyn Roberts, the regulatory environment, the soft futures market and the increasing breadth of the ETF market have led the bank to a growing reliance on the instruments.

“Our use has also been convenience- and efficiency-driven, allowing us to improve

EFFICIENCY DRIVES

AGE of ETFs

By Alexandra Cain + Photos Matthew Fatches

Exchange-traded products are expanding choices and cutting costs for institutional investors as they compete in fast-moving markets UNDER INCREASED REGULATORY PRESSURE.

DEC 2017 – JAN 2018

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SP ONSORED CONTENT \

operational efficiencies,” Roberts said.

He explained that transparency before and after trades around transaction cost is a big advantage of ETFs. “We have clients actively requesting the implicit cost associated with trades,” Roberts said. “We’re looking for alternatives that offer more efficient implementation, particularly around the use of derivative structures versus fully funded options.

That’s [brought] an increase in focus around futures versus cash executions and balancing swaps versus ETFs for exposure.”

Regulatory changes that have reduced margins in interbank trades, as well as more opaque over-the-counter derivatives markets with instruments such as equity swaps, are other factors motivating a move to exchange-traded products.

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GREATER EFFICIENCY

The proliferation of ETFs is allowing fund managers to express a growing number of medium-term investment views using these instruments.

AMP Capital assistant portfolio manager Heath Palos told how the firm recently wanted to take a position on US banks, but found the futures market wasn’t deep enough for the exposure it required, so it used an ETF to implement the investment idea.

“It is simpler to use an ETF for this, given we go through an investment committee,” Palos said. “Investing in an ETF is an easier process, which also makes it cheaper to implement.”

AMP Capital has a growing interest in alternative risk premium managers and

when assessing their merits, implementation framework is a key consideration for the team. ETFs’ efficient nature gives them a competitive advantage over products not traded on an exchange.

“Investment process and asset selection are very similar between managers,” Palos said. “So how they improve implementation efficiencies is what matters.”

BlackRock’s Petering said ETFs play a key role in her job of helping clients solve implementation problems. “We have a broad capital markets team, so we have various businesses that help clients solve problems,” she said.

Palos said tracking error is not a concern.

“The price is moving with the steepness of the curve. It’s tracked that very well; it’s amazing.”

But Petering noted it’s tracking difference, rather than tracking error, that’s important in the ETF market.

She used an emerging-markets ETF to demonstrate her point.

Tracking difference is the gap between the volatility of the ETF and the index every day. The emerging markets ETF is tracking positive to the index at the moment.

This is because it is cheaper than buying an emerging markets futures contract to receive the same exposure.

“If you add back basket lending revenue you get from the ETF, your cost is about four basis points for a one-year period,” Petering said. “The cost to express this would be 90 basis points through a futures contract, depending on your funding.

“So, you get huge savings using an ETF because you’re being more efficient.”

She said transparency is another advantage of using an ETF to access emerging markets, which are typically relatively opaque compared with developed markets, as the ETFs allow investors to understand the underlying securities easily.

HORSES FOR COURSES

While ETFs are becoming more popular due to their efficiencies, low costs and other benefits, it’s important to use the right instrument for the right situation.

DEC 2017 – JAN 2018

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\ SP ONSORED CONTENT

SAM KIM BlackRock

KATIE PETERING BlackRock Australia

“What’s key is working out the risk/return profile for an asset class and then deciding the right hedging instrument,” REST Industry Super investment implementation and due diligence manager Turab Bank said.

“This involves measuring the performance of each instrument and then setting up the right implementation strategy.”

ETFs will often be the right solution for medium-term positions. But other instruments might be more suitable for shorter trades.

Others agreed futures might be the right choice for a fast-moving signal or market.

First State Super senior analyst, treasury and dealing, Stuart Corradini said: “The faster settlement cycle suits that more traditional approach. But you want to have all those tools available at your disposal to execute a decision.”

He said considerations of cost were an important part of these decisions, while noting it is important to think about costs in a more relative sense than just headline fees.

“When I think about transactions cost, it’s the framework I think about,” Corradini said. “There’s a cost to put certain securities into a portfolio and does the alpha potential justify the costs that you’re spending?

“It’s not a matter of, ‘Is it a high cost or a low cost?’, but ‘What is the cost relative to the potential alpha that’s going into the portfolio?’ ”

INTO THE TOOLKIT

BlackRock’s Hong-Kong based head of trading and liquidity strategies, Asia-Pacific, Sam Kim, said investors need to consider a broad range of choices and select the right tool for specific circumstances.

“Whether it’s futures or ETFs, depending on what kind of exposure the investor wants and whether they seek to outsource or use inhouse resources, just having that ability to be tactical is a big part of it,” he said.

DEC 2017 – JAN 2018

One scenario where a number of super funds use ETFs is as a transition management tool. This is typically when they have decided to give a new mandate to an active manager, or re-deploy an existing active mandate away from an underperforming manager, but want to act before they have had time to make a final decision about to whom they will award the mandate.

Bank observed that getting an exposure in place quickly could potentially limit “slippage”, whereby potential gains are given up between the investment decision and implementation.

He said REST Industry Super was currently very focused on reviewing its implementation decision-making processes.

Certain strategies that may have worked in the past may not work now investmentmagazine.com.au

SP ONSORED CONTENT \

REGULATORY INFLUENCE

Regulatory changes are another factor influencing some implementation decisions.

EISS Super chief investment officer Ross Etherington said ETFs had a place in the toolkit, but noted an intense focus by Australian regulators on managing fees and costs risked pushing investors “too far down that path” of worrying about costs.

“I’m not saying you don’t need to worry about transaction costs, but I don’t think it’s as black-and-white as focusing on transaction costs,” Etherington said.

“In terms of deciding what to use – whether to use futures, versus ETFs or swaps – I think they all have a place and depending on your circumstances some are better than others and just whatever your objective is. You look at the three and decide what’s best for you.”

HEATH PALOS AMP Capital

STUART CORRADINI First State Super

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Mercer Sentinel principal Tricia Nguyen, reflecting on her work guiding clients’ implementation decisions, said superannuation funds are seeking “end-toend cohesion” when implementing solutions to address upcoming regulatory changes.

“That’s the key in terms of reducing cost and risk,” Nguyen said. “Compliance, trade reporting – whether it’s one way or two way and whatever jurisdiction you’re in – will be a big focus from now on.”

Willis Towers Watson investment consultant Matthew Conacher said this is especially important for medium-sized and smaller funds. “It’s important to make them aware there are specialists out there who can [help them] be more efficient at implementing a decision once they’ve made it,” he explained.

Conacher said he has been encouraging clients to put in place appropriate governance arrangements for a low-return environment, to meet new regulatory requirements.

“We’re going right back to the basics and reviewing the mission and the investment beliefs of the investment committee,” he said.

“That flows into sourcing models and the structure of different committees, delegation powers and capital market assumptions.

The fund manager line-up falls out of those things.”

Conacher said it is essential for super funds to measure their decisions and track their progress. “Having that monitoring in place in the execution phase is essential.”

Ultimately, the instruments investors use to implement their investment decisions will continue to change, as will the counterparties with whom they trade. And regulatory change is an international phenomenon.

BlackRock’s Kim said the firm is conscious that how investors trade is likely to evolve in response to changes in international rules and regulations.

“Certain strategies that may have worked in the past may not work now,” Kim said.

“So, we really need to understand how the market structure is going to change so that we can be informed and work with our clients to make sure that investment strategies are properly aligned with the regulatory changes.”

It’s an ongoing and evolving process as investment managers continue to negotiate ever more complex investment markets while constantly grappling with regulatory change.

PA R T I C I PA N T S TURAB BANK

Investment implementation and due diligence manager, R EST Industry Super MATTHEW CONACHER

Investment consultant, Willis Towers Watson STUART CORRADINI

Senior analyst, treasury and dealing, First State Super ROSS ETHERINGTON

Chief investment officer, EISS Super SAM KIM

Head of trading and liquidity strategies, Asia-Pacific, BlackRock TRICIA NGUYEN

Principal, Mercer Sentinel HEATH PALOS

Assistant portfolio manager, AMP Capital KATIE PETERING

Director, head of asset manager sales, iShares, Australia GLYN ROBERTS

Head of Australian ETF trading and inventory management, Deutsche Bank

CH A IR SALLY ROSE

Editor, Investment Magazine

DEC 2017 – JAN 2018

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\ UNLISTED A SSETS

A recent gathering of responsible investment practitioners heard how the FUTURE FUND and FIRST STATE SUPER are managing risk by airing out any dirty linen in opaque markets.

By Shelley Hepworth

OVER THE LAST decade, listed equity managers have grown used to demands from major institutional clients for proof of their management of environmental, social and governance risks. Listed debt managers are growing accustomed to the same demands. Now major asset owners are turning their attention to getting a clear view of the ESG risks embedded in the unlisted assets within their portfolios.

This can be particularly challenging in the traditionally opaque world of private equity.

The Future Fund, Australia’s $159 billion sovereign wealth fund, first introduced a system to assess the capacity and commitment of its managers around ESG issues in 2015. Future Fund head of ESG Joel Posters shared how the processes and protocols were implemented, particularly with regards to managers operating in private markets.

As a first step, the Future Fund drew up a heat map of its more than 100 investment managers to identify those that required critical attention. There were three criteria for evaluation: whether ESG moved the dial in terms of the performance of the

ESG’S

private

conversations DEC 2017 – JAN 2018

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UNLISTED A SSETS \

investment; how much influence the Future Fund had in making demands of a particular manager due to the size of its investment; and the duration of the investment.

“We recently put down an investment of $1.1 billion for the privatisation of Port of Melbourne,” said Posters, speaking at the Responsible Investment Association of Australasia’s annual conference, held in Sydney, November 15-16, 2017. “We might hold that asset for as long as the fund survives, be that 10, 20, 25 years. Clearly it’s in our interest there to make sure we manage those ESG issues to the best of our abilities, versus a hedge fund manager we have a relationship with that trades in and out of its holdings every week or every month.”

EYEBALLING MANAGERS

Posters and his team identified 50 managers for priority assessment, a process that now begins whenever the fund onboards a new manager, and have conducted periodic evaluations since then. Evaluation templates are tailored to the relevant asset class, and sometimes to the underlying strategy.

“Among private-equity managers, we would have different questions to ask an emerging-market buyout manager versus a developed market venture capitalist,” Posters said.

The Future Fund does not share its assessment templates with managers in advance and prefers to conduct discussions via face-to-face meetings or conference calls, rather than email.

“I think you get the most honest responses when they don’t know what’s coming,” Posters said. “You can learn a lot more from an investment team if you’re looking them in the eye.”

It is also essential to have the right people around the table and often that’s not the dedicated ESG people.

“I want to talk to the senior portfolio managers,” Posters said. “Those are the people who have to fulfil the mandate, those are the people who are making the investment decisions on a day-to-day basis, and those are the ones who are the most relevant for the discussion.”

Once ESG assessments are complete, that information is incorporated into existing manager evaluations, which are based on a dozen criteria including track records and fees, as a qualitative overlay. Managers are marked as either above expectations, meeting expectations or below expectations.

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“I think if you become more granular than that, it just ends up adding a lot of noise,” Posters said.

FEEDBACK LOOP

For the most part, the Future Fund’s managers are at least meeting expectations. Where they are not, the amount of risk in a portfolio is taken into account before decisions are made about escalation. For example, there is greater risk tolerance for a US venturecapital manager that is just starting on its ESG journey and investing primarily in cloud computing companies in California, than for the industrial sector buyout manager operating in emerging markets.

Managers are ranked according to performance and advised of their ranking.

That feedback loop is important to keep managers engaged in the process, because they want to see how they stack up against their peers.

For managers who aren’t meeting expectations, Posters prefers addressing the issue privately first. If that doesn’t work, the Future Fund has had success raising concerns in collaboration with other investors. In one case, a private-equity manager operating in emerging markets retained an environmental consulting firm to upscale its risk management after concerns were raised with the limited partner advisory committee (LPAC).

Other corrective options include hosting workshops with fund managers, and providing them with tools to screen for ESG issues relevant to their portfolio. Where the Future Fund doesn’t have the leverage to force change, it will reconsider the entire relationship, Posters said.

RENEWABLES BEAR FRUIT

While the pre-investment stage is a critical time to communicate expectations around ESG issues, in most cases the Future Fund will have a governance structure in place to ensure it has access to, and influence over, managers throughout the investment period.

“For example, [along with] the $400 million commitment we have towards AGL’s renewables fund, we have two of our infrastructure guys on the board,” Posters said. “Within most of the private-equity deals that we do, we want a seat at the LPAC.” He said that, while the Future Fund probably took on many renewable energy private-equity deals in the past, the space is really coming to fruition now. “When we

invested $400 million in AGL’s renewables,” he said, “it wasn’t necessarily about the fact that it was renewable, it was about the fact that it was a brilliant opportunity.”

Improving monitoring and reporting is an ongoing exercise. For the Future Fund, part of that effort includes signing up to the Global ESG Benchmark for Real Assets, to guide its relationship with infrastructure and property managers.

“We want to receive information about ESG that moves the dial,” Posters said.

“But we don’t want our managers to have to report to us in a different way than they’re having to report to the 20 other investors on exactly the same issues.”

FOCUS ON IMPACT

Joining Posters for the RIAA conference panel on ESG in private markets was First State Super head of research Ross Barry.

Barry said First State Super has processes in place similar to the Future Fund’s for assessing the performance of its external managers in listed markets; however, the challenge of assessing ESG compliance in private equity makes the fund cautious about how it allocates to the sector. Since private-equity funds are typically blind pools, First State Super has a zero allocation to it in its socially responsible investment options.

Even so, First State Super was eager to explore what it could do in private equity in a manner that was aligned with ESG practices, so it turned to impact investing.

“We wanted to have one piece of the portfolio that was skewed towards finding things that had a very strong, positive social, economic or environmental impact,” Barry said.

First State Super worked with alternatives manager ROC Partners to become a direct shareholder in companies, and other assets, that promise to have a positive impact.

Barry addressed concerns that impact investing requires asset owners to take a haircut on returns, saying that there is enough deal flow for the platform to offer a well-conceived, diversified and compelling return proposition for members.

“The opportunities have to present a compelling reward for risk, or they just get filtered out along with everything else,” Barry said. “There are enough really clever, smart things that people are doing, that employ people, that provide affordable healthcare and affordable energy, and may just have this positive effect on society.”

DEC 2017 – JAN 2018

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\ COLUMN

IN LATE NOVEMBER, the Australian Council of Superannuation Investors (ACSI) published a new edition of our Governance Guidelines. These represent our members’ expectations of governance practices at the companies in which they invest. Although primarily directed at listed companies, the guidelines are an important resource for asset managers and owners.

It is well-established that good governance correlates with stronger financial returns and reduces exposure to risk. You don’t have to look much further than Australia’s scandal-plagued banking sector to see the impact of governance failures BY on company sustainability and LOUISE DAVIDSON community sentiment.

So, it’s vital that asset managers are familiar with, and apply a Louise Davidson is chief executive framework for, evaluating corporate of the Australian Council of governance. Equally, if you’re an Superannuation Investors. asset owner or institutional investor, it’s important to have a conversation with your asset managers about how they integrate governance considerations into their investment decisions.

We continue to sharpen our guidance The latest edition of the ACSI Governance Guidelines takes on shareholder resolutions, gender diversity and more.

The ACSI guidelines articulate the issues we focus on in our engagement work and the factors we consider in determining our voting recommendations. Every two years, we revise them to reflect the evolving governance landscape. Since March, we have been working with our member funds to update the guidelines and have also sought feedback from other stakeholders.

Our members rely on internal and external asset managers to make investment decisions for them. They expect these decisions to reflect their organisation’s overall values and strategy, including their commitment

to upholding good governance standards, which are set out in our guidelines.

UNIQUE INSIGHTS

We think the guidelines are an important resource for all asset managers, whether associated with an ACSI member or not.

We have been publishing them since 2003, and they incorporate more than 14 years of accumulated governance expertise from ACSI and our members.

They offer a unique insight into how large investors reach their voting decisions. Breakout boxes within the text of the guidelines

DEC 2017 – JAN 2018

highlight factors we consider when making our voting recommendations. They focus on governance issues that are of the greatest material concern to our members and these are likely to be relevant to most large investors with long-term horizons.

When assessing an individual company’s performance against the guidelines, we take a pragmatic and commercial approach that considers the specific circumstances of the company. We consider a broad range of factors, including the materiality of any issues, the context in which an issue arises and the size of the company. We also consider the length of time over which shortcomings existed, any history of dialogue with the company, and whether there have been any improvements in company behaviour.

NEW AREAS OF FOCUS

In this edition of the guidelines, we have spelled out increased responsibilities on directors for oversight of environmental, social and governance (ESG) issues. To assist directors with meeting these, we have included a new chapter on managing ESG risks and opportunities, which provides practical guidance on four key themes: climate change, labour and human rights, corporate culture, and tax disclosure.

We identify sources of investment risk and opportunity for each theme and state what we expect companies to do to manage these impacts. This analysis may also be helpful for asset managers and owners.

Throughout the guidelines, we have expanded on the factors we consider when making our voting recommendations.

Other new or expanded topics include: • Remuneration: added factors to consider in the design of remuneration arrangements.

• Gender diversity: how we will progress our voting policy to support a 30 per cent target for women on boards.

• Shareholder resolutions: factors that we consider when evaluating non-binding recommendations.

• Chair workload: our expectations for managing the chair’s capacity and other commitments.

• Director tenure: encouraging companies with long-serving directors to disclose their renewal process.

• Audit firm services: our expectations for audit firm rotation and other audit firm services.

The ACSI Governance Guidelines can be downloaded at www.acsi.org.au/publications

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THE WORLD IS CHANGING. Should your fund’s portfolio change too?

For over 15 years, FTSE Russell’s ESG Ratings have measured ESG risk and performance for thousands of companies across developed and emerging markets. Our expertise makes us a preferred partner when integrating ESG into passive strategies.

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\ PRI IN PERSON

ESGin

ACTION DEC 2017 – JAN 2018

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PRI IN PERSON \

PRI in Person delegates were inspired and challenged by world’s best practice examples of how leading funds are implementing STRATEGIES FOR SUSTAINABILITY. The pressure is on.

By Amanda White

A RECENT GATHERING of responsible investing exponents shone a light on how some of the world’s biggest pension managers and sovereign wealth funds are embedding environmental, social and governance risk management into their portfolios – and how they can do more.

Delegates at the Principles for Responsible Investment’s global PRI in Person conference, held in Berlin from September 25-27, 2017, were challenged to push harder to make their organisations live up to the obligations of being a signatory to the PRI. This message was driven home particularly strongly by Christiana Figueres, the convenor of Mission 2020, who challenged PRI signatories to invest 1 per cent of their assets in clean technologies and renewable energy by 2020.

“We have run out of time for anything that is gradual or marginal, we need to step up exponentially if we are to protect the global economy,” Figueres said. “We don’t want to be caught unawares or in a systemically uninsurable economy.”

The PRI, founded with the support of the

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United Nations in 2005, describes itself as the world’s leading proponent of responsible investment. Signatories to the PRI pledge to incorporate environmental, social and governance (ESG) factors into their investment and ownership decisions.

Signatories have a total of about US$70 trillion ($92.6 trillion) under management, making them an influential force for creating change within the companies and markets in which they invest.

Figueres, who was the executive secretary of the UN Framework Convention on Climate Change and was instrumental in COP21, further challenged delegates to announce their 1 per cent commitment to renewables within one year, when a Climate Action Summit will be held in California, hosted by Governor Jerry Brown.

“We are at a very important transition stage in the global economy,” she explained.

“We now have $320 billion per year invested in renewable energy and technologies.

A growing number of shareholder resolutions are asking for disclosure of the carbon risk and the risk to the value of the company in the future. And the amount of money in green bonds will move to about $100 billion this year, up from $8 billion only a few years ago. All of those data points show we are moving in the right direction in decarbonising the global economy and shifting capital from carbon intensive investments to lower or no-carbon investments.”

She said, however, that this transition can’t be elastic or drawn out infinitely. In

particular, she said there are two firm boundaries to keep in mind.

First, earth’s atmosphere can take only another 600 gigatonnes of carbon emissions before crossing a dangerous threshold.

“We’ve already put up 1200 gigatonnes.

If we go beyond another 600, then there will be huge implications. We are putting 40 gigatonnes up each year now.”

But there is also a boundary for the rate of decarbonisation.

“The global economy can’t decarbonise by much more than 6 to 7 per cent per year,” she said. “This means we can take that 40 to net zero by 2050. If the economy had infinite adaptability, we could move to zero immediately, but it doesn’t. These are very tight boundaries.

“Putting together all of those numbers, you come to the conclusion that we need to take advantage of the fact we’ve had three years of flat emissions, and actually begin to bend the curve of emissions down. It is out of the question to stay at 40 gigatonnes per year. The point at which we need to bend the curve down is 2020, only three years from now. We need to [cut] 50 per cent of emissions every decade [to get] to net zero by 2050 – that is the prudent rate of descent to protect the economy.”

Investors, she said, can play a more extensive role in the prudent decarbonisation of the economy.

She congratulated the PRI, and its signatories to the Montreal Pledge, which she said was instrumental in giving governments the confidence they needed to negotiate the Paris Agreement.

Institutions that presented case studies to the PRI in Person event demonstrating how their investment teams are making progress on integrating ESG thinking into their portfolios included: Japan’s Government Pension Investment Fund (GPIF), Sweden’s Second Swedish National Pension Fund (AP2), the Netherland’s ABP, France’s Établissement de retraite additionnelle de la fonction publique (ERAFP), the California State Teachers’

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\ PRI IN PERSON

Retirement System (CalSTRS) and the California Public Employees’ Retirement System (CalPERS), plus Cbus Super.

GPIF GOES GRANULAR

Japan’s ¥145.7 trillion ($1.7 trillion) GPIF is actively promoting ESG integration at all levels of its investment chain.

GPIF chief investment officer Hiro Mizuno told the audience at PRI in Person that because the fund outsources investments, ESG integration can be done only through the chain.

“We work hard internally to consider ESG in our asset manager evaluation,” Mizuno said. “We are encouraging our passive managers to set up as active stewards.

They hold a lot of our voting shares and they need to consider ESG in their business activities. We are one of only a few asset owners to change our mandates to passive managers according to the quality of their ESG activities.”

Such ESG factors should be a part of all asset classes, he said.

“We have a 25-year investment horizon, we spent a lot of time on finding managers to generate good alpha, but at the end of the day…the financial system has to be sustainable,” he said. “It’s important for us to make sure we affect the whole investment chain and it becomes more sustainable by taking ESG into consideration.”

Mizuno said the fund was looking at engagement with index vendors, whose indices also play an important role in making sure the investment chain is more sustainable.

“Performance is measured by traditional benchmarks, but we need to change that to enforce alignment with ESG priorities,” he said.

GPIF has three explicit expectations of managers, outlined in its stewardship principle guidelines.

It asks managers to become signatories to the PRI or explain why they don’t need to do so; it expects managers to integrate

ESG into their investment decisions; and it asks managers to engage with companies on serious ESG issues.

The fund also has recommendations for other asset owners, to help forge a sustainable financial system.

“Short-termism is not just a problem at corporate or asset manager level, but also at the asset owner level,” Mizuno said.

“I encourage all asset owners to stop producing quarterly reports. It’s hard to step back from that because it seems like going backwards in transparency.”

AP2 & CALSTRS COMMIT

Speaking alongside Mizuno, Eva Halvarsson, CEO of Swedish pension fund AP2, said integration means having a sustainability lens throughout the organisation.

“To be successful, you have to have commitment from the top,” Halvarsson said.

“We are very lucky to have that. Every board meeting, management meeting and meeting with our staff we talk about sustainability.

It’s commitment and culture. This is part of our DNA at AP2; everyone is engaged with these issues. I’m a strong believer that this should come from within. These are not issues just for the ESG department.”

AP2 is the second of the Swedish government’s five pension funds, with SEK 336.3 billion ($52.7 billion) in assets under management. Halvarsson said the fund’s motivation for ESG integration comes from an investment imperative.

“The investor with the best and most information can make the best investment decision. You need a new kind of information,” she explained. “One of our most important values at AP2 is constant improvement. If we are to achieve that, we need to learn a lot of new things…You can apply that in working with ESG.” Meanwhile, Chris Ailman, the CIO of the US$214 billion ($282.3 billion) CalSTRS, told PRI in Person delegates that ESG is an integral part of every asset class and every stage of the investment process at the fund.

CalSTRS has individual teams for each of the three sub-sectors of ESG – environmental, social and governance – with the belief that specialists are needed to deal with the complexity of the individual issues in each sub-sector.

“We have at least one or two staff people who are E, S and G within every asset class,” Ailman said. “If you look at the things that will affect us, things like demographics, urbanisation and climate change, they are different when you look at different asset classes. We are constantly monitoring how we have done on the integration.”

ERAFP URGES TEAMWORK

Philippe Desfossés, chief executive of the €18.5 billion ($28.7 billion) French fund ERAFP said it’s important for investors to pay attention to “anything that might derail your mission of paying pensions”.

“So we designed a charter around [ESG] issues, and decided to implement this in a no-nonsense approach,” Desfossés said.

This was through a best-in-class policy, where the bottom quartile of investments rated on ESG scores were excluded.

“It is very hard to out-guess the market, the only thing you can do is apply criteria to lead you to exclude the bottom quartile,” he said.

It’s important for us to make sure we affect the whole investment chain and it becomes more sustainable by taking ESG into consideration

DEC 2017 – JAN 2018

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PRI IN PERSON \

As a large investor, we have nowhere to hide from the world’s problems and risks

ERAFP also paid particular attention to measuring manager performance on ESG. “Now we have regular meetings with managers on the way they’ve been delivering on ESG,” he explained.

Desfossés urged the members of the audience to collaborate with one another.

“Together, we can make a big difference,” he said.

ABP LEADS ON SDGs

Since 2008, the giant Dutch pension fund ABP’s policy has evolved to integrate objectives for sustainability and corporate social responsibility completely. Josepha Meijer, vice-chair of the €385.6 billion ($604.8 billion) ABP, said that until 2008, it had a traditional policy

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and assessed investments on risk, return and cost. But since then, ESG criteria have been added, and then a lens of sustainability and responsibility were added.

“We promised our beneficiaries we would achieve the returns required to pay current and future pensions in a responsible, sustainable manner,” Meijer said. “We have a fiduciary duty to contribute to a more sustainable society, and believe sustainable companies will perform better in the long run.”

The implementation of this revised policy is through the concrete investment objectives of: reducing carbon dioxide by 25 per cent by 2020; increasing the allocation to investments that contribute to a better and cleaner future from €29 billion to €58 billion by 2020, including investments in renewable energy to the tune of €5 billion by 2020, and €1 billion in communication infrastructure and education. The fund is also focusing on specific themes, including child labour, cocoa, human rights, and working conditions.

ABP, which is the largest pension fund in Europe, is also a signatory to the United Nations’ sustainable development goals.

The SDGs were established in 2015 and are a list of 17 goals, measured against 169 targets, designed to guide the decisions of governments, businesses and investors to ‘transform the world’ in a positive fashion.

Meijer said the SDGs provide a widely supported frame of reference, a vision to the world that is broad and has a long timeframe.

“We think they’re a gift from the UN to the world,” she said. “As a pension fund, we have a vested interest in helping to achieve those goals, as we think they’ll shape the world the beneficiaries live in, and also shape areas of growth and provide a more stable economy.

They create alignment for a common vision and avoid further fragmentation.”

CALPERS & CBUS USE SDGs

Anne Simpson, investment director of sustainability at CalPERS, where the SDGs are also under consideration, says the goals are not just a moral imperative, they are an economic necessity.

“As a large investor, we have nowhere to hide from the world’s problems and risks.

But we are not in a position to tackle them without a public policy framework. The SDGs provide a consensus on a shared to-do list,” Simpson said. “Until now, investors haven’t had a legitimate framework to think about allocating capital and managing risk.”

CalPERS has US$343.3 billion ($453 billion) under management, making it the largest pension fund in the US. Alexandra West, portfolio head of strategy and innovation at local super fund Cbus Super, said there are two reasons investors should align with the SDGs. “Investors need progress on the SDGs because they’ll assure a stable economy and drive economic growth,” West said. “And the SDGs need us; without mainstream institutional investment, the SDGs won’t be realised. As long-term value creators, we rely on a sustainable economy and economic growth. We can’t afford to sit on the sidelines and leave it to others.”

West said developing a strategy for how to contribute to the SDGs was very difficult, and that the $41 billion fund was looking to learn from global peers, such as ABP and the Netherland’s PGGM.

TO READ MORE STORIES FROM THE WORLD’S L ARGEST ASSET OWNERS VISIT TOP1000FUNDS.COM

DEC 2017 – JAN 2018

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DEFAULT COVER

A super

safety net

There may be room for improvement in the group insurance sector, but a push to move away from default cover to an ‘OPTIN’ MODEL could leave members OUT IN THE COLD.

By Kevin O’Sullivan

| chief executive of UniSuper

AUSTRALIA’S CURRENT MODEL of default group life insurance within superannuation provides a valuable safety net for the vast majority of workers.

Research consistently shows the Australian population is underinsured, unnecessarily exposing families to financial hardship if people are unable to work.

Recent proposals to change the current ‘opt-out’ model for group life cover via superannuation to an ‘opt-in’ approach would only exacerbate this problem, leaving many super fund members with no protection.

More than 92 per cent of the working population has default life insurance within their super fund (or funds), providing automatic cover that is more accessible and more affordable than directly purchased retail life insurance.

The system does have its shortcomings, and the industry has recognised the need to address some of them. The Insurance in Superannuation Working Group (ISWG) is leading the way in developing policies to address some important issues.

REDUCING DUPLICATION

One of the concerns is that, by accident rather than design, so many people have multiple superannuation accounts.

Australia has about 12.5 million citizens of working age, yet there are more than 29 million superannuation accounts nationwide. That’s more than the total population of about 24 million. As a result, too many people are paying multiple

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insurance premiums. This can lead to unnecessary erosion of account balances, which is especially concerning for the casually employed and lower-income earners.

UniSuper takes this issue seriously. The fund runs regular campaigns to encourage members to combine accounts, including illustrations of potential savings.

Four months after a new member joins UniSuper, the fund writes to them about using our simple Combine My Super online tool to help transfer their insurance and super from a previous fund.

We also conduct an annual process of running the tax file numbers of all consenting members against the Australian Taxation Office’s Lost Member Registry to identify members with lost super. We then write to those members, letting them know what we’ve found and the steps they can follow to combine their funds.

BETTER ENGAGEMENT

Another challenge is that most Australians have little to no understanding of their insurance policies.

The industry should make it easy for members to opt-out of unnecessary or unwanted cover; however, we must first ensure they are aware and well-informed.

Members are often confused about the three main subcategories of life cover within group insurance – death cover, income protection, and total and permanent disability (TPD) cover. Likewise, few people have a clear understanding of what level of

cover is adequate for their circumstances.

Super funds must look at communicating more simply and effectively to improve awareness and understanding. At UniSuper, we have seen success with targeted insurance messaging within benefit statements, dedicated web pages and insurance campaigns with a clear call to action. These initiatives have all encouraged many members to act.

INNOVATIVE DESIGN

At the fund level, we strive to tailor our insurance to meet the needs of the different cohorts of our members, who range from casual employees to members on high incomes with higher-than-standard rates of employer superannuation contributions.

We do not offer income protection insurance to members who are casuals or contractors, to prevent potential erosion of account balances. Additionally, we’re able to provide higher relative cover levels for permanent employees at competitive premium levels.

Super funds have a fiduciary responsibility to manage retirement outcomes for members; however, we also have a responsibility to support our members throughout their lives.

Insurance is one additional way to ensure we are there for members when they need it most, and are best able to support them in reaching their retirement goals.

The insurance benefits paid to UniSuper members and their families cushion the impact of a member’s death or disablement.

Our staff compassionately assists during these difficult times when claims are made.

Insurers have also worked hard on outcomes for individuals, codifying this commitment by recently unveiling the Financial Services Council Code of Practice.

At UniSuper, we welcome such commitments to raising the bar on member outcomes.

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\ CHAIR’S SE AT

up

OPENING Edited by Sally Rose + Photos Glenn Hunt

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CHAIR’S SE AT \

In this Q&A with Investment Magazine, QSUPER chair KARL MORRIS reflects on recent changes at the $94 billion Brisbane-based superannuation fund, including going public offer and launching an insurance arm. The long-time LIBERAL PARTY POWERBROKER also speaks in defence of the representative trustee board model.

Q. QSUPER OPENED TO NEW

MEMBERS AS A PUBLIC OFFER FUND ON JULY 1, 2017. ARE YOU PLEASED BY THE RESPONSE SO FAR? HOW DOES BECOMING A PUBLIC OFFER FUND CHANGE THE CONVERSATION FOR THE BOARD?

A. The response to date has exceeded expectations, we have been quite overwhelmed. The majority of new members are friends and family of existing members, and we are happy to be able to welcome so many of them. We’re also seeing past members who, having experienced other funds, have now chosen to return to QSuper.

Becoming a public offer fund hasn’t shifted our focus. Members will always remain our key focus and we will continue to innovate and enhance the award-winning, tailored products and services we are renowned for.

Q. WITH ADVICE, INVESTMENT MANAGEMENT, AND INSURANCE CAPABILITIES IN-HOUSE, QSUPER IS ONE OF THE MOST ‘VERTICALLY INTEGRATED’ NON-PROFIT FUNDS IN THE COUNTRY. HOW DO YOU MANAGE THE GOVERNANCE RISKS THAT COME WITH THIS ADVANTAGE?

A. Having so many of our capabilities inhouse ensures that the teams are working together across the organisation and it provides great opportunity to share ideas and leverage expertise. Our Lifetime product, which is our default investment option, was made possible through the internal investment, product and advice teams working together to bring the idea to fruition.

Internalising teams has required some changes to governance processes, but these changes have not been prohibitive and have positively contributed to member outcomes.

These changes have ensured that appropriate delegations inform responsibilities around each function. They’ve also ensured clarity of purpose and role, along with setting in place strong due diligence processes.

investmentmagazine.com.au

DEC 2017 – JAN 2018

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Q. QSUPER HAS POSTED SOME OF THE STRONGEST INVESTMENT RETURNS ACROSS THE INDUSTRY IN RECENT YEARS WHILE HAVING A VERY DIFFERENT INVESTMENT STRATEGY TO ITS PEERS. HOW DID THE BOARD GET COMFORTABLE WITH THE ‘PEER-AWARE BUT NOT PEER-ANCHORED’ APPROACH?

A. Having great clarity of a central purpose is very powerful. At QSuper the focus has been, and will always be, on achieving the best outcomes for members. The QSuper board holds this view strongly and we spend a lot of time considering the diverse nature of our membership, their needs and expectations and tailoring products and services to them.

Anchoring our investment philosophy and strategy to peers would be contrary to this. Whilst we know that this may mean we look very different in fund comparison tables, positively and negatively, we believe that this is the right approach. Ultimately, we are targeting a smoother path to their retirement, with returns comparable to those of traditional balanced funds.

Q. ARE MERGERS PART OF THE GROW TH STRATEGY FOR QSUPER?

A. As one of the largest funds in the country, we already have benefits of scale that we leverage at every opportunity. Whilst mergers are not a priority at the moment, we are open to considering opportunities as they arise. The primary test for us is that any merger would have to be of benefit to our existing members.

Q. ARE THERE ANY IMPORTANT WAYS IN WHICH CHAIRING A SUPERANNUATION FUND IS DIFFERENT TO YOUR PREVIOUS EXPERIENCE CHAIRING STOCKBROKING FIRM ORD MINNETT?

A. There are a number of differences to being on the ‘buy side’ from the ‘sell side’.

A stockbroking firm has shareholders who want a return on equity, whilst at QSuper we have the ‘sole purpose test’ and ‘best interest of members’ to guide how we best provide for members’ retirement. The board appointment processes are also very different and the nuances between directors representing shareholders to trustees representing members requires a slightly different fiduciary lens. There is typically a lower level of engagement from

superannuation fund members, with many investing through the default offering. To make decisions for hundreds of thousands of members is a huge responsibility. I believe that QSuper took a big step forward when we separated our default investment option into eight smaller options, grouping members by age and account balance, and recognising that one size does not fit all when setting investment strategies for such a vastly diverse group of members.

Q. HOW HAVE YOUR VIEWS ABOUT WHAT MAKES A GOOD CHAIR CHANGED OVER THE LAST DECADE?

A. A good chair continually makes sure board members are collegiate and respectful of one another, whilst acknowledging that sometimes there may be different opinions. The key to getting a board to get big decisions right, is making the decisions in a considered and consensus way. In my career, I have had the opportunity to report to boards, be a director on boards, and chair various boards, so I’ve experienced both the good and bad from various angles.

To be a good chair requires a keen interest in the business area, the desire to work collaboratively with a broad range of people, and the ability to see the big picture and identify priorities. I think that the role of boards is much more challenging today than a decade ago, and the chair’s role has also grown significantly in scope and complexity over this time. These days, organisational strategy needs to be more flexible, risk management is much more prominent, and the level of governance appropriately high.

Q. WHAT IS YOUR TOP PIECE OF ADVICE TO INVESTMENT SPECIALISTS FOR IMPROVING THEIR COMMUNICATIONS WITH SUPER FUND TRUSTEES?

A. Make sure there are no surprises. It’s an obvious statement, but critically important to developing trust and collaboration.

Continually update trustees so that they are attune and open in their thinking to cyclical and structural changes to economies and markets. I think it’s important that investment specialists communicate frankly with super fund trustees to ensure the full range of potential outcomes is understood.

There are good and bad investments, and there are bull and bear markets. Boards

DEC 2017 – JAN 2018

need to be aware of both the upside and the downside of this and how this translates into the experience for members.

Q. WHAT IS THE MOST VALUABLE PROFESSIONAL DEVELOPMENT OR TRAINING YOU HAVE DONE THAT HAS HELPED YOU BE A BETTER CHAIR?

A. The Australian Institute of Company Directors course was very good but, in reality, director development is more experiential.

I have learnt a lot from ‘good and bad’ chairs.

One important thing I have learnt is that all directors must be equal in information and remuneration. And whilst not strictly professional development, the activity that resonates with me most regarding my fiduciary duty is attending QSuper member events and talking directly to our members.

Q. WHO HAVE BEEN YOUR MOST IMPORTANT MENTORS? TO WHOM DO YOU TURN FOR ADVICE NOW?

A. My father was a man of great faith and upmost integrity. Another great influence on me has been Terry Morris (no relation), the founder of Sirromet Wines. One of the smartest, most loyal, generous and entrepreneurial people I have met. He is one of the few people I know who has been successful across different industries.

Q. YOU ARE AN INDEPENDENT CHAIR GOVERNING A REPRESENTATIVE BOARD. DO YOU FEEL THAT BOARD COMPOSITION MODEL WORKS WELL FOR QSUPER? WHAT ARE THE PROS AND CONS?

A. I think the results speak for themselves.

QSuper has long been fortunate to have trustee representatives from both the employer and member organisations who have truly championed the ‘best interest of members’ philosophy. The pros of a representative board are the direct channels of engagement with the employer and member organisations, while the cons are the relatively limited ‘pool’ of people available within these organisations from which to choose candidates. A board that operates as a highperformance team requires a group of people with diverse and complementary abilities.

Ultimately, where the trustee directors come from (employer, member or independent), is less important than the knowledge and experience they bring and the commitment they demonstrate in their role as a fiduciary.

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back on regulation that protects investors.

Former US Federal Reserve governor Randy Kroszner spoke on the role of regulation and the influence of central banks, interest rates and the range of possibilities for the next Fed chair. A key insight was that central banks have not been the only force driving lower interest rates. The timing of the secular decline in global interest rates from the 1980s onwards seems to fit with when China began to engage with the global economy.

Kroszner noted the excess supply of money coming from growing wages, combined with a 40 per cent average savings rate from income in Chinese households. When this effect is amplified in coming years, with the declining spending patterns of a globally ageing population, the effect will be for further downward pressure on long-run interest rates, he suggested.

Kroszner’s rationale makes for a live case study of how large groups of people with different motivations can combine to influence important financial markets.

BY GRAEME BIBBY

Graeme Bibby is president of the CFA Society of Melbourne and the chief investment officer of Mutual Trust.

Conference touts people power

THE PROFESSION’S FUTURE

CFA SOCIETIES are taking the lead in promoting PROFESSIONALISM and ETHICS, because the fairness and efficiency of financial markets is driven by human behaviour.

FAIR AND EFFECTIVE markets are integral to better investment outcomes.

To keep markets functioning that way, it is important to remember that they are driven by the behaviour of the people who participate in them.

The theme of the CFA Australia Investment Conference 2017, held in Melbourne on November 1, was Best and Fairest: Integrity and Innovation in Capital Market Structures.

Paul Smith, CFA Institute president and chief executive, highlighted how the CFA Institute and CFA Societies are striving to develop the profession and capital markets in an ethical way for the ultimate benefit of society. As markets are composed of people, integrity in the capital markets comes from those same people, who should be encouraged to participate in an ethical way.

Often the perception is that markets innately respond to data efficiently. This is

investmentmagazine.com.au

a flawed view. Markets are driven by the people who participate in them, incorporating their aspirations, fears, preferences and needs.

The degree to which they are ethical combines with their sentiment, emotions and perceptions to drive markets.

INDIVIDUALS’ IMPACT

The role of individuals in determining market integrity was a theme for many speakers at the CFA conference.

Australian Securities and Investments commissioner Cathie Armour spoke of how the regulatory framework on innovation and technology should help deliver potential benefits to society. When asked whether the regulatory cycle had gone too far, Armour noted that there were still too many court cases pursuing unscrupulous investment scheme operators where mum and dad investors lost money to warrant pulling

Colonial First State Global Asset Management chief executive Mark Lazberger and AustralianSuper chief investment officer Mark Delaney shared their personal insights and concerns for the future of the investment profession. (See “Future under fire”, next page.) Delaney’s concerns included the rise of indexing, robo-advice’s influence on portfolio construction, and the importance of reputation. Lazberger focused on technological innovations, noting the motivations of innovators and the nature of their developments are not always good.

Both agreed that improving the diversity of the profession is crucial.

Grant Williams, founder of Real Vision and author of Things that make You Go Hmmm, posed the question ‘What if the aberration of near zero interest rates is the norm?’ Williams went on to compare equity, bond and realestate markets with total credit growth, velocity of money, and gold. He argued asset prices are “in a world of pure imagination” never seen before when measured by traditional fiat currencies, but perhaps not in terms of real assets, particularly gold.

We must look to the nature of market structures and the level of integrity and distortions that operate on them, to understand how to develop better investment strategies for our ultimate clients and society.

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FUTURE UNDER

fire

AUSTRALIANSUPER’S Mark Delaney and COLONIAL FIRST STATE GLOBAL ASSET MANAGEMENT’S Mark Lazberger, both CFA charterholders, agree investment professionals need to EMBRACE CHANGE TO SURVIVE.

By Claire Stewart + Photos Chris Sprott

DESPITE A RAFT of reforms and changing social norms that reined in much of the asset management industry’s excesses after the global financial crisis, professional investors working in large institutions are still on a good wicket. It’s a great gig if you can get it. But the future of the investment profession as we know it is under threat.

The outlook for financial markets has been fundamentally altered by a decade of radically easy global monetary policy in the wake of the GFC. Meanwhile, other forces are reshaping the investment profession as well, including the rise of low-cost passive managers and robo-advisers powered by artificial intelligence, a public image problem, and the changing power dynamic between asset owners and their managers.

Two doyens of the local industry, one from the buy side and one from the sell side, mused on these issues at the 2017 CFA Australian Investment Conference, held in Melbourne on November 1.

Mark Delaney is deputy chief executive and chief investment officer of AustralianSuper, which has $130 billion in assets under management, making it the nation’s largest industry super fund. He

reflected on how fortunate he was to have begun his career during the heydays of the early 1980s.

“The industry has basically boomed right through the whole 30-year, nearly 40-year, period [of my career],” he said.

“What worries me is that I don’t think the prospects look anywhere near as optimistic for the next 20 years.”

Delaney named three reasons for this: “the rise of indexing” at the expense of active management; robo-advisers displacing the CIO’s role in portfolio construction; and the reputational issues facing the investment profession. He warned the gathering of investment professionals that whether they’re in securities selection or portfolio construction, their roles are at risk of being displaced by technology in the years ahead.

“The only response the profession has is to embed itself in the technology,” Delaney argued. “Be better than indexing. Be better than robo-advice. If you’re not better, you’re not going to survive. Technology is coming to investments and, I suspect, it’s going to take a chunk of the market share. A chunk of the jobs, and a chunk of the income.”

DEC 2017 – JAN 2018

RISE OF THE ROBOTS

Colonial First State Global Asset Management chief executive Mark Lazberger joked that Commonwealth Bank’s $218 billion wealth-management arm was already looking into whether artificial intelligence could produce a better CEO than him.

But on a more serious note, he said it was increasingly apparent that while technology is becoming a constant and critical part of the industry, few people understand how that will play out for the profession and its activities.

How and when AI is used to automate back-office functions and sort large data sets, and how that feeds into decision-making, represents a big opportunity for the sector and how firm’s embrace these technologies will be crucial to their future success, he said.

Lazberger drew parallels between the current failure to delve into this issue and the failure of the industry 30 years ago to question the motives of those selling portfolio insurance, which is often considered a precursor to the 1987 sharemarket crash.

“All of us need to have… a preparedness to question. What are the reasons? What does this really mean? And fundamentally, what are the consequences of these sorts of changes?” Lazberger said.

He predicts, like many, that technology will change the way individuals think about investing. The challenge for those in investment management firms is to be clear about their own position, and ensure their ongoing relevance.

“That length, complexity and disconnection [from professional to client] concerns me considerably…I’m not saying it’s insurmountable but it is a challenge,” he said.

“It only takes a couple of seconds to realise that we’re part of a massively individuated… intermediated value chain.”

Lazberger and Delaney made their comments during a panel titled The Future of the Investment Profession, facilitated by Investment Magazine editor Sally Rose.

GROWING PAINS

The investment conference crowd was keen to hear the pair’s views on how the growing scale of Australia’s $2.3 trillion superannuation industry, and the trend for big funds like AustralianSuper to in-source more of their investment management, is changing the relationship between asset owners and their external managers.

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The big four banks are stepping away from vertical integration, selling parts of their wealth-management and insurance businesses, and investment management firms are stepping in. It has been widely reported in the media that CBA has CFSGAM up for sale.

Delaney noted that the uneasy tension between those who gather assets and those who invest the money is always present and said the approach needs to be reviewed as a fund grows and achieves different benefits of scale. This has been at the forefront of his thinking recently, as AustralianSuper has increased its funds under management by almost one-third over the last 18 months.

“In a well-run organisation, where [the investment business and the investment profession] do work in harmony, there should never really be an issue,” Delaney said, adding that there is “no magic number” where efficiencies and scale meet, rather it’s a constant question of adjustment.

“What you do know is, you can’t wear the same shorts you wore as a 17-year-old when you’re 21. They just don’t fit. So you have to change the clothes you buy,” he said. “As long as you change what you do and adapt to the circumstances, you can keep on making money.”

Lazberger agreed with the notion that an ability to embrace change is vital to success.

Both Delaney and Lazberger stressed that, in light of the many challenges facing the industry, it is more important than ever that investment professionals act to preserve the industry’s reputation. “…It’s always easier said than done,” Lazberger said of raising the next generation of captive asset managers in the right culture.

“If you find that you’re being challenged by your owner, the larger organisations, your partner or whatever, I think all of us as

professionals have a responsibility to…meet that whole issue head on.”

Delaney warned that, amid a proliferation of mass-market, cheap products, professional investors have to be able to position themselves “like any luxury product” – with a reputation for quality.

“The whole business model and framework [in which] people thought about investing, I think, needs to change,” he said.

That is why remuneration and incentives are critical because, as Lazberger said, they drive behaviours.

However, Delaney cautioned against the idea of any single remuneration design program being perfect. Rather, it must be a process of continual revision to shape the program to encourage a culture that puts responsibility to the client above all else.

DIVERSIT Y MATTERS

Another point on which Delaney and Lazberger agreed was the urgent need for the investment profession to improve its gender diversity. There are only about 10 female CIOs at the top 100 largest asset

It’s inherently interesting. It’s not that demanding a job to do. And it’s well paid. So, I would think everybody would want to do it investmentmagazine.com.au

SALLY ROSE Investment Magazine, MARK DELANEY AustralianSuper, MARK LAZBERGER Colonial First State Global Asset Management

owners in the country. And a dearth of young women coming through the ranks indicates the imbalance is likely to persist for many years. Only 12 per cent of local CFA charterholders are women.

Still, Delaney says the culture is changing, albeit it too slowly.

“When I first got into investments, it was like an old boys’ private school stockbroking culture, where the people went to lunch and they all knew each other. It was like a gentlemen’s club,” he says. “The world is nothing like that today, thank goodness.”

He believes the profession needs to do a better job of selling its appeal to women.

“It’s inherently interesting. It’s not that demanding a job to do. And it’s well paid.

So, I would think everybody would want to do it,” he says.

Lazberger has “an unproven hypothesis” that unconscious biases are disadvantaging women in both hiring and promotion processes.

“When we’re hiring people, we tend to hire people in our own image,” Lazberger says. “And, given that the starting point is very male-dominated anyway, I think that, quite frankly, has actually been quite an inhibitor in terms of seeing organisations – firms small, medium and large – actually make much progress on this issue.”

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AN AGEING POPULATION is a demographic trend to which the superannuation industry must respond.

We feel this particularly keenly at ESSSuper, where we’ve noted that our members are living longer than the average Australian.

The fund’s actuary, PwC, has highlighted that the average life expectancy of a male ESSSuper member aged 55 is 90, compared

BY MARK PULI

Mark Puli is the chief executive of ESSSuper.

Making a game of planning for retirement ESSSuper has applied behavioural finance theory and gamification technology to create AssistMe, the fund’s new online retirement income planning tool. with 87 among the general population, while the average life expectancy of a 55-yearold woman member is 91, compared with 89 population-wide.

Most ESSSuper members are current or past employees of Victoria’s emergency and state services. Many of our older accumulation members are also in a defined benefit plan, which will require them to take a lump sum upon retirement. We recognised a need to support these members in particular more effectively as they transition from their accumulation years, to help them invest and plan for an account-based retirement income stream.

This need to help members think about their retirement account balance as an income source, rather than a lump sum, is a common challenge for the broader industry.

Historically, retirees in account-based retirement products have not had access to the same range of tools and calculators as pre-retirement members and we felt this was a gap. In response, ESSSuper developed our new retirement income stream education tool AssistMe.

MODELLING RISK

AssistMe is an online tool that provides forecasts of risk-based investment strategies for ESSSuper Retirement Income Stream

accounts. AssistMe shows members how each investment strategy might improve their forecast retirement outcomes.

This is something previously considered too complex and intimidating for a sizeable proportion of our members, who previously had limited exposure to market volatility, having been in a guaranteed super environment their entire working lives.

The ‘set and forget’ mentality, which allows members to detach themselves from making decisions about their superannuation, is a challenge for the entire industry.

AssistMe reduces what can be a highly complex decision framework and demonstrates the key financial trade-offs members face. Three investment strategies were designed and linked to a member’s risk tolerance to achieve the following objectives: • Mitigate longevity risk, given the life expectancy of members • Mitigate sequencing risk, given drawdowns and member aversion to market risk • Reduce complexity and make the strategies simple to understand and apply.

The AssistMe strategies are constructed with a bias towards an upward-sloping glide path, which has been supported by academic research and runs contrary to many common post-retirement strategies in the market.

DEC 2017 – JAN 2018

Prospect theory, from the study of behavioural finance, holds that individuals are less likely to risk profits than losses. This theory is evident in the design of the three strategies. The default drawdown sequence encourages members to leave money in risk assets in spite of gains (or losses), by drawing from the more defensive assets first.

MEMBERS EMBRACE ASSISTME

In the first 5-10 years of retirement, a member will tend to increase their exposure to risk assets, after which time their exposure to them slowly reduces.

AssistMe uses gamification technology and a visual approach to foster better interaction, and enhance the education experience for members. It creates a dynamic and interactive animated sequence centred upon the analogy of a journey. The visualisations demonstrate abstract and complex concepts, such as risk, living standards and financial longevity, as more familiar ideas, such as distance of travel, comfort, road surface and the weather.

We got Retirement Income Stream members actively involved in developing the new tool to ensure the final product met the real-life challenges they face. Since the launch of AssistMe, member feedback has been overwhelmingly positive. We have also observed a change in member behaviour with the use of the AssistMe tool to model investment scenarios, which later results in active changes.

investmentmagazine.com.au

2018 FUND EXECUTIVE FORUM

Connections Brands, boards, members & employers - how do we best connect?

R E G I S T R AT I O N S NOW OPEN FOR

Wednesday 28 February Forum Dinner Park Hyatt, Melbourne (FEAL members and guests)

Thursday 1 March Fund Executive Forum Melbourne Business School, Carlton (FEAL members only)

Hear from academics, superannuation executives & corporate leaders.

REGISTER NOW SUPPORTED BY

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

www.feal.asn.au

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\ HONOUR ROLL

In the RUNNING

The 2018 CONEXUS FINANCIAL SUPERANNUATION AWARDS celebrate excellence in the industry and will be announced at a gala event in March. The FULL LIST OF FINALISTS has now been revealed.

JUDGING COMMIT TEE MEMBERS CHRIS AILMAN

Chief investment officer, CalSTR S JOANNA DAVISON

By Amanda White

Chief executive, FEAL

IN ITS SIXTH year, the Conexus Financial Superannuation Awards received a record number of entries, and the judging committee noted scoring in each category was very close.

The committee also remarked that “pleasingly” there were 25 entries for the innovation award, with some interesting developments.

The Conexus Financial Superannuation Awards recognise excellence in the industry and aim to encourage super funds to raise the bar in all aspects of their operations. The focus of the Awards is to honour funds that offer products and services that will ultimately lead to better retirement outcome for members.

An independent committee selects the winners.

Funds are invited to nominate themselves for awards across 11 categories.

The committee assesses a broad range of quantitative factors – including fees, investments and member services – and overlays this with a number of qualitative considerations.

This year the committee added a 10 per cent weighting to governance in its assessment of the funds’ offerings. This included an examination of gender

balance at the board and executive level, director engagement and director tenure.

The committee members, including special adviser Australian Prudential Regulation Authority deputy chair Helen Rowell, were of the opinion that good governance is an important ingredient for fund success. Accordingly, the shortlist of finalists will be asked some additional questions regarding the nature and quality of their trustees’ performance assessment.

Taking a holistic view is important in assessing the winners, including evaluating whether a fund’s purpose is being met, the committee stated.

The 2018 Fund of the Year will be awarded to the nominee the committee believes has the best broad proposition, and the highest level of innovation and overall excellence.

The Conexus Financial Superannuation Awards judging committee remains the only truly independent awards panel in the sector. For the 2018 awards, it has broad representation from all areas of the industry – including the retail and industry fund sectors – and consumer representation. This is complemented by the perspectives of two offshore chief investment officers.

ALAN KIRKLAND

Chief executive, CHOICE SALLY LOANE

Chief executive, Financial Services Council MICHAEL RICE

Chief executive, Rice Warner HON BERNIE RIPOLL

Former minister for financial services and superannuation and chair of the Parliamentary Joint Committee on Corporations and Financial Services MATT WHINERAY

Chief investment officer, New Zealand Super

– SPECIAL ADVISER – HELEN ROWELL

Deputy chairman, Australian Prudential Regulation Authority

– CO-CHAIRS – SIMON HOYLE

Editor-at-large, Conexus Financial AMANDA WHITE

Director of institutional content, Conexus Financial

The winners of the 2018 Conexus Financial Superannuation Awards will be announced at a special black-tie event on March 8 at the Ivy Ballroom, Sydney. Tickets now available, visit conexussuperawards.com.au DEC 2017 – JAN 2018

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HONOUR ROLL \

Superannuation 2018

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

SMALL FUND OF THE YEAR (less than $5 billion in assets)

Bendigo SmartStart Super | BUSSQ Building Super | Kinetic Super MEDIUM FUND OF THE YEAR ($5 billion to $10 billion in assets)

EISS Super | Energy Super | LG Super | LGIAsuper | Statewide Super | Super SA LARGE FUND OF THE YEAR (More than $10 billion in assets)

AustralianSuper | HESTA | QSuper | Sunsuper | TelstraSuper | UniSuper DEFAULT FUND OF THE YEAR AustralianSuper | LGIAsuper | QSuper | Sunsuper | Super SA | UniSuper PENSION FUND OF THE YEAR AustralianSuper | LGIAsuper | QSuper | Sunsuper | UniSuper | VicSuper MEMBER SERVICES FUND OF THE YEAR Cbus Super | QSuper | Sunsuper | TelstraSuper | UniSuper | VicSuper BEST ADVICE OFFERING AustralianSuper | First State Super | QSuper | Sunsuper | UniSuper | VicSuper BEST INSURANCE OFFERING AustralianSuper | BT Super | Kinetic Super | Statewide Super | Sunsuper | UniSuper BEST TECHNOLOGY OFFERING AustralianSuper | BT Super | Cbus Super | HESTA Super Fund | QSuper | Russell Investments Master Trust INNOVATION AND TRANSFORMATION REST Industry Super | Russell Investments Master Trust | Statewide Super | Sunsuper | VicSuper CHIEF INVESTMENT OFFICER OF THE YEAR David Macri, Australian Ethical Mark Delaney, AustralianSuper Jonathan Armitage, MLC Con Michalakis, Statewide Super Ian Patrick, Sunsuper EVENT SPONSOR

investmentmagazine.com.au

DEC 2017 – JAN 2018

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Good consultation, better regulation The Australian Institute of Superannuation Trustees is developing a framework for consultations on regulatory changes – communication is at its core.

MANAGING A PLETHORA of new regulatory requirements has been one of the biggest challenges for the super industry in recent years.

For those of us working in policy and compliance, this has meant endless rounds of consultation involving government, the regulators themselves, and myriad other stakeholders.

Over the last 15 years, I have sat on all sides of this process – as a regulator running policy projects, as an advocate for member-owned credit unions and as a policy manager in the profit-to-member super sector. I have seen regulatory change done really well, but also very poorly.

Recently, the Australian Securities and Investments Commission agreed to review its new fee and cost disclosure rules (RG 97) and extend its facilitative compliance approach. This followed a four-year complex consultation process, which many participants described as tortuous.

So what lessons are to be learnt? In my experience, there are boxes to tick to ensure that any new regulation delivers on its goal.

COST, COMPLEXIT Y, CONTEXT

The first is that any significant regulatory change must be subjected to a cost-benefit analysis, ideally by an independent body, with the results made public.

Regulation costs money that comes out of members’ retirement savings. A clear benefit to consumers must be established before proceeding.

The second box concerns simplicity.

Not only does complexity cost money, it can also create loopholes that can be exploited.

Sometimes it is better to decide on broad objectives and prescribe only what is strictly necessary to achieve them.

The third box to tick is consideration of the broader policy and regulatory context. How does the new proposal relate to, or impact on,

BY AILSA GOODWIN

Ailsa Goodwin is head of advocacy at the Australian Institute of Superannuation Trustees.

existing policies or other processes that are about to begin, or are already under way?

There are at least five separate bodies examining insurance in super with the view to establishing new rules. This includes the government, ASIC, the Australian Prudential Regulation Authority, and the Productivity Commission. And the Insurance in Superannuation Industry Working Group, with its web of subcommittees, is working on developing a code of practice.

While there is some dialogue between the various groups, it’s hardly the most efficient process.

Similarly, there are overlaps and inconsistencies among all three regulators (APRA, ASIC and the Australian Taxation Office) that collect or are proposing to collect recurrent data from super funds.

The fourth thing to get right is the consultation process. A good one can achieve efficiencies for government, regulators and industry and – most importantly – better outcomes for consumers.

A transparent, orderly, inclusive process avoids surprises, builds confidence, maximises input and delivers efficiencies for stakeholders battling near-constant consultation fatigue.

DEC 2017 – JAN 2018

Leadership is another key. An interesting development in recent times is the increasing reliance on co-regulation in the super system. This has led to the industry taking responsibility for running increasingly complex consultation processes – where we are no longer just stakeholders.

It’s a hard job that requires the ability to foster inclusivity, understand differing agendas, build consensus, maintain momentum, navigate disagreement and overcome unexpected obstacles to deliver outcomes.

Timeframes are also critical. It takes time for super funds to consider reform proposals. It takes more time for their industry associations to consider and synthesise the views of their members and establish a house view. AIST has more than 50 member funds, located in every state and territory, which all have a right to be heard.

A good consultation process needs a strong feedback loop. Without this, stakeholders understandably feel their submission has disappeared into a black hole, and they have no idea why the decision-maker didn’t accept their argument.

In 2018, AIST plans to develop a framework for designing effective processes for consulting on proposed changes to the regulation of the super industry.

This framework will acknowledge that participants in each consultation process are responsible for ensuring that it is effective – including stakeholders.

The government and industry owe it to our stakeholders, taxpayers and super fund members to ensure we get bang for their buck.

investmentmagazine.com.au

Tuesday 20 February, 2018 Sheraton Melbourne Hotel

Whether in-house, outsourced, delivered by human or robot, financial advice is an area of increasing focus for profit-to-member super funds. This member service is an opportunity to engage and educate, and have a significant impact on your members’ end retirement balance.

The 2018 AIST/IFS Financial Advice in Superannuation Symposium will provide you with the tools you need to stay up-to-date and excel across all areas of financial advice including face-to-face and digital.

Topics include: Ageing population Explore the latest ageing population trends globally and here in Australia and the opportunities for financial advice to consider.

Digital advice Understand the varying objectives of digital platforms and the thinking behind the digital design offering.

Engaging members with advice Find out tips for overcoming the challenge of communicating advice and its value to members.

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MINISTER FOR REVENUE and Financial Services Kelly O’Dwyer recently used a keynote address to a private industry forum to draw attention to the shortcomings of the retirement phase of the superannuation system.

O’Dwyer said funds should help their members by designing income solutions that meet their needs in retirement, and by cutting the complexity of the decisions members have to make about retirement products.

The Committee for Sustainable Retirement Incomes strongly agrees on the “absolute need to have a retirement income framework”, as the minister highlighted.

Going forward, a fund’s success will be judged on its ability to help members manage the heightened financial risks members face in retirement, when they no longer have the security of employment income.

These risks go well beyond investment risk. They include the possibility of facing negative returns when the member has little opportunity to recover losses (sequencing risk), the chance of outliving savings, and the major and often unexpected health and agedcare expenses of retirement (longevity risk).

The minister’s speech provided feedback on almost 12 months of consultation by Treasury on a regulatory framework for comprehensive income products for retirement (CIPRs), a key recommendation of the David Murray-led Financial System Inquiry.

OPINIONS VARY ON DETAILS

O’Dwyer said the Treasury consultation process had shown broad agreement on the importance of CIPRs, and on the idea that funds should offer multiple products designed for the needs of different member segments. There was, however, a range of views about specific design and implementation issues, including who should and should not be offered a CIPR and measures to influence uptake by trustees and members.

The government has already acted to support more innovative solutions by removing tax barriers to new income stream products from July 1, 2017.

Retirement income must work for all The FEDERAL GOVERNMENT has issued a challenge to Australia’s SUPERANNUATION INDUSTRY to develop retirement benefit strategies that address the diverse needs of members ill-equipped to judge complex risk trade-offs ON THEIR OWN.

A RANGE OF STRATEGIES

BY PATRICIA PASCUZZO

Patricia Pascuzzo is the founder and executive director of the Committee for Sustainable Retirement Incomes.

O’Dwyer also stated that she is working with Social Services Minister Christian Porter to determine the social security treatment of products such as deferred annuities that will form components of CIPRs. This is a critical first step. Without clarity about the means-testing of new income stream products, uptake of CIPRs will be severely constrained.

O’Dwyer foreshadowed further government consultation with the industry before finalisation of the regulatory framework for CIPRs, which Treasury has suggested be rebadged as MyRetirement products.

DEC 2017 – JAN 2018

Managing risks in retirement involves complicated trade-offs that are highly specific to each member’s particular circumstances and preferences. As has been shown in the numerous inquiries to date, most savers are ill-equipped to make decisions about accessing their retirement income or protecting themselves from these risks.

Default MySuper fund members, by definition, have had minimal, if any, involvement in investing their funds prior to retirement and are, therefore, particularly poorly placed to suddenly manage these risks at retirement.

To address these problems, it is important for trustees to recognise that behavioural biases afflict us all and design techniques to nudge members towards improved outcomes.

A default fund that limits itself to the accumulation phase will not be in a position to engage with members to better understand their needs and guide them during the difficult transition in pre-retirement and through the retirement years.

Trustees need to develop a retirement benefit framework for their fund that includes consideration of the needs of the membership and a range of strategies to manage the various risks members face.

O’Dwyer clearly articulated her expectation for the industry to give more attention to members’ needs in retirement. For those in the industry who do not support governments intervening in superannuation, this presents an opportunity to drive change that generates better outcomes for members.

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privatemarketsconference.com.au CONTACT Alex Proimos

alex.proimos@conexusfinancial.com.au | 02 9221 1114