Investment Magazine August18_Issue 152

INTELLIGENCE FOR INSTITUTIONAL INVESTORS

ISSUE 152

AUGUST 2018

ALLOCATION

of authority

TelstraSuper CIO GRAEME MILLER focuses on the decisions that matter most

TRUSTEE PROFILE

MENTAL HEALTH

INDUSTRY

CASH MANAGEMENT

FIRST SUPER’S TIM CHATFIELD

THE MANY WAYS

MUCH TO TEND TO

TECHNOLOGY’S

LINKS ABORIGINAL AFFAIRS

EMPLOYERS CAN

BEFORE CELEBRATING

EVOLUTION STREAMLINES

TO THE CORPORATE WORLD

SUPPORT WELLBEING

WHAT SUPER GETS RIGHT

TERM DEPOSITS

INVESTMENT MAGAZINE

ABSOLUTE RETURNS CONFERENCE

SEPTEMBER 19-20, 2018 INTERCONTINENTAL, DOUBLE BAY, SYDNEY FINDING ALPHA IN A WORLD OF COMMODITISED BETA No alpha is safe. With computing power growing exponentially, all alpha will eventually morph into beta.

With beta ubiquitous, easily replicable and cheap, it makes sense to pay more for genuine alpha. But what opportunities exist for asset owners and what types of premia are worth the fees?

The Absolute Returns Conference is designed for chief investment officers, heads of investment strategy, heads of alternatives, portfolio managers, analysts and consultants.

Registration is open to institutional investors, chairs of investment committees and specialist consultants.

REGISTER NOW

absolutereturns.com.au CONTACT Emma Brodie

emma.brodie@conexusfinancial.com.au 02 9227 5708

THIS ISSUE \

CONTENTS AUGUST 2018

COVER STORY

22

14

POWERFUL DYNAMIC

BUT FIRST, THE TURMOIL

TelstraSuper CIO Graeme Miller has put his stamp on investments with a keen focus on dynamic asset allocation and an empowering mindset.

ROUNDTABLES

10 CASH BUSINESS Experts gathered recently to discuss the evolution of cash management through technology.

16 BRAINSTORMING SESSION Industry stakeholders gathered to discuss the many ways super funds and life insurers could create mentally healthy workplaces.

06

COLUMNS

TRUSTEE PROFILE

“If you look at the population of Victoria, there are 55,000 Aboriginal people and just a small percentage are employed in full-time work…If you’re not maintaining a job for 10 to 20 years, or if you’re always moving about the country, what does that mean with regard to your super?”

TIM CHATFIELD | BOARD MEMBER | FIRST SUPER

Before Australia can get back to refining its world-class superannuation system, the industry will have to endure many shockwaves.

21 CUSTODY MATTERS A proper focus on cybersecurity requires internal and external controls, plus ongoing assurance.

27 LIFESKILLS AI’s precise reading of big data makes it perfect for disrupting group insurance.

29 VALUES SHAPING LEADERS FEAL chief executive Joanna Davison discusses how evolving societal norms shaped the theme for this year’s national conference.

30 COMPLIANCE A new model for operational due diligence will help funds hold up under APRA’s intensified scrutiny while streamlining the process and the cost.

03

04

\ FROM THE EDITOR

EDITORIAL DIRECTOR OF INSTITUTIONAL CONTENT AND ACTING EDITOR

AMANDA WHITE / amanda.white@top1000funds.com

Amanda White JOURNALIST

Jean-Paul Pelosi HEAD OF DESIGN

A LETTER from the editor

I

Kelly Patterson ART DIRECTOR

Suzanne Elworthy SUB-EDITOR

Haki P. Crisden PHOTOGRAPHER

Matt Fatches

‘AIM FOR AN IDEAL WORLD’

matt@mattfatches.com.au CHIEF EXECUTIVE

Colin Tate

F YOU’RE READING this, I just want to say, thanks.

I’m sure anyone working in superannuation right now doesn’t have much spare time; it’s been a big year for super and that’s not going to change in the second half of 2018. It’s probably been tough to get your head, and resources, around all of the change afoot.

Already, there’s been the Productivity Commission’s comprehensive work on superannuation, Darren McShane’s review of RG 97, the government’s reform package for accountability and member outcomes, along with its reform of group life. Now the Hayne royal commission hearings on super are kicking off on August 6.

The minister for financial services, Kelly O’Dwyer, said the royal commission presents an unprecedented opportunity for the industry to reflect on the practices and actions that have resulted in the commission in the first place.

“Reflect and reform is an appropriate motto,” O’Dwyer said, and I agree with her. Rather than being overwhelmed or fearful, this is a great opportunity for the industry to draw a line in the sand.

Recently, Neville Owen, who headed up the HIH royal commission in 2003, has been making some comparisons between his report and the current inquiry, reminding us that accountability is at the heart of a fiduciary’s duties.

AUGUST 2018

In a July Australian Institute of Company Directors article, Owen wrote: “Essential to accountability is the concept of ‘stewardship’ – that is what is at the heart of governance. They are not your assets you are dealing with. It is a question of culture and we ought to be working on principle as much as we should be working on legislation.

“Culture involves an understanding of why the law is as it is. The more you rely on the letter of regulation, the less likely you are to examine underlying principles.”

As the royal commission hearings get back under way, I’d urge you to examine your principles, and also your ethics and your actions.

When Owen wrote his report 15 years ago, at the core of his musings was the question: “Did anyone ask themselves, ‘Is this right?’” This is something everyone who manages someone else’s retirement savings should ask themselves every day.

And as Owen also stated in his report: “In [financial services], as elsewhere, we should at least aim for an ideal world.”

We’re thrilled our new editor, Alice Uribe, arrives this month and will be writing this letter starting with the September issue. It’s been a blast.

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

Caitlin Leitch

caitlin.leitch@conexusfinancial.com.au (02) 9227 5718 CLIENT RELATIONSHIP MANAGER (EVENTS)

Bree Napier

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

PRINT

Special T Print Average Net Distribution:

ISSN 1838-8949 Subscriptions are $165 including GST per year for 11 issues within Australia

3,964

Exclusive Media Partner of

2b

ADVISORY BOARD MEMBERS Debbie Alliston, head of multi-asset portfolio management, AMP Capital | Richard Brandweiner, chief executive, BTIM Australia | Peter Curtis, head of investment operations, AustralianSuper | Joanna Davison, chief executive, FEAL | Michael Dundon, chief executive, VicSuper | Kristian Fok, chief investment officer, Cbus Super | Robert Goodlad, chief executive, CIMA Society of Australia | David Haynes, executive manager, policy and research, Australian Institute of Superannuation Trustees | Geoff Lloyd, chief executive, Perpetual | Graeme Mather, head of distribution, product and marketing, Schroders | Mary Murphy, chief digital officer, First State Super | Paul Newfield, senior investment consultant, Willis Towers Watson | Nicole Smith, chair, MLC Superannuation Trustees | Anne Ward, chair, Colonial First State and Qantas Super | Nigel Wilkin-Smith, director portfolio strategy, Future Fund

investmentmagazine.com.au

INVESTMENT MAGAZINE

GROUP INSURANCE SUMMIT AUGUST 28, 2018 FOUR SEASONS SYDNEY, NSW AUSTRALIA’S LARGEST GROUP INSURANCE SUMMIT Now in it’s seventh year, the Investment Magazine Group Insurance Summit is the largest annual forum exploring the insurance trends affecting industry super funds.

With a program developed for group insurance professionals by group insurance professionals, this year’s event covers: 

Innovation in product design



The importance of mental health



A review of the code of practice amid a royal commission



Insurtech and smart analytics



Investing in restorative health management



The future of group insurance

REGISTER NOW

groupinsurancesummit.com.au CONTACT Emma Brodie

emma.brodie@conexusfinancial.com.au 02 9227 5708

06

\ TRUSTEE PROFILE

AUGUST 2018

investmentmagazine.com.au

TRUSTEE PROFILE \

Aboriginal Elder TIM CHATFIELD’S broad life experience will help him teach the importance of super and link Aboriginal affairs to the corporate world as a board member at FIRST SUPER.

By Jean-Paul Pelosi + Photos Jane Murray

RIGHT MAN for the

JOB investmentmagazine.com.au

AUGUST 2018

07

08

\ TRUSTEE PROFILE

IT’S NO EASY task explaining super to those who know little about it, but that’s just one of the big challenges facing new First Super board member Tim Chatfield.

Chatfield, who is an Aboriginal Elder of the Djab Wurrung people in Victoria, was appointed to the fund’s board as an independent director late last year and says he hopes to educate Indigenous people about the need for super and the importance of basic employment.

“If you look at the population of Victoria, there are 55,000 Aboriginal people and just a small percentage are employed in full-time work,” Chatfield says. “If you’re not maintaining a job for 10 to 20 years, or if you’re always moving about the country, what does that mean with regard to your super?”

Furthermore, many Indigenous Australians don’t live long enough to get super, Chatfield says.

“There are still a lot of Indigenous people who don’t understand super or what it’s about,” he says. “But more importantly, they don’t own their own home or even have a job.”

Chatfield acknowledges that Indigenous Australians are far behind the rest of the population when it comes to issues of health and employment, so above all else, he wants to be a voice and a leader for his people. He’s always been focused on his community and hopes to use his new platform at First Super to create more opportunities for future generations.

“You have to come back to the question of why it’s been difficult to get Aboriginal people in jobs,” Chatfield says. “And why is it difficult to get a good quality of health service because of cultural differences?

Is it cultural knowledge and information?

Is it because we’re not skilled enough or knowledgeable enough?

“The key question then becomes how do we pass this [knowledge and skill] on to generations so they can capitalise on it and build a portfolio to grow wealth.”

UP FOR THE CHALLENGE Chatfield’s life experience is broad. He grew up in regional Victoria and now lives on his mother’s land as a farmer. As if running a farm and looking after three kids wasn’t enough, he is also the chair of Aboriginal Housing Victoria, the chief executive of a successful Aboriginal managed health clinic, the chair of Aboriginal political party Martang, and a member of the Victorian Aboriginal Heritage Council and the Aboriginal Stakeholder Group of the Victorian Government.

With all this on his plate, joining a super fund board was perhaps not an obvious next step. Yet, Chatfield says he is motivated by his community and armed with experiences that can help bridge the gap between grassroots Aboriginal affairs and the real world of corporate business.

“I’m interested to see what super funds are doing and what they can do for the Indigenous people of the country,” he explains. “As the new kid on the block, I’m still learning. I had no idea how super funds worked but I have good insight now.”

Because many Indigenous Australians don’t enter into a formal retirement, Chatfield focuses on the idea of selfdetermination. For example, if Indigenous communities can help themselves, they can better secure a financial future that suits them. The solution has long been to simply give handouts to Aboriginals, which isn’t right, Chatfield explains.

Australia’s leaders need to move away from this approach and start empowering the Aboriginal community, he argues.

“Why can’t we be a super fund where

How do we pass this [knowledge and skill] on to generations so they can capitalise on it and build a portfolio to grow wealth

AUGUST 2018

investmentmagazine.com.au

TRUSTEE PROFILE \

we can control our own issues?”

Chatfield says. “Why do we have to be regulated and monitored by the powers that be?

“Everything comes from selfdetermination. You can own your own home and when you retire you can have funds to continue your life.

But more importantly, you can look after your immediate family by setting up some sort of trust or foundation for the future, for education and training, whatever your need may be.”

VALUED PERSPECTIVE First Super chief executive Bill Watson has said that Chatfield’s experience is especially relevant to the fund’s board because many of its members live and work in rural Australia.

With $2.7 billion in funds under management, First Super is significantly smaller than many other Australian funds but Chatfield doesn’t see this as a disadvantage. He’s fully aware of the pressures on smaller funds to consolidate but in his view “small is beautiful”.

“Our returns to members and our fees are better than most funds, including funds that are 50 times bigger than First,” Chatfield says. “If the returns are strong and the fees are low, I can’t really see an imperative to merge.”

Of course, Chatfield doesn’t presume to represent every Indigenous person in every community but does hope to feed the Indigenous perspective into the conversation at First Super.

“I hope I am considered a good allrounder who can contribute in many ways, including with insights gained through starting a successful small business and from initiating community projects,” he says. “But I think the rural and regional perspective is valuable in the context of board deliberations, given the composition of the fund’s membership.”

A COMMUNICATOR Chatfield clearly has a competitive spirit, too, undoubtedly fostered by success at Australian rules football while growing up, which he says helped him learn skills

for meeting people and handling various social situations.

“The great thing about footy is that it teaches you to communicate with different people,” Chatfield says.

These communication skills have served him well – on the farm, with local community initiatives, in regional government, and now in the arena of big business. One minute he’s in a suit, and the next it’s back on the land with his sheep in footy shorts and work boots.

This latest experience on the First Super board has been rewarding thus far, he says, because he meets many interesting people who bring a lot to the table.

“Some people, but not all, have an awareness of Aboriginal issues,” Chatfield says. “Maybe they haven’t met an Aboriginal person before. I think when you tell them where you’re from, eyebrows can raise a little but it also becomes a point of interest.

“I enjoy it – it’s exciting times. It’s outside of my comfort zone, which is why I got involved, and I’m looking forward to the challenge.”

09

10

\ SPONSORED ROUNDTABLE

AN INVESTMENT MAGAZINE ROUNDTABLE, sponsored by CASHWERKZ

BUSTLE

and FLOW

CASH INVESTING AND MANAGEMENT make up the final frontier for leveraging technology to streamline and automate, so investors can better manage term deposits.

Experts gathered recently to discuss the evolution.

By Rachel Alembakis + Photos Matthew Fatches

GREATER EFFICIENCY AND the increasing importance of managing term deposits as more fund members move into retirement were hot topics as cashmanagement experts gathered recently.

Cash investments, the asset class that has been left behind? Is cash the oil that lubricates the machine? Is it the bane of the custodian or a necessary evil? What role will term deposits play in post-retirement member retention? And how can cash management be streamlined to facilitate more efficient implementation of instructions?

These were the questions considered by an expert panel from all along the cash management lifecycle, from superannuation fund to custodian to bank, at a recent roundtable discussion conducted by Investment Magazine and sponsored by Cashwerkz.

How streamlined is your cash investment process?

While there have been technological advances in other parts of investment and portfolio management, the cashmanagement function has received little attention. Panellists reported reliance on faxes and other manual and timeconsuming processes.

Seamus Collins, head of portfolio implementation at Mine Super, said cash management had a number of different dimensions, including investment cash used in diversified options or cash-driven options, and term deposit books. For Mine Super, investable cash is managed by the in-house asset allocation team for diversified options. For the cash option, the money is managed in-house and externally by two cash managers, using a cash trust structure with a same-day application redemption strategy that

cashwerkz.com.au

SP ONSORED ROUNDTABLE \

11

and out, and they have an 11.00am account there that they can draw on to facilitate the member cash flows coming in and out.

Strategic asset allocation at EISS Super is performed by the investment management team.

“Each of the individual options has a cash allocation and they will be reviewing, on a daily basis, what that cash allocation is, depending upon the option,” Gilmartin explained. “We have some reserves, they’re also in term deposits. But, again, we don’t really have a lot of money lying around, everything is invested fully. The one key thing for us, from an operational perspective, for term deposits, is getting a share certificate every time and having to send a proper instruction in to the custodian to do that.”

SWIFT ADJUSTMENT

“seems to work reasonably well”, Collins said. Further, Mine Super has a term deposit book.

THE ‘PAIN POINT’ “Term deposits [require] a slightly more tedious process, and we largely run complex spreadsheets to track all our terms and maturities; that’s by and large a headache and a manual process,” Collins said. “We also have operational cash – a different category altogether – which we essentially try to manage down as tightly as possible. Some of that is with the custodian and we essentially manage [that] in-house to optimise that for margining for collateral needs and for daily member cash flows, but essentially, we’ve been pretty effective in managing that down.”

Mine Super leaves “a reasonable

amount” of its cash with its custodian, and Collins notes that the biggest “pain point” in the discussion of managing cash is around term deposits.

“Would I like a custodian to have a little bit more of a transparent discussion on a cash-plus model with cash balances?” he asked. “Probably. But the reality is I’m pretty knowledgeable about how custodians treat cash, so I’m fine with that and move forward.”

Louise Gilmartin, head of investment operations at EISS Super, noted that the fund also has a cash option, managed externally by a single investment manager.

“All our cash is invested,” Gilmartin said. “We don’t actually have any cash sitting at the custodian like Mine does. It’s all invested into our investment manager.

We tell them every day what’s coming in

Secure instructions.

Real time reporting.

Gilmartin said it would be more efficient to receive the share deposit certificate via Society for Worldwide Interbank Financial Telecommunications [SWIFT] messaging, rather than directly.

Custodians view cash management as a two-part process as well. Sally Surgeon, head of client services, Australasia, at Northern Trust, says the starting point is providing the cash balances for clients, receiving the instructions and processing them. But while most investment managers tend to be SWIFT enabled, with the associated automation, asset-owner clients are not SWIFT enabled and can send instructions via fax, so the custodian has to be the facilitator in the instruction process.

“Things like term deposits tend to be more manual in nature; as Louise indicated, you’re waiting for instructions,” Surgeon said. “We have looked at ways to automate that process by providing an instruction portal. So that’s something relatively new that we’re rolling out at the moment. But it’s really about trying to make that process as seamless as possible for something that is quite manual and bespoke.”

She noted that at Northern Trust, when they receive an instruction from a superannuation fund client, they effect the transaction within the day.

Paul Toepfer, chief operating officer

cashwerkz.com.au

12

\ SPONSORED ROUNDTABLE

MARK COCHRANE Cashwerkz

SEAMUS COLLINS Mine Super

at State Street, noted similar processes and similar pain points if there is a paper-based message from a client.

“There’s the outbound, and how well we can electronically instruct the ADI [authorised deposit-taking institution] and what they have set up there, which either is a smooth or not so smooth process,” Toepfer said. “And then we’ve got the maturity piece as well and what happens upon maturity and different measures to make sure there is awareness around what’s happening at that point and then there’s action being taken.”

The transaction can slow down if there is a new investment from a superannuation fund, or if the custodian has to interact with a new ADI for the first time, because there’s more upfront work, Toepfer said.

“The process works, but there’s definitely time pressure in making sure the transactions occur and then you get the deal that’s actually been quoted to the investment team,” he said. “And so, there are things that need to be done in the required time to make that happen, and if there are paper-based instructions throughout, it’s definitely slower and it creates that pressure and risk.”

Simon Martin, head of multi-sector sales and business development at HSBC Securities Services, noted that the firm has adopted SWIFT messaging to accommodate automated communication amongst State Street, Northern Trust and itself.

“With State Street and Northern and

If there are paper-based instructions throughout, it’s definitely slower and it creates that pressure and risk

our other clients, we’ve seen a really big adoption of SWIFT messaging,” Martin said. “So generally, when these go out, we will send a cash or SWIFT message confirming the cash payment has gone out. We can then send a follow-up SWIFT confirming that it’s settled. We’re starting to see a lot of fund managertype clients taking in those SWIFT messages, and if cash management’s really important to them, it’s all about getting the real-time messages back.

So as soon as those acknowledgements have come back in the SWIFT network infrastructure, then they’re straight back out the door. There’s no reason a client can’t come in the next day and know their actual positions.”

Drew Vaughan, a consultant in

Online investment in minutes.

institutional superannuation, notes that while decisions on term deposits are easy for custodians because the settlement process with the ADI is efficient, it’s harder for asset owners to convert a decision into an instruction.

“The conversion of the decision into an instruction that goes to the custodian is the clunky bit,” Vaughan said. “That’s the bit that often takes the time and is potentially later in the day, and potentially the bit that can give rise to some failure on settlement because timing isn’t met.”

To that end, Cashwerkz chief executive Hector Ortiz noted that the company’s platform passes compliance hurdles in terms of ADI partners and then improves the efficiencies of the workflows for

cashwerkz.com.au

SP ONSORED ROUNDTABLE \

the custodians and asset owners.

“As we were talking to the market about this product, the value is in four key areas,” Ortiz said. “So, it’s the rates gathering, which is very important because custodians struggle to have the resources to gather rates on behalf of a fund manager that already has a rate in its mind and needs to check it to see if a custodian can do that, so that’s number one. And number two is about the delivery of the instructions in a secure manner, highly efficient, etc.

Number three is all about the reporting or exporting of the data externally, and then we’ve got this regulatory requirement around compliance, because what’s coming out of the [Hayne royal commission] is very interesting with regards to best interests.

So how do you demonstrate best interests?

And I think my view is that anybody who

PA R T I C I PA N T S MARK COCHRANE Relationship manager, financial institutions, Cashwerkz SEAMUS COLLINS Executive manager, portfolio implementation, Mine Super LOUISE GILMARTIN Head of investment operations, EISS Super SIMON MARTIN Head of multi-sector sales and business development, Australia and New Zealand, HSBC

HECTOR ORTIZ Cashwerkz

HECTOR ORTIZ Chief executive, Cashwerkz JOHN POWELL General manager, deposits, ME Bank SALLY SURGEON Senior vice-president, head of client services, Australasia, Northern Trust PAUL TOEPFER Managing director, head of product, Australia, State Street Global Services DREW VAUGHAN Principal, Dymond, Foulds & Vaughan

CH A IR ALEX PROIMOS Conference content producer, Conexus Financial

LOUISE GILMARTIN EISS Super

Your trusted technology partner for cash solutions.

13

manages clients’ money is going to have to show how they execute [acting in clients’] best interests.”

Cashwerkz gathers term deposit rates in real time, and offers secure communication of the instructions between the asset owner client, its fund manager, the custodian and the ADI that offers the term deposit.

This real-time transparency and secure, efficient communication around allocations to term deposits comes at a time when cash options, and therefore cash management, are receiving greater attention from superannuation fund members approaching retirement.

RETENTION OPPORTUNIT Y Cash management has been seen as a “necessary evil rather than something to optimise” by superannuation funds in the past, said John Powell, general manager of deposits at ME Bank. However, that may change as the superannuation industry moves from the accumulation business to the pension business. To that end, superannuation funds may start seeing cash management as “more of a retention opportunity for the fund”, which will mean offering more competitive cash returns, with increased efficiency and the ability to transact instructions more easily.

Mine Super’s Collins noted that the fund offers individualised term deposits as part of its post-retirement strategy. It states that self-managed super creates “a flight risk” for members aged 45 to retirement, but another trend is the unwinding of self-managed super arrangements at retirement, which has led the fund to dedicate a post-retirement team to paying attention to that strategy.

“Part of that is a retention strategy,” Collins said. “There’s no doubt about it, because we have high-net-worth members talking to people and saying, why can’t I do this? It’s not necessarily something the investment team would endorse, but as part of a member-focused fund, it’s something we do and will continue to do.”

cashwerkz.com.au

14

\ COLUMN

INDUSTRY

THE STORM BEFORE THE CALM Australia cannot get back to refining its world-class superannuation system until the industry endures the shockwaves from a very high-profile airing of what it gets wrong.

MICHAEL RICE CHIEF EXECUTIVE | RICE WARNER

THE NEGATIVE MEDIA coverage arising from the Hayne royal commission and Productivity Commission findings has tarnished the reputation of the Australian superannuation system. This has created unprecedented levels of uncertainty for the industry, and a widespread public perception that there is poor value and inappropriate conduct from superannuation.

Yet, this is the opposite of the experience of most members.

Not only has ‘Brand Super’ been trashed, but also the industry faces major levels of change and activity. While we are used to changes from the annual Federal Budget, this year, the impact will be

profound, with the removal of default life insurance for those with balances under $6000 and younger than 25.

Simultaneously, the Australian Prudential Regulation Authority is seeking more power to weed out underperforming super funds and we expect the Australian Securities and Investments Commission to become even more involved in ensuring consumers get fair value, particularly around financial advice.

Over the next two years, even before considering the changes recommended by the Productivity Commission or potentially by the royal commission, every fund will need to review a range of services, and their cost, including: • Insurance arrangements • Retirement products, including the new concept of a comprehensive income product for retirement (CIPR) • Financial advice models.

Every fund will then need to address the budget changes, which include

In their current form, the proposed changes have the capacity to cause significant and sub-optimal disruption throughout the industry AUGUST 2018

pricing restrictions on small accounts and on exit fees, and the removal of large numbers of smaller accounts. This will require a thorough review of fee structures.

There will be much activity: • APRA will apply pressure on many smaller funds to reconsider their future.

• The retail segment will bring out renewed MySuper products to compete with industry funds, and to continue to simplify complex choice products and trade-up legacy products.

• Third-party administrators will need to review their business models and pricing.

• Investment managers will need to respond to increased use of in-house investment models, and a consolidating market.

• SMSFs will continue to flourish, despite the criticism they receive from many quarters.

These changes will affect the strategies of every super fund and all their service suppliers.

For example, late last year, we noted in our Superannuation Market Projections report that about half of all super funds would fold in the next five years. We now think this will happen much sooner than initially anticipated. Now that the consultation period for the budget changes and CIPRs has passed, the industry has begun to digest the Productivity

Commission’s draft report on levels of efficiency and competition within superannuation. It outlines a range of proposed changes that are broadly intended to consolidate the superannuation system and increase efficiency.

Overall, it is difficult to argue against the sentiment of the report – while funds are making significant inroads toward improving efficiency, there remains much work to do. However, in their current form, the proposed changes have the capacity to cause significant and sub-optimal disruption throughout the industry. This is particularly true regarding the proposal to create a ‘best-in-show’ shortlist of 10 funds to capture all new members to the system.

The goal of this initiative is to move the power of appointing funds for default SG contributions away from employers and back to members. While it is true that most employers have neither the desire nor the competence to select a suitable fund, most young members remain apathetic and do not have the information or desire to choose for themselves either!

The Productivity Commission’s analysis of the many deficiencies in our complex superannuation system shows that there is much room for improvement, particularly around multiple accounts and under-performing funds. The industry and regulators need to work on these immediately or they will face significant disruption.

Perhaps, once those issues are sorted, we can reflect on the reasons why our super system is held in such high esteem internationally – and point out that the majority of members receive excellent value over the long run.

investmentmagazine.com.au

SPONSORED CONTENT \ THIS REPORT IS sponsored by MFS INVESTMENT MANAGEMENT

Collaborate for synergy MFS Investment Management has spent decades building the systems and culture that allow its equities, fixed income and quantitative analysis teams to blend their knowledge and experience.

By Ben Hurley THERE IS A certain amount of collaboration in every workplace, but few organisations go the extra distance to build a truly collaborative culture–one that attracts and elevates talented professionals and becomes a core competitive advantage.

MFS Investment Management (MFS) –one of the oldest asset management companies in the world–has spent decades building and refining the systems and practices that allow for the crosspollination of insights and investment ideas across its equities, fixed income and quantitative analysis teams.

The company’s fundamental research platform is built to emphasise global collaboration across different skillsets, bringing a deep understanding of the rewards and risks of prospective investments. Combining the experience of multiple teams from different asset classes can also deliver priceless insights on matters such as the calibre of a company’s management team or the history of its private equity sponsors.

“There’s probably a large pool of investors that could be successful from an investment acumen point of view, but there’s a markedly smaller pool of investors that are willing to come to MFS and give something of themselves to make the process, their colleagues and, ultimately, the investment outcome for clients, better,” says Bill Adams, MFS chief investment officer of global fixed income.

“But in doing so they realise they are also becoming better investors themselves.”

MFS does not emphasise star investors.

Rather, it measures and rewards collaboration with a bi-yearly 360-degree review process that assesses collaborative communication skills and teamwork; essentially each individual’s contribution to the overall research platform.

Equity, fixed income and quantitative research teams meet regularly around the globe and travel together to visit companies.

As an example of how the integration of skillsets from different teams leads to better investment outcomes, Adams describes MFS’ dealings with a large consumer goods company with both publicly available stock and publicly available bonds, which equity and fixed income analysts from MFS’ consumer goods sector team examined.

Equity analysts’ models tend to look for upside opportunities, while fixed income analysts focus more on factors that threaten the steady generation of revenues that can in turn service debt. Complementary perspectives from both sides of the capital structure–equities and debt–allowed a fundamental view of the company and its securities to be expressed with a higher level of conviction.

Adams explains that fixed income analysts spend a lot of time looking at liquidity and cost of capital, examining how the bonds are being priced and whether there is enough strength in the

BILL ADAMS

business model to repay the principal and any coupons. They help the equity analysts understand indenture and covenant structures, which could be hurdles when the bonds need to be refinanced.

The globally dispersed equity team, on the other hand, helped Adams’ fixed income team gain context on a global revenue opportunity, such as what different revenue streams look like in different locations. And crucially, the equity team’s assessment of the relative value of the stock helped the fixed income team shore up its bond valuation metrics.

The greater number of relationships offered by the combined two teams is also a major advantage, allowing better access to management and a much more nuanced assessment of their calibre. The consumer goods company had spent some time in the hands of private equity, and the fixed income analysts had experience dealing with the firm at this time.

Underpinning all of MFS’ investment research is a deeply integrated commitment to sustainable investing and ESG (environmental, social, governance) principles.

MFS was an original signatory of the United Nations Principles for Responsible Investment.

ESG should never be a marketing slogan or a tool to accumulate assets under management, Adams says. Rather, any investment manager that emphasises longterm sustainability should naturally focus its analysis on any threats that could one day jeopardise business models or investment durability or, for that matter, opportunities created by sustainability factors.

“We are really incorporating our own analysis of ESG and sustainability considerations into our fundamental research process,” Adams says.

Disclaimer: This article is directed at investment professionals for general information use only with no consideration given to specific investment objective, financial situation and particular needs of any specific person. The views expressed in this article are those of the speaker, and are subject to change at any time (40900.1).

investmentmagazine.com.au

AUGUST 2018

15

\ SPONSORED ROUNDTABLE

AN INVESTMENT MAGAZINE ROUNDTABLE, sponsored by AIA

BRAINSTORMING

SESSION

By Jean-Paul Pelosi + Photos Matt Fatches

Industry stakeholders gathered recently to discuss the many ways super funds and life insurers can create MENTALLY HEALTHY workplaces.

MENTAL HEALTH AND wellbeing are increasingly top of mind for employers yet remain a big challenge. Differences in individual circumstances, types of work and even sizes of businesses, make it tricky for leaders to find the right approach.

At a recent Investment Magazine roundtable sponsored by AIA, leaders from super funds, life insurers and the health industry gathered to discuss how to better support good mental health and wellbeing for employees. The consensus was that more could be done to provide financial stability to employees, improving their financial wellbeing and, therefore, their general mental health.

This might include more flexible super options for those forced to leave work, or

Over $1.3 billion in claims paid during 2017.

ADV4065

16

aia.com.au

SP ONSORED ROUNDTABLE \

more diverse claims packages that consider mental health issues.

In the short-term, however, the focus has been on simply opening lines of communication within workplaces.

Super funds and insurers are among the companies leading the way.

AIA Australia’s group strategy manager, rehabilitation and claims, Simonie Fox, began by saying AIA is eager to help create change. She said there was a great deal of responsibility on business leaders to build strong relationships with employees so they could speak up about mental health.

“It requires leaders to share authentically and create a safe environment for real conversations,” Fox said. “This means people can put their hand up and say, ‘I’m struggling at the moment’, and the leaders know firstly, how to have the conversation, but secondly, how to support that employee [in remaining] at work.”

National workplace health and safety manager at The Reject Shop, Keith Govias, was invited to the roundtable to share his experience creating these types of conversations.

Govias said The Reject Shop used data to begin its journey, studying where injuries

occur and what the outcomes of those incidents are for employees.

“Everyone has HR policies, but how many managers have the skills and resources that are relevant to a worker who is going through a traumatic or life-changing experience?” Govias said.

“We looked at the challenge from a holistic perspective to build a safe environment where people could talk about any injury or any incident they had.”

REST Industry Super has been using the experiences of The Reject Shop in particular. General manager, strategic relations, at REST, Craig Hobart said the fund had focused on having better conversations with employees, but had also tested new strategies, such as its buddy system.

“When someone joins the organisation, the first person they’re introduced to is a buddy,” Hobart said. “It’s been extremely powerful.”

Head of people at Sunsuper, Simone Blumberg, said the fund had similarly helped support its employees by empowering leaders to take a more active role. This had also involved teaching them to start conversations.

PA R T I C I PA N T S CHRISTINE BAIRD Director, injury prevention and rehabilitation, NSW State Insurance Regulatory Authority (SIRA) YVONNE BARRETTA Team leader, injury management, Department of Planning and Environment NSW SIMONE BLUMBERG Head of people, Sunsuper NONI BYRON Managing director, Prestige Health Services Australia KATE CONNORS Director, Wellness Centre of Excellence, PwC SIMONIE FOX Group strategy manager, rehabilitation and claims, AIA Australia KATHERINE GOBBI Chief executive, EMLife KEITH GOVIAS National workplace health and safety manager, The Reject Shop JOANNE GRAVES National rehabilitation manager, AIA Australia CRAIG HOBART General manager, strategic relations, REST Industry Super

SIMONIE FOX AIA

SUZANNE JONES Independent director and consultant MEGAN KINGHAM Manager, health and wellbeing, Optus ERICA RUBIC Work, health and wellbeing manager, SafeWork NSW JOSHUA VAN GESTEL National manager, education, Sunsuper

CH A IR

JOANNE GRAVES AIA

MARGO LYDON Chief executive and company secretary, SuperFriend

ADV4065

Because we’re here for your members’ moment of need. aia.com.au

17

\ SPONSORED ROUNDTABLE

“Our key message is that it’s not a standalone wellbeing program, it’s integrated and embedded into our strategy,” Blumberg said. “Leaders need to live and believe it.”

Having meaningful conversations can be difficult at larger companies, however, director Wellness Centre of Excellence, at PwC, Kate Connors said. Perfectionism among employees has also been a challenge at PwC, she said.

“Perfectionism is a risk to psychological health,” Connors explained. “This is why we created a new program to help our people feel safe, to see role models and see that they can have open conversations.”

As part of the PwC program, employees who have experienced mental health issues have been encouraged to share their stories in a series of video profiles.

Chief executive of EMLife, Katherine Gobbi, shared a story from her time as operations manager on the police force, where case managers were forced to handle trauma on a regular basis, which later led to mental health issues.

“I was really struggling to get the attention from leadership that I needed to get the investment for a cultural overhaul,” Gobbi said. “I’m fortunate that I was able to articulate what was an emerging crisis.

“Once the leadership understood what was happening and felt empathy about the issue, there was a connection between them and employees.”

CHRISTINE BAIRD SIRA

In a similar story, team leader, injury management, at the Department of Planning and Environment NSW, Yvonne Barretta, said there were many people having mental health problems during her time at a large technology company.

To help, her team built a case to convince leadership that urgent action was required to help these struggling employees.

The roundtable’s chair, SuperFriend chief executive Margo Lydon said overcoming the challenges of large workplaces and opening a dialogue with employees took courage. To this end, SuperFriend helps super funds and insurers build better mental health and wellbeing programs and systems.

AIA national rehabilitation manager Joanne Graves said that, in her experience, the best support systems start early, with a preventative approach to mental health issues.

“It’s about being aware that people aren’t coping,” Graves said. “Then, as they need support, you can offer it and help them stay at work.”

Govias agreed with this sentiment and added that it also helped employees feel like they could comfortably return to work after suffering in some way.

WORK AS A SOLUTION The idea of recovery at work has become crucial to improving the mental health of those who have suffered either a physical or mental issue, SafeWork NSW work health and wellbeing manager Erica Rubic said.

“If you can stay at work, your chances of recovery increase,” Rubic said.

The way work is delivered to employees could still be improved upon, however, said health industry independent director and consultant Suzanne Jones.

“I get to speak to all types of stakeholders and what’s not changing is the reframing of work,” Jones said.

“People don’t think work is as effective as meditation or treatment. But if you get it right and fit the right person with good work, you can reduce treatment needed or the need for medication.”

This shift in mindset can take time, national manager, education, at Sunsuper, Joshua Van Gestel, told the group. He said that when his team first conducted general employee roadshows, many people didn’t understand the need for a specific session about mental health. But persistence is paying off at Sunsuper.

“We did a roadshow this year and the perception completely changed because

JOSHUA VAN GESTEL Sunsuper

Over $1.3 billion in claims paid during 2017.

ADV4065

18

aia.com.au

SP ONSORED ROUNDTABLE XXX \

we talked about building financial resilience to help with people’s broader wellbeing,” Van Gestel said.

Talking about financial flexibility can definitely help relieve an individual’s stress, Jones added.

“If someone needs to work less because they aren’t well, then the conversation needs to be had about what it means to their income and their super,” Jones said.

The conversation needs to be led by the employer around repackaging super, she said.

Of course, different businesses with diverse employee bases make the job of helping employees challenging, director of injury prevention and rehabilitation at the NSW State Insurance Regulatory Authority, Christine Baird, said.

MARGO LYDON SuperFriend

Mental health doesn’t just sit over there, it’s part of our safety program. It weaves into everything we do

SUZANNE JONES Independent director and consultant

MEGAN KINGHAM Optus

“There are great opportunities for all types of businesses, not just the big ones that have worked out what to do,” Baird said. “We’re looking at ways we can pull levers to help each. We’re looking at a co-regulatory response and want to engage in different ways, because it’s not a one-or-the-other scenario.”

Optus takes a broad approach. The telecommunications company’s manager of health and wellbeing, Megan Kingham, said mental health and wellbeing was central to the way the company works.

“Mental health doesn’t just sit over there, it’s part of our safety program,” she explained. “It weaves into everything we do. People need things at different times. So, you need to be able to have conversations on all things that may eventually lead to intervention.”

Managing director of Prestige Health Services Australia, Noni Byron, reiterated that transparency was paramount in any program, not only between employers and employees but also for health professionals who are invited inside a workplace to help.

Finally, the question of measurement came up. Connors said PwC was looking to include a workplace health index into its people survey. Jones supported this idea and said it wasn’t hard to take an interest in measuring how employees feel.

The group concluded, however, that there was generally too much complexity in the health and wellbeing space, and that navigating the number of providers in the industry was among the main challenges.

Some of the suggestions for handling this included having an industry forum or even pitch sessions that could help funds and insurers pick the most suitable providers for partnerships.

Lydon said SuperFriend was developing a national framework at the regulatory level that would help. This would include an aspirational view for all workers and guidance for employers on how to keep everyone engaged in good work.

As this discussion revealed, better employee engagement is integral to improving mental health and wellbeing across Australia’s workplaces.

ADV4065

Because we’re here for your members’ moment of need. aia.com.au

19

20

\ SP ONSORED CONTENT THIS REPORT IS sponsored by J.P. Morgan

Robotics will revolutionise asset owners’ efficiency

Automation is one of the key components to operational efficiency in the process-driven world of superannuation, according to J.P. Morgan.

JONATHAN EVANS HEAD OF CUSTODY AND FUND SERVICES OPERATIONS, ASIA-PACIFIC | J.P. MORGAN

ROBOTICS IS NO longer the future, it’s the here and now.

How asset owners can become more efficient and competitive has been front of mind since the Productivity Commission’s recent 571-page opus exploring the topic.

Achieving those objectives is a complex, multi-faceted task, but institutional investors taking their first steps into the world of robotics are set to take the lead in this new world.

Bots are a class of software that emulates humans conducting repetitive processes. There are more than 800 such bots working across J.P. Morgan, performing tasks such as data entry, data aggregation, data transformation, reconciliation, file relocation and digitisation.

Many of these bots can also find a natural home with asset owners.

For example, many asset owners such as super funds are bringing asset management in-house. Their portfolio or risk management systems will be absorbing data from very different sources: their own organisation, custodians and third-party vendors.

Robotics provide a lower-cost way for funds to transform that data into a format their systems can easily use, rather than relying on error-prone offline spreadsheets or time-consuming manual data entry.

Similarly, robotics can help manage data typically found in lengthy paper documents, such as information related to unlisted assets like infrastructure.

A bot can find contextual keywords and then pinpoint aspects of interest for operational risk compliance staff.

While the industry is still closer to the start of this journey than the end, institutional investors can already benefit indirectly, as large service providers such as J.P. Morgan are increasingly employing robotics and artificial intelligence.

In the past, asset owners would need to provide data to custodians

and others in a precise format.

Now, they can provide data in a wider variety of structured, electronic formats.

At J.P. Morgan, it can take as little as a few weeks to as long as a few months to implement a new bot, depending on the complexity. Cases are presented and reviewed to check whether core infrastructure could already solve the issue. If a bot is the answer, we then check that it will not raise risk or control concerns.

Requirements are then drafted and used during development. This has been one of the most crucial components in getting bots up and running as efficiently as possible, reducing bot re-work and potential failures. Bots are then tested before being implemented.

J.P. Morgan has learnt a number of lessons in its journey, which it is addressing through an established feedback loop for ongoing governance and collaboration with technology, risk, controls and end-users, to ensure an effective and scalable framework.

Organisations implementing bots need to consider questions such as: What point does the bot inform the owner when a process is completed?

Is there a central inventory that records all of the bots running in the organisation, their functions, and who controls them? Does introducing a bot introduce additional risks?

Nevertheless, the robotics opportunity for asset owners is growing, whether they’re used as the glue between traditional data sources such as spreadsheets and new digital platforms, or to improve member-facing services at scale.

Owners are hungrier than ever for stronger member engagement and improved efficiency to stand out in a crowded market. Bots can crunch through the data to help them achieve those goals. Just don’t expect them to digest the Productivity Commission’s report yet.

The products and services described in this document are offered by JPMorgan Chase Bank, N.A. or its affiliates subject to applicable laws and regulations and service terms. Not all products and services are available in all locations. Eligibility for particular products and services will be determined by JPMorgan Chase Bank, N.A and/or its affiliates. © 2018 JPMorgan Chase & Co. All rights reserved.

AUGUST 2018

investmentmagazine.com.au

SPONSORED CUSTODYLIFESKILLS CONTENT MAT TERS \

PROTECTION, INSIDE AND OUT A proper focus on cyber-security requires internal and external controls, plus ongoing assurance checks from providers, as FIRST STATE SUPER demonstrates.

By Rachel Alembakis

CYBER-THREATS AND MANAGING cyber-risks are at the top of the riskmanagement agenda for superannuation funds and have been there for a number of years.

In August 2017, PwC surveyed the wealth management industry for its 2017 Risk and Compliance Benchmarking Survey, and 52 per cent of participants – including superannuation funds and fund managers – “identified preparing for cyber-attacks against the privacy of consumer data and confidential information as one of the top three risks”.

That focus will continue to be sharpened. In March, the Australian Prudential Regulation Authority (APRA) proposed CPS 234, which would require regulated entities to “clearly define the information security-related roles and responsibilities of the board, senior management, governing bodies and individuals”, and implement information security controls to protect information assets, along with testing to assure the effectiveness of the controls, among other measures.

investmentmagazine.com.au

The $90 billion First State Super is one of the fund managers making IT security a priority. Chief risk officer Suzette Thurman says the fund has identified cybersecurity as a key material risk.

Thurman gives a monthly briefing on cyber-risk and

we put in place, and a number of controls we’d like strengthened.”

Thurman notes that the fund is using the voluntary National Institute of Standards and Technology framework to manage risk related to cyber-security.

I would say the priority should be on protection, putting up as many controls as possible to prevent anything from occurring

the fund’s operational management of it as part of her report to the board.

First State Super manages cyber-risk with a combination of internal and external expertise, and ongoing assurance from outsourced providers.

“We had a senior partner with KPMG come to run a cyber-security maturity survey [of the fund and compare it with] the ASX 100, so that’s the kind of information we’re getting,” Thurman says. “We have a number of controls that

Further, First State Super has recently implemented 24/7 threat monitoring from Symantec, conducted anti-phishing training with staff, and implemented an IT security committee.

“We are focusing on making sure our internal controls are strong and up

to date, and that detection is always fully functional,” Thurman says. “It’s such an ever-morphing threat – data and privacy leaks.”

Operational focus extends to outsourced arrangements, Thurman notes.

“We have an outsourcing assurance program with key service providers, including our custodian,” she explains.

“We highlight a number of risks, and we get assurance from them on how they mitigate that risk. Cyber is one of them. We meet with our providers quarterly, and if there is a threat – we will pick that up through GS 007 reports. That provides us with the additional level of comfort, and will tell us exactly what’s happened…

We’d look at it case by case and we’d work closely with [our providers] to address [the issue].”

Even with the internal and external controls in place to monitor systems, Thurman says, the biggest risk is the human factor – such as staff clicking on the wrong link and unleashing an attack by accident.

The priority is the security of members’ information.

“I would say the priority should be on protection, putting up as many controls as possible to prevent anything from occurring,” Thurman says. “Then, you do need to have that quick identification to see if anything’s falling through the cracks.”

CUSTODY MAT TERS IN A SSO CIATION WITH

AUGUST 2018

21

22

\ COVER STORY

TELSTRASUPER CIO Graeme Miller has put his stamp on investments with a keen focus on dynamic asset allocation and a mindset that envisions the organisation as a WORLD-CLASS fund manager.

S

By Amanda White + Photos Christopher Pearce

IMPLY PUT, GRAEME Miller believes the primary driver of value in a superannuation fund’s investment portfolio is asset allocation decisions.

It’s no surprise, because Miller, chief investment officer of the $21 billion TelstraSuper, spent most of his nearly 30-year superannuation career in investment consulting, culminating in a role as head of investment consulting, Australia, for Willis Towers Watson.

He is now just over two years into performing the top investment job at Australia’s largest corporate superannuation fund, and the biggest change he has made to the team and investment process is to establish a “well-resourced” asset allocation team.

“TelstraSuper has a good track record of adding value through asset allocation and dynamic asset allocation calls,” Miller says. “But the process was largely based on the views and judgements of the CIO and narrowly supported by others as an adjacency to their roles.

“Given the importance of it, I wanted to have dedicated people in that role and we thought carefully about how to structure that.”

AUGUST 2018

investmentmagazine.com.au

COVER STORY \

David Schneider, who worked at UniSuper for 10 years, joined TelstraSuper in January as head of asset allocation.

Including him, there are now four investment staff members dedicated to strategic and dynamic asset allocation.

Schneider’s team does the research and analysis to support asset allocation changes, which are then debated by a newly established asset allocation committee, which includes all the heads of asset classes.

John Eliopoulos is chair of the panel.

“Before an asset allocation change is made, it is debated and the heads of asset classes give their deep domain input,” Miller explains. “Then the committee collectively reaches a decision. All senior members of the team are involved and encouraged to contribute and challenge. It is important those allocations are supported and tested by the team.”

Miller emphasises the importance of this not only from a cultural perspective – so the whole team makes and owns the decisions – but also from a total portfolio perspective.

“We are delivering aggregated outcomes, not individual portfolios, to members,” he says.

TelstraSuper has a well-developed governance structure and Miller and his team do not need to go to the board for asset allocation changes.

“Under the delegation structure, the investment committee has substantial delegated authority for dynamic asset allocation changes,” he says. “I don’t feel in any way constrained by the governance.”

POWERFUL

DYNAMIC investmentmagazine.com.au

AUGUST 2018

23

24

\ COVER STORY

CURRENT POSITIONS There are a number of asset allocation tilts in play, relative to the fund’s strategic positioning, most of which relate to making the portfolio more defensive.

“This reflects a somewhat cautious view of the level of valuations in the market,” Miller says. “We are not in the camp that is bearish for global economies, we think there are a number of powerful drivers for global economic growth. But we are in the camp that says that is already fully reflected in asset prices, so we think the risk to asset prices is skewed to the downside, which means we have taken a number of steps to make the portfolio more defensive.”

The fund is underweight equities and has also sold off some of its real assets.

“We have taken the opportunity to sell some of the real assets we own and lock in very strong returns. It’s at the margin, and very targeted and deliberate. We are making sure the portfolio is resilient but also that the assets we do sell are the least well placed for how the global economy is likely to evolve.”

The fund is also holding more cash than it ordinarily would. Some of this is from the reduction in equities and the real assets sales, but it’s also the result of an exposure to fixed income that’s lower than normal.

The tilts sit under the dynamic asset allocation choices, but the decisions to hold specific assets within portfolios remain portfolio construction decisions.

This includes tilts towards, or away from, certain industries. An example of this is within renewable energy; Miller points out the fund would much rather own a sustainable low-cost energy producer than a fossil-fuel power generator.

Big-picture themes, such as disruption, are considered by the team, and TelstraSuper recently conducted a comprehensive study on disruption, led

by Miriam Patterson, head of real assets.

“This looked at a number of themes, but energy disruption is the one that rose to the top,” Miller says. “The rapid decline in the cost of producing renewable energy and the trajectory of reduction in the cost curve is really fascinating. People don’t appreciate how fast and far the technology has come in the renewable space.”

Such a deep study revealed some detail on how to invest in the space, and Miller says because the price point is moving so quickly, it would be better to invest in the

AUGUST 2018

Over a full cycle, 5-10 years, dynamic asset allocation should add 50-70 basis points above the benchmark

distribution not the generation of energy.

“Owning distribution infrastructure is a more resilient way to play it, and just one anecdote we’ve been looking at with regard to disruption,” he says.

Another example is the disruption of traditional shopping malls and department stores, and the impact of logistics and online shopping on real estate.

MONEY WHERE ITS MOUTH IS TelstraSuper believes in active management; most of the portfolio is actively managed.

About two-thirds of the active budget is spent on traditional approaches, such as stock picking. Now, dynamic asset allocation is also framed relative to the other parts of the active-management program.

“Done well, our dynamic asset allocation will [use] one-third of our active risk budget in the fund,” Miller says.

TelstraSuper is prepared to put its money where its mouth is in terms of

its return expectations from dynamic asset allocation, and has articulated the expected value add from the program.

“Over a full cycle, 5-10 years, dynamic asset allocation should add 50-70 basis points above the benchmark,” Miller says.

With the current size of its positions, however, the fund is not taking enough risk to make that a reality.

“I’ve encouraged the team to look carefully at how to spend the active risk budget,” Miller says. “The case for investment has to include active risk, fees and returns. Sometimes, the case for investing isn’t as strong and our members are better off if we spend those dollars in a different way or not at all.”

Active currency management is an example of how the fund is willing to make changes. In the past, TelstraSuper had a big currency overlay but that has been reduced and the fund has changed its thinking in this area. Traditionally, it was managed at an asset class level. But about a year ago, the fund started managing currency at the

investmentmagazine.com.au

COVER STORY \

Te l s t ra S u p e r ASSETS: $21 billion MEMBERS: 95,000 RETURNS (YEAR ENDED JUNE 30, 2018): Balanced fund, 8.3 per cent; growth fund, 10 per cent FEES (RG 97 DISCLOSURES): Balanced fund investment fee, 0.38 per cent a year, indirect cost ratio, 0.47 per cent a year; growth fund investment fee, 0.43 per cent a year, indirect cost ratio, 0.50 per cent a year BALANCED FUND ASSET ALLOCATION (%) 2016

2017

2018

26.1

26.8

24.7

International shares

26.0

27.7

27.4

Property

14.4

12.0

12.2

Infrastructure

5.1

4.6

4.3

Hedge funds

2.7

3.8

4.0 4.7

Australian shares

Alternative debt

0

3.4

Private equity

3.5

3.4

3.1

Australian FI

3.6

3.9

3.7

Intl FI

3.5

3.0

2.8

Cash

11.9

10.6

12.0

Opportunities

3.2

0

0.1

0

0.8

1.0

Credit

whole portfolio or investment option level.

“At the overall option level, we now look at what the desirable level of currency exposure would be,” Miller says. “We look at the likely risk/return outcomes of that and ask the same questions as for any exposure to any asset class. We target currency exposures independent of physical assets we hold in that option.

It’s a commonsense way of looking at things.

“Previously, the actual foreign exchange exposure was an outcome of the hedge exposures in asset classes, our currency exposure just fell out of that.

Now we are more targeted in allocating forex exposures, and the asset allocation team looks at that.”

The fund uses internal resources to make decisions around currency and an external manager to implement them.

It also adopts this hybrid in real assets.

“We have a couple of portfolios that we manage totally in-house but in real assets we have a very successful hybrid model. This means we retain the ability to influence the way the portfolio evolves

investmentmagazine.com.au

and the transactions in it, but we have a manager implement it,” he says.

TelstraSuper has about 90 manager relationships. Miller says about one-third of those are legacy relationships in closedend private market and real-estate funds and are going through a natural winding down. That leaves about 50 to 60 active, ongoing relationships with managers.

Miller observes that the trend in the industry towards fewer managers and larger relationships will probably resonate at TelstraSuper but the fund does not have a set target.

“We recently terminated an Australian equities manager but rather than replace them, we decided we would be just as well off distributing the assets across existing managers and getting economies of scale,” he explains. “An undeniable trend, and one we’re very supportive of, is for funds to leverage their relationships with fund managers. There is so much intellectual capital embedded in our fund manager partnerships and having a smaller number of larger relationships allows us to more effectively exploit that intellectual capital.”

Perhaps due to his time as a consultant and exposure to hundreds of managers, Miller has quite a profound view of how managers will need to add value, and model themselves, to thrive.

“The traditional fund manager model is challenged,” he says. “If you’re a wellresourced partner engaged for a specific role but can add value across the portfolio, that gives increased relevance for the manager. If the only source of value it can bring is narrow domain expertise, that’s a big risk to the manager itself. As pressure mounts on fees, managers are in a better position to negotiate if they can offer more.”

Fees and costs are an important focus for Miller and his investment team of 20.

“Far and away the most important thing we are focused on is returns net of fees for our members,” he says. “We are always looking at how much value we are deriving from what we’re spending.”

This is also the lens the fund looks through when it is deciding whether to manage an asset internally or externally.

“There is much more value for money spent internally. We spend about 20 times more on external management,” he says.

“We will always be heavy users of external managers but they have to present a compelling value proposition and not all do at the moment.”

Miller is challenging his team to see itself as an investment management organisation, rather than an investment department of a super fund.

“I challenge the team to operate in the way a world-class fund manager would in everything we do,” he explains. “For too long, super funds and consultants haven’t thought of themselves in the same frame of reference as investment managers, and they have sold themselves short. They have thought that a dollar spent on external resources and agents is different to internal systems, processes and people.

When you look through a value lens, it is almost always the case that an internally spent dollar will generate a multiple of external dollars.

“We aim to challenge our thinking and culture and ask if this is the way a worldclass investment management institution would do it. If not, why? Sometimes we can’t, because of resources, but other times it’s because of a frame of reference. We apply the same principles to ourselves we expect from external providers.”

AUGUST 2018

25

IN YOUR MEMBERS’ MOMENT OF NEED, WE’RE HERE In 2017 alone, we paid over $1.3 billion in claims to both Group members and Retail clients. That’s over $5 million every working day.

ADV4063 05/2018

Because we’re here for your members when they need it.

aia.com.au

LIFESKILLS \

AI MAKES GAINS IN GROUP INSURANCE Data sits at the heart of the sector, making it the perfect domain for disruption by artificial intelligence. IT IS HAPPENING NOW.

PETER TILOCCA CHIEF UNDERWRITER | ANZ

AS A SECTOR, insurance has not been good at the kind of deep data analytics we now see from machine learning.

This is especially apparent in group insurance, which has traditionally lagged the investment provided to retail or individual insurance.

Give or take a few key terms, we are still, in effect, asking clients all the same questions we were more than two decades ago.

With the arrival in recent years of new technology, an odd contradiction has developed in insurance.

Leaders in the industry know they must move to embrace artificial intelligence but they have been hesitant to commit to – and invest in – such systems.

We have seen some early adopters around the edges. In the UK, insurance group Neos Ventures offers competitively priced home insurance policies

investmentmagazine.com.au

by installing smart monitoring devices in people’s house.

Perhaps the quirkiest standout is US group Lapetus Life Event Solutions, an insurer that offers cover based on a selfie alone. The company’s software can use the photo to build a basic risk profile based only on your face – taking into account factors such as if you are a smoker, for instance.

OnePath is exploring how modelling customer behaviour through machine learning, data science and probability can help add value and reduce the time it takes to secure a policy.

Previously, customers would receive a quote and were then invited to complete their medical history and a lengthy questionnaire. Only following this process – and potentially up to a month later – would

US insurer Lapetus Life Event Solutions has software that can build a basic risk profile based on a selfie

ONEPATH AND UTS At ANZ, the bank’s OnePath Life Insurance arm has had some early wins in AI-based collaboration with the University of Technology Sydney (UTS), primarily focusing on how AI and machine learning can lead to improvement in underwriting processes. The pilot program has allowed OnePath to slash the time and effort required to deliver what is ultimately a better service for both consumer and provider.

Through work with the UTS Advanced Analytics Institute,

they obtain confirmation or, in the worst-case scenario, news that they could not be covered at all.

FASTER AND BET TER In late 2017, a group of tradies in Victoria was invited to participate in a pilot testing a new predictive underwriting capability, which draws on big data and artificial intelligence to make the process faster, easier and more accurate.

The pilot was a success and led to a reduction in the application process from 32 questions to seven.

Using 10 years of insurance data, analysis by ANZ and UTS has made connections between customer segments, their questions and answers, and the resulting claims – allowing pinpoint correlations between responses to questions and claims.

This has enabled the OnePath team to pick out the most relevant medical questions in the underwriting process and discard the least relevant, reducing time, paperwork and cost.

This is potentially applicable to all forms of insurance; however, some of the biggest gains could be in the group insurance space.

Group insurance is typically offered to automatic acceptance levels but for members who want extra cover, the current application process can be even further reduced than it can be in retail insurance.

The advantage in group insurance is that members typically need to be at work on the date of commencement of the cover, thus reducing the anti-selection risk even further.

While this breakthrough in technology is a game-changer for underwriters, it is unlikely that AI will ever replace the underwriters themselves.

The skills of an experienced underwriter will always be worth their weight in gold.

Underwriting will always be part art, part science.

LIFESKILLS Lifeskills is a regular section in Investment Magazine.

Each month, we publish an independent column from an industry leader with insights into best practice in the group insurance sector.

This page is produced with thanks to advertising support from AIA Australia.

AUGUST 2018

27

The

4th

A•N•N•U•A•L CONFERENCE

INVESTMENT MAGAZINE

EQUITIES SUMMIT

SEPTEMBER 11, 2018 CROWN TOWERS MELBOURNE, VIC THE ROLE OF FUNDAMENTALS IN EQUITIES The Equities Summit brings asset owners, consultants and investment managers together to hear the latest research and thinking related to international and domestic equities, risk management, alpha generation, and investment implementation.

Held over one day, the event enables institutional investors to engage with industry thought leaders in a collegial environment that promotes shared discussion.

Registration is open to institutional investors, chairs of investment committees and specialist consultants.

REGISTER NOW

equitiessummit.com.au CONTACT Emma Brodie

emma.brodie@conexusfinancial.com.au 02 9227 5708

COLUMN \

LEADERSHIP

VALUES THAT SHAPE DECISION-MAKERS

and is continuing to evolve to meet the challenges whilst maintaining a focus on the member. FEAL has played a very small part in achieving this.

SOCIETAL NORMS EVOLVE and these changes are reflected in corporate behaviour. What these shifts mean for the industry and its leaders will be the subject of this year’s FEAL national conference.

JOANNA DAVISON CHIEF EXECUTIVE | FEAL

Q: THE THEME FOR THIS YEAR’S ANNUAL CONFERENCE IS PRINCIPLES AND VALUES: CHARTING YOUR COURSE THROUGH SHIFTING SOCIETAL EXPECTATIONS. WHAT IS FEAL TRYING TO EVOKE IN ITS MEMBERS WITH THIS THEME? WHAT ARE YOU TRYING TO GET MEMBERS TO THINK ABOUT? A: The aim of this year’s conference is to encourage a conversation around not only what our principles and values are and how leaders in the industry reflect these in their everyday decisions, but also around how our values change over the course of our careers, due to our experiences. We will also consider how society’s values evolve and how this is reflected in corporate behaviour. Issues that in the

Inevitably, as a result of the royal commission, trust in our industry will be affected investmentmagazine.com.au

Q: HOW DO YOU EXPECT THE INDUSTRY AND ITS LEADERS TO EVOLVE IN THE FUTURE?

past were not considered to be relevant for superannuation funds are increasingly discussed and debated. We hope to prompt a discussion around why this is and how it is reflected in our behaviour.

Speakers at the conference will cover this from a personal, corporate and global perspective.

Q: HOW HAVE YOU SEEN LEADERSHIP STYLES CHANGE OVER THE YEARS, AND WHAT HAS BEEN THE EFFECT OF THE EVOLUTION? A: Over the years, leadership has become less “control and command” and more engaged and consultative. The effect of this has been the increased involvement and importance of senior executive teams.

It has also resulted in flatter organisational structures and improvements in succession planning. The demands on the leaders of our industry have become much more complex and challenging than when FEAL was established nearly 20 years ago. Funds are now large financial organisations with a wide variety of demands on their leaders. I think the industry has responded well to these demands

A: As the industry has grown, the recognition of its importance as a responsible investor has increased. I expect this to continue, with more funds engaging with the companies they invest in and a greater involvement in impact investing. As the funds have become financial services businesses, they will need to continue to develop their executive teams and support them in becoming well-rounded leaders.

Q: IN THE NEXT YEAR, WHAT ARE THE KEY AREAS OF FOCUS FOR FEAL AS IT GUIDES AND EDUCATES MEMBERS? A: Over the next year, FEAL will continue to support the professional development of our membership. Depending on the outcomes of the Hayne royal commission, there may be an increased focus on highlighted areas of required education. If anything, it appears FEAL’s role will become even more relevant!

Inevitably, as a result of the royal commission, trust in our industry will be affected.

We will endeavour to assist in restoring this and protecting the mental health of our membership.

AUGUST 2018

29

30

\ COLUMN

COMPLIANCE

‘SELLER PAYS’ FOR DUE DILIGENCE A new model will help funds hold up under APRA’s intensified scrutiny of operational due diligence while streamlining the process for funds and managers alike.

EVA SCHEERLINCK CEO | AIST

IT HAS BEEN almost four years in development, but a unique ‘seller-pays’ approach

by Australian super funds to managing the operational risk of investment managers aims to relieve individual funds of an expensive and onerous process, saving millions of members’ dollars along the way.

The initiative – a world first – is a prime example of how a collective approach to regulatory requirements can change the investment landscape and lead to positive outcomes for all.

Not to be confused with investment risk, operational risk is the danger of loss resulting from inadequate or failed processes (be it from people or systems) or from external events. The high cost of this risk – both to consumers and businesses – has been put into sharp focus by the current Royal Commission into

Misconduct in the Banking, Superannuation and Financial Services Industry.

Add to this the escalating risk of cyber-attacks and it is understandable why regulators around the world and here in Australia are intensifying their scrutiny of the operational due diligence (ODD) processes of external investment managers.

Earlier this year, the Australian Prudential Regulation Authority put the industry on notice that it would be stepping up the monitoring of ODD. APRA reinforced that the responsibility for these requirements rested squarely with registrable superannuation entity (RSE) licensees.

How best for funds to address this? Reviewing the back-office administration and trading execution systems of up to 50 or more investment managers is an expensive and onerous exercise for any super fund.

Enter former CareSuper manager of investments and current LUCRF Super

investment committee member, Greg Nolan. Back in 2014, Nolan approached the Australian Institute of Superannuation Trustees with the idea of co-ordinating an industry-led response to the question of how super funds could comply with ODD requirements.

For the next few years, an AIST-led working group that included representatives from a broad cross-section of AIST members worked on a new ODD model. It is a sellerpays arrangement, whereby investment managers engage an independent ODD provider to review their processes and produce a report that can be provided to any super fund considering investing with them. The cost of the report is borne by the manager.

This is the opposite of the approach taken globally, whereby overseas-based pension funds (and their members) generally foot the ODD bill and managers produce multiple reports.

In March last year, AIST

This ODD model aims to save everyone money and standardise the process across the industry as much as possible

AUGUST 2018

launched a guidance tool for the model, which APRA notes is cost-effective. Earlier this year, the Financial Services Council came on board, releasing guidance tools to help investment managers respond more easily to super funds’ routine due diligence requests, which are carried out before investment managers’ services are enlisted.

Since then, AIST has been actively promoting the ODD framework to the wider investment community.

More tools (available on AIST’s website) have now been released to help investment managers understand what information they are expected to provide to super funds and to answer questions about how this will be included in the managers’ due diligence reports.

This ODD model aims to save everyone money and standardise the process across the industry as much as possible. A common approach makes comparison easier for super funds and they can be confident that any unintended risks they assume when outsourcing investments are considered and managed as much as possible. There are also advantages for investment managers, in that they can streamline the process and avoid having to deal with 50 requests coming at them from different RSE licensees.

AIST is working with our member funds, investment managers and global and local ODD providers to ensure that the ODD reports produced under the model are of the high standard the regulator requires.

So far, the response from some of the world’s leading global managers has been positive. It will be interesting to see if this uniquely Australian and fresh approach to ODD takes off globally.

investmentmagazine.com.au

UPCOMING EVENTS

ASI2018

Cairns Convention Centre 5-7 September 2018

SUPER INVESTMENT CONFERENCE

PROGRAM NOW AVAILABLE Join our incredible line of up leading investment experts as we explore the many geo-political forces at play challenging the investment strategy of proďŹ t to member super funds.

Emma James Funds SA

Gabrielle Munzer

Challenger Investment Partners

Dr Stephen Kinsella

University of Limerick

Shane Oliver AMP Capital

Download the program and register today at aist.asn.au/asi NOMINATIONS ARE NOW OPEN FOR THE ANNUAL

AIST MEMBERS CAN ENTER IN THE FOLLOWING CATEGORIES:

Entries close: 13 September, 2018

Visit aist.asn.au/awards to enter and for all the details

A VOLUNTEERING DAY YOU CAN PUT YOUR HEART INTO The Wayside Chapel invites you and your colleagues to spend a day in Kings Cross learning about life on the streets and lending a helping hand to the most vulnerable people in our community. Come to hear about lived experiences of homelessness, learn about local social issues, and cook and serve a lovingly prepared meal.

You’ll leave with a different perspective of the people you pass in the street, and a whole lot of love.

an AWAYSIDE day A TEAM EXPERIENCE LIKE NO OTHER

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