Investment Magazine June18_Issue 150 by Conexus Financial

INTELLIGENCE FOR INSTITUTIONAL INVESTORS

ISSUE 150

CENTRED and whole

VFMC’s RUSSELL CLARKE on the holistic approach to continuous improvement

CHAIR’S SEAT

DIVERSITY

ROUNDTABLE

TCORP CHAIR

HOW SUPER FUNDS

SUPER AND INSURANCE

SYDNEY UNI

PHILIP CHRONICAN

ARE TACKLING

INDUSTRY LEADERS

STUDENTS MANAGE

EDUCATION

TALKS ABOUT

THE TIRELESS

DISCUSS CHANGING

REAL PORTFOLIOS,

OVERSEEING CHANGE

DIVERSITY PROBLEM

ATTITUDES TOWARD PAIN

REAL MONEY

JUNE 2018

THIS ISSUE \

CONTENTS JUNE 2018

COVER STORY

FEATURES

TRANSFORMATION

DIVERSITY

Russell Clarke has launched a total portfolio approach seeking continuous improvement

Myriad approaches in the industry for taking on this stubborn problem

NEWS

06 TCORP’S OVERHAUL TCorp has reorganised its investment team, centralising portfolio construction and manager selection

12 ACSI CONFERENCE Coverage from the annual event

14 ROUNDTABLE The role of super funds in relieving the burden of persistent pain

26 NEXT GENERATION Sydney University students manage real portfolios

30 TECHNOLOGY The financial and reputational costs of data errors spread like a disease; prevention is better than a cure

OPINION

29 LIFESKILLS BT Financial Group says voluntary code communicates trust

32 AIST

The government’s plan to force flagship CIPR products is a bad idea

CHAIR’S SEAT

“If we can get a 0.5 per cent improvement in performance on $90 billion, that would dwarf any cost savings we’ve made.” PHILIP CHRONICAN | CHAIR | TCORP

34 RETIREMENT Improving outcomes means helping members make better decisions

\ 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

Kelly Patterson ART DIRECTOR

Suzanne Elworthy SUB-EDITOR

Haki P. Crisden PHOTOGRAPHER

Matt Fatches

EVERYONE SHOULD SEE IT THIS WAY

matt@mattfatches.com.au CHIEF EXECUTIVE

Colin Tate

ADVERTISING BUSINESS DEVELOPMENT MANAGER

HE LAST THREE chief investment officers of large institutional investors we have interviewed – at HESTA, TCorp and, for this month’s cover story, Victorian Funds Management Corporation – have been engaged in transformations with total portfolio management at their core. All three funds were in positions of strength before they made the changes, as measured by their size, performance and team resources. Yet all three have made the decision to move to a different investment decision-making structure. With other sophisticated investors around the world also using this centralised structure, including Canada Pension Plan Investment Board, the Future Fund and New Zealand Super, no doubt it is effective. The way this structure brings into focus the overall portfolio when the team considers opportunities and risks should not be underestimated. What a great idea. But, somewhat cynically, this makes me feel uneasy. What have these funds been doing up until now and how are other investors, that don’t have this setup, viewing their total portfolio? It’s extraordinary to think it’s normal for a fund not to have a totalportfolio view, and that it is industry practice for a fund not to know its

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total exposure to equity risk, or how vulnerable it is to interest rate rises or its weighting to China across all asset classes. This is especially startling when the risks that affect the total portfolio are large and growing. ESG and geopolitical risks are not asset-class specific risks but affect the total portfolio and should be assessed as such. In May, Conexus Financial was fortunate enough to host Stephen Kotkin, professor of history and international affairs at Princeton University. Kotkin is an adviser to our business and a geopolitical expert. While he agrees, to a large extent, that geopolitical risk is difficult to price, he warned investors at our various meetings that geopolitical systemic risks do exist. In particular, he said, the battle between the US and China over Taiwan has the potential to “blow up” and should be viewed as a systemic risk. Total portfolio management, in its purest forms, means planned risk exposures at a strategic level can be maintained at the total portfolio level as individual investments enter, leave or change in the portfolio. Risk systems and technology that provide total-portfolio look through should be a priority for all investors.

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

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

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

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\ NE WS

TCORP PULLS THE

TRIGGER The NSW Treasury Corp has reorganised its investment team, including the centralisation of portfolio construction and manager selection. By Amanda White

TCORP HAS UNDERGONE a revolutionary reorganisation of its investment team that has resulted in many of its staff having to re-apply for their jobs. The TCorp team, previously organised along sector lines, will be more centralised around investment advisory, portfolio construction, exposure management and partner selection, chief investment officer Stewart Brentnall said. The current positions of a number of staff will be terminated and those employees will be invited to join the new partner selection or portfolio construction teams, Brentnall confirmed. The $92 billion TCorp investment team numbers 35 and will grow to about 55 in the next two years, he said. Under the previous structure, TCorp’s strategic asset allocation work was centralised and the portfolio then

JUNE 2018

passed on to sector teams to populate, with each team responsible for finding the right fund managers. “This meant we had de-centralised portfolio construction and a large number of manager search and management processes,” Brentnall said. Under the new structure, the investment and asset allocation team will be split into an investment advisory function, headed by Steve McKenna, and a portfolio construction function yet to have a head appointed. The investment advisory function will be where the initial set of investment decisions will be made with TCorp’s three clients – NSW Treasury, State Super and icare. This includes establishing investment objectives, liability analysis and determining the client’s detailed risk appetite. “It is critical to understand the client, in a lot of depth and what their needs and constraints are,” Brentnall said.

The next phase in the new structure is portfolio construction, with a new leader for that function to be hired from outside the organisation. TCorp’s portfolio construction team will be responsible for building a client-centric portfolio, analysing and constructing this from a whole-of-portfolio perspective, considering risk, cost, liquidity and complexity budgets. “In my view, two things needed to change,” Brentnall said. “We needed portfolio construction to be fully centralised, where previously much of it was decentralised down to the sector level. And we needed partner selection to be a single, consistent process.” Where individual sector teams were previously responsible for manager selection and monitoring, a partner selection team has now been established that will be responsible for all lifecycle management for all managers. A new head of the partner selection team, also yet to be appointed, will design a process to be consistent across all sectors, Brentnall said. The partner selection team will also be responsible for embedding stewardship and environmental, social and governance concerns – led by Lucy Thomas – and

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NE WS \

for building and managing a strategic partnership program. TCorp has about 80 manager relationships, and Brentnall said it was expected that there would be fewer managers, and more deep relationships, in the future as the model evolved. The partner selection team will also be responsible for developing a peer engagement strategy for idea sharing, collaboration and co-investment. TCorp manages about $25 billion in Australian cash and bonds in-house, plus about $12 billion in direct property and infrastructure. There are no immediate plans to bring more assets in-house, Brentnall confirmed. Direct investments and cash and fixed income will not be affected by the restructuring and will remain direct reports to Brentnall. Exposure management, which was previously outsourced, will now be managed in-house. “The implementation of strategic asset allocation, tactical asset allocation, managers, daily cash flows and

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rebalancing will all be done internally,” Brentnall said. This means investment implementation will move from operations into the investment team. General manager, investment implementation and operations, Jonathan Green, will leave the organisation after 13 years, and investment operations will now report to chief operating officer Paul Smith. Green was instrumental in moving TCorp from three custodians to one following the merger.

CLEARER ALIGNMENT TCorp is also prioritising its technology strategy and delivery and will move that function from reporting to the COO to a seat at the executive committee level, reporting to chief executive David Deverall. A new head of technology will also be recruited. Brentnall said many organisations build their investment processes, measures, objectives and incentives around

decentralised activities and measures that are not necessarily consistent with client objectives. “What we are trying to do with our new structure is have clearer alignment of activities and processes so each part of the structure and operating model better relates to and serves our clients.” Brentnall will have seven direct reports in the new structure, three of which are yet to be hired. The aim is to have the first phase of the new structure complete by July 1 this year, with the expectation that several of the leadership positions may take a little longer to fill. There will be a team of five in partner selection, a team of 10 in portfolio construction increasing to about 16 in two years, a team of six in investment advisory, a team of three in exposure management, a team of 10 in direct investments and a team of eight in cash and fixed income.

JUNE 2018

\ CHAIR’S SE AT

Philip Chronican has had 35 years of experience in banking, including as the head of ANZ, and is now on the board of NAB. He talks to Amanda White about TRANSFORMATIONAL CHANGE at TCorp, which he chairs. By Amanda White + Photos Christopher Pearce

Q: TCORP HAS UNDERGONE, AND CONTINUES TO UNDERGO, MUCH CHANGE – TRANSFORMATIONAL CHANGE IN FACT. WHAT HAS BEEN YOUR ROLE, AND THE BOARD’S ROLE, IN DIRECTING AND OVERSEEING THAT AND WHAT OUTCOMES ARE YOU EXPECTING? A: The changes to TCorp [NSW Treasury Corporation] date back now four years, to when the whole idea of amalgamating the state’s funds management activities got legs. With the clarity of that, and going from a fund with $20 billion to $90 billion, it meant when we were looking for a replacement for [former chief executive] Steve Knight, who was retiring, we needed a fundamental change. TCorp was a financial markets business with some funds management, but the profile of its debt and assets flipped and became about asset management. This changed the way we thought of selecting a new chief executive and the aspiration of the business. The board played an important role. Before the amalgamation, the secretary of the treasury was the chair, but as part of this change, we moved to an independent chair, and I was appointed. I had been on the board since 2009 as an independent member. We have seen transition at every level – a change in the governance arrangement and change in personnel. David Deverall was appointed chief executive in 2016, when Rob Whitfield was still the chair, and they planned the new strategy. This included the transformation that was needed to become a world-class organisation, and we are working with Roger Urwin from Willis Towers Watson on this. It involves looking at the key attributes of a world-class investment manager,

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including beliefs and benchmarks, and we tried to absorb some of those attributes into TCorp. The real benefit to the state will be better performance. Other changes we have made include strengthening the investment committee. Susan Doyle was appointed chair of that committee and we also have another independent member of the investment committee – neither of those two is a member of the board. We also brought in Stewart Brentnall as chief investment officer and he and the team are working with Willis Towers Watson and talking with our clients about their investment goals. In some ways it was back to basics. We felt it had to be more than just crunching three organisations together. TCorp has made so much progress in the two years since the merger. We have moved to one custodian and one team, and saved a lot of money on costs. But performance will be where the real upside is. If we can get a 0.5 per cent improvement in performance on $90 billion, that would dwarf any costs savings we’ve made. Q: WHAT IS THE MOST IMPORTANT CONVERSATION YOU ARE HAVING AT THE BOARD TABLE THIS YEAR? A: Portfolio risk is very important to us. Because we are a public-sector organisation, risks are somewhat asymmetric. When you are managing the public’s money, there’s a different approach, and you are more loss averse. So you are more conservative and want to manage downside risk but at the same time we want to be high performing. We are looking at tail-risk hedging in some portfolios and not others and also managing different levels of diversification, depending on the client. But we are looking at investments in infrastructure, property and more in equity than in the past.

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CHAIRâ&#x20AC;&#x2122;S SE AT \

WHEN it all COMES

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JUNE 2018

\ CHAIR’S SE AT

Q: HOW WOULD YOU DESCRIBE YOUR REL ATIONSHIP WITH DAVID DEVERALL, STEWART BRENTNALL AND THE EXECUTIVE TEAM? A: We have a very positive relationship. I play the coach role you’d expect. For example, I understand the public-sector world, and I think David has done a good job of fitting in with Treasury and the Treasurer. We meet regularly to discuss our agendas but I’m clear the role of the CEO is to lead the team. We still need to be aware of other executives’ capabilities and the chairs of our committees stay close to the relevant executives. The board likes to see all of the leadership team regularly. Q: WHAT IS YOUR BEST PIECE OF ADVICE FOR HOW TO CHAIR A CONSTRUCTIVE BOARD MEETING? A: I think ‘constructive’ is the right word. It is always difficult for the board to be both supportive and challenging for executives. The art of a good, mature board member is doing that. Our executives can’t be complacent but they also can’t feel like the board is picking on them. The interaction has to have a performance focus. Q: HOW HAVE YOUR VIEWS ABOUT WHAT MAKES A GOOD CHAIR CHANGED OVER THE YEARS? A: I’m not sure my view has changed,

but I’m now a lot closer to living it. In my executive life, I was lucky enough to work with a lot of good chairs, and I pick and choose from their traits. It’s important to have a balance of keeping the climate open but having everyone perform and prepare. Q: YOUR BOARD HAS A LOT OF FINANCIAL SERVICES EXPERIENCE AND BOARD EXPERIENCE, WHAT IS YOUR VIEW IN THE DEBATE AROUND GOVERNANCE AND THE VALUE OF INDEPENDENT DIRECTORS FOR SUPER FUND TRUSTEES?

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A: Super is about managing individuals’ retirement funds, and boards need to have a single purpose around that. Independence is important. The only true protection for the member in the long term is [the organisation] being independent of other interests apart from the member. Some groups are in it for profit, others are not for profit, such as employee and employer groups. There must be some measure of independence, where the sole purpose is the interests of the members. Q: YOU AND MANY OTHER MEMBERS OF YOUR BOARD HAVE HAD LONG CAREERS IN BANKING. WHAT IS YOUR OPINION OF THE ROYAL COMMISSION AND WHAT ARE THE MOST IMPORTANT PRACTICES THAT NEED TO CHANGE IN FINANCE? A: All of financial services needs to ensure that we get back to thinking about customers first. Whoever is being criticised, it’s usually because they’re focused on something else. We need to form an ethical view. Behaviour comes from the beliefs you have, then incentives come from that. My hopes are that we get out of the micro examples in the royal commission and back to the big themes of finance’s role in benefiting society and making it better. I think the business is about providing finance to help the economy grow. Q: WHO ARE YOUR MOST IMPORTANT MENTORS AND TO WHOM DO YOU TURN FOR ADVICE NOW? A: I don’t think I have any one mentor in the sense they would know who they were. But I have learnt a lot from many people. I worked closely with David Morgan and observed Bob Joss (at Westpac) and also David Gonski at ANZ. I think you need humility on a board, and as chair, to create the right climate. We can’t have people feeling intimidated but they also need to lift and be their best. A board operates best when that balance exists. If I look at my style as chair, I guess most people would describe me as a good listener. I like to hear different viewpoints before I form a view. If you rush, you can miss critical elements. I listen more than I speak. I’m more contemplative than intuitive.

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SPONSORED CONTENT \ THIS REPORT IS sponsored by BNP PARIBAS

The data gold rush There is now a common maxim that more data has been generated in the last two years than in the entirety of prior human history. Florence Fontan, Global Head of Asset Owners, and Ian Perkins, APAC Head of Asset Owners at BNP Paribas Securities Services, explain how pension funds can use this plethora of data. THERE HAS BEEN AN ASTRONOMICAL SURGE IN THE VOLUME OF BUSINESS DATA WORLDWIDE. WHAT ARE THE BIGGEST DATA CHALLENGES FOR INSTITUTIONAL INVESTORS?

FONTAN: It stands to reason that a pension fund’s key objective (paying current and future retirees) is more likely to be met if the organisation can make decisions based on the greatest amount of relevant information. In order to create full transparency when monitoring investments and liabilities, pension funds have to harmonise data into a common format, then scrub and aggregate it. This is time-consuming and challenging. The key challenge lies in the aggregation of data, primarily because it comes from multiple sources. A custodian is able to aggregate that data and a custodian investing in the right technology now has the opportunity to become something of a ‘super custodian’, akin to a data or technology company, aggregating data from multiple managers and multiple custodians, and making this data available to clients in useable and consumable chunks.

PERKINS: Specific data and information requirements vary across asset owners and geographies based on the different regulatory requirements and objectives of a fund. For example, insurers will be seeking to optimise risk-based capital requirements and their collateral positions, whereas a defined benefit pension fund will be focused on asset and liability matching. Through the use of greater data processing power, asset owners will have faster access to the results of complex calculations, the ability to perform more predictive analysis, and improved visualisation tools for their specific data and information.

WHAT SOLUTIONS HAS BNP PARIBAS IN PARTICULAR DEVELOPED TO HELP SERVICE CLIENTS IN THIS IMPORTANT AREA?

FONTAN: The investment office is a collection of data services currently being developed by BNP Paribas. It is an ecosystem of service outputs, where an institutional investor can become a data explorer by visualising and interacting with their data. It can accommodate all stakeholders – CFO, CIO and operational staff, helping them meet their daily activities and the organisation’s overarching goals.

It uses ‘smart data’ technology to combine disparate data from existing services such as custody and middle office, alongside external data sets such as market and client data. It uses both structured data, such as accounting and performance data, and non-structured data, such as social media and news feeds. A user is alerted to critical issues but even more importantly is provided with the necessary tools to perform his or her own analysis, such as what-if simulation, asset allocation analysis, and new risk-adjusted measures comparing performance, risk, ESG and capital data in new analytical measures. For example before selecting a new manager, the smart data analysis solution can assess how the manager’s investments will impact the overall fund in terms of asset allocation, ESG scores, the risk profile, etc. The BNP Paribas Investment Office will also allow the user to explore data through a dedicated sandbox (a user-specific virtual space for clients to experiment with their data), dynamic data visualisation, client-run application programing interfaces (APIs) and stateof-the-art reporting. All of this changes the classic asset owner user experience, making interaction with a custodian more interactive and customisable. Data as a service will provide pension funds access to their disparate data, provide it in common formats and draw connections that previously could not readily be made. It will allow pension funds to extract greater value from the services they receive from their providers and make more informed investment decisions.

*Disclaimer: BNP Paribas Securities Services is incorporated in France as a partnership limited by shares and is authorised and supervised by the ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the AMF (Autorité des Marchés Financiers). BNP Paribas Securities Services ARBN 149 440 291 (AFSL No: 402467) is registered in Australia as a foreign company under the Corporations Act 2001(Cth) and is a foreign ADI within the meaning of s 5(1) of the Banking Act 1959. The information contained within this document (‘information’) is believed to be reliable however BNP Paribas Securities Services does not warrant its completeness or accuracy. Opinions and estimates contained herein constitute BNP Paribas Securities Services’ judgment and are subject to change without notice. BNP Paribas Securities Services shall not be liable for any errors, omissions or opinions contained within this document. The information contained in this document is confidential and may not be reproduced in any form without the express written consent of BNP Paribas Securities Services.

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JUNE 2018

\ ACSI CONFERENCE

HIGH STANDAR DS at the

SUMMIT

Industry stakeholders at the ACSI Annual Conference called for a renewed focus on improving all aspects of financial services for the benefit of fund members. By Jean-Paul Pelosi

HEADLINES FROM THE Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry were top of mind at the 2018 ACSI Annual Conference in Sydney in May. Most speakers framed their discussions around the urgent need to tighten up and improve all aspects of the financial services sector. Presenters talked about necessary cultural improvements at the organisational level of many businesses, but also an industry-wide refocusing on how to better serve the needs of members. More recently, due to the work of the royal commission, those needs have extended beyond financial goals to include responding to the ethical, social and environmental concerns of the wider community. As such, institutional investments need to be made with greater consideration for the behaviour of corporate partners and how mindful they are of social issues, such as human rights, labour conditions and the environment. Many of the Australian Council of Superannuation Iinvestors conference speakers, including leaders from some of Australia’s largest super funds, such as AustralianSuper chief executive

Ian Silk, infused their opinions with these ideas, while others focused wholly on corporate misconduct. The latter group was perhaps motivated by the comments of ASIC chairman James Shipton, who set the tone when he called for the financial services industry to better address conflicts of interest and meet its legal requirements to act in the interest of shareholders and consumers. Shipton said it was time to repair damaged consumer trust and better meet the expectations of the community by bridging what he called a “trust deficit”. He said ASIC was now focused on diagnosing the issues facing corporate Australia. “It’s essential that investors and organisations like ACSI hold the industry to account for malpractice, malfeasance or unacceptable harm to consumers,” Shipton said. NZ Superannuation Fund head of responsible investment, Anne-Maree O’Connor, talked about environmental considerations – particularly related to climate change. In working towards its renewable energy strategy, the fund found that an engaged board was important. “We’ve brought the board along with us and they’ve encouraged us,” O’Connor said. “I’ve been truly amazed how much intellectual firepower we could throw at climate change once everyone had

FOR MORE COVERAGE OF THE ACSI ANNUAL CONFERENCE, GO TO INVESTMENTMAGAZINE .COM. AU

JUNE 2018

a project, whether looking at physical risk of our real assets, our valuation stream, footprinting, or integrating climate change into manager mandates and how to improve our engagement.” On a director panel that covered leadership and best practice for boards, independent non-executive director at Super Retail Group Sally Pitkin said culture and ethics were important to the foundation of every organisation. “For me, what’s come out of the royal commission is that I want us, as an organisation, to go back to those foundational elements of culture and ethics – you want them to be effective and to achieve their purpose,” Pitkin said. “[Culture and ethics] are complex and difficult to change if you need to change them. Culture is difficult to change because it’s all about how people in an organisation have been doing things, sometimes for a very long period of time. “And with ethics, research shows people have a lower moral compass in a work environment than they do personally. There’s a complex interplay between how they are at work and how they respond. So [culture and ethics] have got to infuse everything we do.” ACSI chief executive Louise Davidson said that culture would continue to be a focus for the organisation. “Recent revelations involving some of Australia’s largest companies have thrust corporate culture and the role of the board oversight of culture into the forefront of the corporate debate. No longer can culture be dismissed as a soft issue without financial consequences,” Davidson said. “Mismanaged, culture has the ability to destroy both trust and value. ACSI regards good culture as critical to the long-term sustainability of the companies in which our members invest. This has been and will continue to be a major focus of our discussion with the boards of listed companies when we meet with them.” Finally, in the spirit of the day, ACSI launched a stewardship code to help asset owners provide greater transparency of their activities. AustralianSuper and HESTA were the first funds to sign on to the Australian Asset Owners Stewardship Code, a set of principles that aim to increase the transparency of asset owners. Hostplus has agreed to sign on by the end of the year.

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Fund Executive of the Year

2018

FEAL is pleased to invite nominations for the Fund Executive of the Year Award. Now in its 17th year, the Award recognises outstanding leadership by a fund executive within the Australian superannuation industry. The recipient will receive a $25,000 business education grant made possible with the support of AMP Capital.

NOMINATE NOW

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AN INVESTMENT MAGAZINE ROUNDTABLE, sponsored by AIA

IT’S ALARMING TO think that 1 in 4 people experience persistent pain but that’s the reality, says professor Lorimer Moseley, clinical scientist, author and pain expert from the University of South Australia. He uses the term ‘persistent’ to shift the common view of chronic pain as something to fix. There’s a subtle difference: persistent pain lasts longer than perhaps expected and by framing it this way, people in healthcare can move away from quick fixes and open up new possibilities for rehabilitation. In a recent roundtable hosted by Investment Magazine and supported by AIA Australia, a group of business leaders from across the super and insurance industries gathered to discuss the burden of persistent pain. That burden includes significant financial and productivity costs for insurers and the economy at large, but even more worrying is the impact of mental health issues suffered by those with ongoing pain. The goal of this discussion, therefore, was to better understand pain and discuss ways each of the organisations represented at the table could play a role in patient recovery.

A MASSIVE CHALLENGE Moseley firstly talked about the science behind persistent pain and how the insurance industry can do its part. There’s no easy solution because, as Moseley explained, it’s often the behaviour of those assessing and treating pain, and even those handling claims, that most significantly affects the course a patient takes. This behaviour has become ingrained and needs to change. “I’m convinced in my belly that the health field has made a significant contribution to the burden of persistent pain,” Moseley said. “We’ve made a lot of mistakes, most obviously with opioids. But my field of physiotherapy has also made a lot of mistakes pathologising stuff that shouldn’t be pathologised. “I’ve shifted a big chunk of my focus to the community. We want patients to

The PAIN REVOLUTION By Jean-Paul Pelosi + Photos Matthew Fatches

Persistent pain creates a burden for patients and businesses. A recent gathering of SUPER AND INSURANCE INDUSTRY LEADERS discussed how to overhaul the thinking and the system for better results.

Over $1.3 billion in claims paid during 2017. ADV4065

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also create pain without any physical stimuli and this distinction is critical to both insurance and society’s handling of persistent pain. “We know that if you develop persistent pain, you can increase your risk of depression eight-fold,” Moseley said. “We know that with some persistent pain disorders, your risk of attempting suicide is enhanced 25 times.” Moseley drew a few gasps when he added that the persistent pain burden costs the US more than its wars. It’s a massive burden by any measure, including for the super and insurance industries, he said. Part of solving the problem is recoding an injury months after it’s treated. “You guys can do something about this,” Moseley said. “I imagine your businesses are paying for a big chunk of the burden because the biggest costs are related to productivity. The costs for loss of income and treatment are substantial.”

FINDING SOLUTIONS Moseley called for a new approach to reducing pain, mostly around retraining pain systems. Increased movement and exercise, among other things, were mentioned throughout the discussion as central to helping patients rehab. AIA group strategy manager, rehab and claims, Simonie Fox, added that it would be challenging to reshape the way the industry handles persistent pain but there are things everyone can do. “The goal for us is to work with the industry to see how we can do this better,”

LORIMER MOSELEY Explain Pain

Fox said. “It’s really about how you get that education piece happening and how you get employers to understand as well. “For example, if a super fund sees a large employer where the majority of claims come in, you can start to look at intervention. You can say this employer has the majority [of claims] so you can dive in and create a strategy for them.”

GET TING THE MESSAGE OUT The main issue for the super and insurance industries is that the message is not reaching those at the coal face, such as medical practitioners and claims teams. “Insurance has to move forward and we have an obligation to work with the government and mental health organisations to improve the processes we have as insurers,” AIA’s Phillips said. “We want to collaborate with partners who can help us. Our organisation has a commitment to mental health issues in the industry and we’re working toward being a change agent in this.” Change is happening, although it will take more work on the ground, Moseley said. He’s been educating doctors and others in the field who typically rely on treatment instead of retraining and rehabilitating the body. UniSuper manager, insurance claims, Alison Devitt suggested that those providing pharmaceutical treatments need to be brought into the fold to become a bigger part of the solution. While Moseley is continually trying to educate GPs, he said the focus should ultimately come back to patients, families and the wider community. “We need to have some sympathy for a GP who has 10 minutes when someone is suffering and can either embark on a journey of complexity and retraining the system or write a prescription,” Moseley said. “What would you do under the pressure? “This is the problem with partnering with people who have a treatment to sell. That’s why I’m excited to deal with organisations that have recovery to sell. We’re not trying to achieve treatment, we’re trying to achieve recovery.”

PA R T I C I PA N T S TRACEY ALLAN Insurance and resolution manager, HESTA NATHAN BELL Superannuation operations manager, BOC South Pacific MEGAN BUICK Director, health benefits of work, strategic research and innovation group, Comcare DARYL BULL Executive manager, insurance, Mine Super ALISON DEVITT Manager, insurance and claims, UniSuper SIMONIE FOX Group strategy manager, rehab and claims, AIA Australia GERARD KERR Head of life insurance, ANZ Wealth LORIMER MOSELEY professor, author and co-author, Explain Pain BERNARD O’CONNOR Company secretary and manager, insurance and complaints, NGS Super STEPHANIE PHILLIPS Chief group insurance officer, AIA Australia CHRIS SINCLAIR Director and exercise physiologist, Exphys Rehab

CH A IR COLIN TATE Chief Executive, Conexus Financial

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\ COVER STORY

Centred AND

WHOLE VFMC now has a more transparent view of its total portfolio. RUSSELL CLARKE, in his first interview as CHIEF INVESTMENT OFFICER of the organisation, discusses plans for continuous improvement. By Amanda White + Photos Nicole Cleary

JUNE 2018

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COVER STORY \

N THE 12 months that Russell Clarke has been chief investment officer of the $60.4 billion Victorian Funds Management Corporation (VFMC), he has been quietly getting on with it. In the last year, he and the team have undertaken a number of continuous improvement initiatives, including the creation of a centralised portfolio management group. “When I joined VFMC, I was struck by how professional the organisation was; in particular, the team was very strong technically,” he says from the fund’s 101 Collins St office. Historically, the organisation has added much value at the asset class level, with infrastructure and non-traditional assets as particularly stellar performers. Infrastructure, for example, has added 9.2 per cent above the benchmark (CPI + 5 per cent) in the three years to June 2017. “VFMC was a good example of very strong teams at the asset-class level, and they did a good job of adding value at the asset-class level. Credit to [former CIO] Justin Pascoe and the team,” Clarke says. But in observing how the portfolio was managed, and the structure of the investment team, what struck Clarke was that the organisation would benefit from a wholeof-portfolio approach. He points out that some functions, such as trading, previously reported to the CIO, but other functions, like asset allocation, didn’t. A restructure started nine months ago. “We needed to think about things more holistically,” he says. “We recognised that and adopted a more whole-of-portfolio mantra.” The centralised portfolio management group was created and Paul Murray, formerly head of fixed income and absolute returns, was promoted to head that. Nick Tribe has taken Murray’s old job. The portfolio management group covers all the functions that have an impact on the whole portfolio, including implementation, environmental, social and governance (ESG) concerns, strategic asset allocation and dynamic asset allocation, trading and investment risk.

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JUNE 2018

\ COVER STORY

Each asset-class team interacts with the portfolio management group, putting forward ideas, and is still responsible for manager selection. The fund has 85 manager relationships. “Manager selection still resides in the asset class teams, and this is working well and I see no reason to change,” Clarke says. While other Australian investors that have undergone recent organisational redesigns – notably TCorp and HESTA – have used Roger Urwin and the Willis Towers Watson team, Clarke and VFMC have gone it alone. “We have done this organically, ourselves,” he says. “We have a lot of good expertise internally, and I am happy we could do that.”

BROAD PERSPECTIVE Before joining VFMC, Clarke spent 15 years managing assets at Mercer, culminating with his position as global CIO for mainstream assets and Mercer CIO, Pacific, responsible for investing $185 billion in assets for more than 200 funds. That role, and his previous experience as a consultant, gave him a broad perspective. “I saw how clients were doing things differently and in those roles you also have to look at the total portfolio perspective,” he says. “My background was helpful in how to think about a portfolio, all it’s moving parts and how it fits together.” In addition to creating a management group to look across the portfolio, Clarke has made the ESG focus holistic, too, refreshing the policy and making it an investment-led function embedded within the investment team. “We now have a specific implementation roadmap for ESG, and are lifting our level of engagement with managers,” he explains. “We are not being prescriptive with managers but recognising [ESG is] an area of significant risk and opportunity and asking our

JUNE 2018

managers what they are doing about it. We now have views and ratings of managers in that area.” VFMC has also reviewed how it reports ESG and exercises proxies, and is doing a carbon footprint across the portfolio. There are about 100 staff at VFMC, 45 in investments, of whom about 15 are now in the portfolio management team. The team has been managing assets internally for about a decade, and roughly 30 per cent of the portfolio is handled in-house. There are no immediate plans to change this. Clarke says one of the by-products of the reorganisation is that he now has only four direct reports. Under the previous structure, he had eight.

12-STEP PL AN Another step Clarke was keen to take soon after he arrived was to have an offsite for the whole investment team. “This was really a brainstorming exercise, to improve everything we do,” he recalls. “As a result, we came up with a list of around 12 continuous improvement projects, and some will lead to material changes.” These projects fall into three broad groups: foundation items; portfolio resilience; and data analytics and risk. Foundation items include reviewing and refreshing the fund’s investment beliefs, including an uplift in the investment philosophy and liquidity

budget. It also includes reviewing all benchmarks, including an assessment of the balance between absolute and relative returns and the most appropriate benchmarks for unlisted assets, hedge funds and private credit. The team is also creating an improved process for debating ideas, including a discussion around developing the right forums for this. Portfolio resilience projects relate to VFMC’s 2020 strategic plan; they include introducing more flexibility in asset allocation and focusing on better beta; for example, by diversifying asset exposures. Overall defensive strategies are also being reviewed, looking at ways to make the portfolio more defensive without having to put in expensive hedges. Lastly, resilience initiatives include what has been labelled a “fire drill project”, in which the portfolio will be tested with hypothetical situations. “For example, we’d test how we would respond if there was a heavy fall in equities markets, what decisions would need to be made and who would need to be involved,” Clarke says. In data and analytics, the fund has projects in train to improve risk analytics. In particular, it is looking at how to deaggregate risks appropriately, and feed them into the investment process to make better decisions. This means spending money on technology. There is a major IT project under way across the organisation. “We have a strategic partner helping us scope out what we need and to select providers,” Clarke says. “This is a multiyear exercise and has a significant commitment from the organisation in time and budget.” The team is also producing a whole-of-

Manager selection still resides in the asset class teams, and this is working well and I see no reason to change

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COVER STORY \

What we really want is an evolving overall asset mix over time, done in a thoughtful way

portfolio dashboard that is nearly complete. This combines data on performance, risk, asset allocation and manager allocation. “It is a management tool for me but also, importantly, a great way to share information with the team and organisation to raise awareness of how we are travelling and also cement the focus on the whole of portfolio,” he says. “Cross-asset teams have been formed to work on all of these projects. It’s a different intellectual challenge that people are enjoying.”

DOWN TO FLEXIBILIT Y Clarke reports to chief executive Lisa Gray, who joined VFMC in January 2016. He is also chair of the risk allocation committee, which meets every two weeks or whenever needed. There is no investment committee at VFMC.

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“We have a very good board that has a clear set of delegations that has allowed the investment team to get on with it,” Clarke says. This structure allows the investment team to be responsive to market dynamics, and it can invest up to $1 billion without approval. Anything significant, such as strategic asset allocation changes, the addition of an asset class or investments over $1 billion will go to the board. VFMC has a core group of big clients. Its five largest represent 92 per cent of the fund’s assets under management and the investment team has a close relationship and meaningful dialogue with them. The other 25 or so clients are in a multistrategy portfolio, and are relatively low maintenance, Clarke says. At the end of June 2017, the asset allocation of VFMC’s portfolio was

international equities (33.9 per cent), Australian equities (19.2 per cent), diversified fixed income (10 per cent), inflation-linked bonds (9.8 per cent), property (7.7 per cent), infrastructure (6.1 per cent) private equity (0.5 per cent), non-traditional strategies (10.6 per cent) and cash (2.2 per cent). But Clarke says asset allocation changes are coming. While VFMC has been good at managing individual asset classes, he says the next step is to balance total portfolio construction, too. “What we really want to do is pull all the elements together and have an evolving overall asset mix over time in a thoughtful way,” he says. Obvious areas for change include fixed income and credit. The fund has historically focused on domestic bonds and has had no global credit or sovereign debt exposures. “Now is not necessarily the time to gointo those assets but they are a key defensive lever and we want it in the tool kit,” Clarke says. VFMC was also an early investor in private credit, which was an opportunistic allocation. Clarke is now looking to add it as a base exposure instead. Ultimately, Clarke sees flexibility as the key challenge. VFMC has a two-pronged approach to asset allocation, with strategic asset allocation covering a 20-year timeframe and dynamic asset allocation over 12 months. Now it is looking to incorporate a process that allows for an evolving asset mix and a cycle-aware approach to allocating assets. “There is a big gap there between strategic and dynamic asset allocation,” Clarke says. “We are looking at how we might evolve the overall asset mix over time and we may need to make strategic changes that aren’t necessarily 20-year changes. There may be points in the cycle in five to 10 years’ time when we will have to evolve the portfolio. We want to have a governance structure to be able to do that.”

JUNE 2018

\ DIVERSIT Y

IT’S NO SECRET that the investment management industry has a diversity problem, on any measure – gender, ethnic heritage, cognitive diversity. But asset owners, asset managers and consultants are developing strategies to open the doors and encourage new voices and new faces to enter and thrive. There is no one repository of figures for diversity across investment management, so stitching together the picture of the industry based on empirical evidence is a patchwork affair. But clearly, there are not enough women at any level, particularly senior management. In 2017, Mercer conducted a survey in conjunction with 15 asset owners and managers, based on a survey, focus groups and interview. Diversity was measured across gender, cultural background, age, socioeconomic background and educational qualifications. The study found that 76 per cent of investment managers are male, 48 per cent are private-school educated (compared with the national average of 35 per cent) and 76 per cent of those who completed postgraduate studies had a master’s degree in finance. Additionally, the study found that female investment managers are up to 20 per cent less likely to be promoted through the ranks and up to 50 per cent more likely to leave than men. Women on Boards tracks board positions for various sectors, and its latest data shows that in the banking industry, women hold 172 out of 578 board positions, or 30 per cent. On superannuation boards, out of 826 trustees, 273, or 33 per cent, are women.

CBUS WIDENS TALENT POOL Some asset owners and fund managers are developing practical programs to address this problem and tie increased diversity to better outcomes within their teams. Cbus Super is tending to its own management team and structuring its operations to hire, support and promote diverse talent, chief investment officer Kristian Fok says. “There is quite a lot of empirical evidence that shows companies and asset management firms that have diversity in the workforce, in the investment settings, tend to outperform,” Fok says. “If you start with that premise, in our case as we are building out a team, then why would you not try to build something in a way that

JUNE 2018

Diverse s t ra t e g i e s Industry stakeholders are employing MYRIAD APPROACHES to tackle the stubborn problem of how to increase DIVERSITY at all levels of investment management.

By Rachel Alembakis

builds higher performance?” Fok notes that more than half of his investment team has had experience working overseas, and 40 per cent speak a language other than English. Women make up more than 40 per cent of the team, and Cbus is planning to get more women into senior management positions. Additionally, Fok points out that about 20 per cent of the investment management staff have “some kind of board or board advisory experience”, and more than 10 per cent have been involved in start-up companies. To build a more diverse team, Cbus has focused its thinking on recruitment, and flexibility of working location and working hours. The fund employs staff in Melbourne and Sydney, and works to engage its staff through technology such as videoconferencing, Fok says. This approach, in addition to creating a wider

pool of talent, offers Cbus the opportunity to work out how to manage remote teams, a skill Fok thinks will be a strength if the superannuation fund ever opens overseas offices to support its direct investment scheme. “I have flexibility to offer it full-time or part time and also by location in many cases,” Fok says. “We are careful about how we advertise, what we put in a position description. We run it through various algorithms to use gender-neutral language. Most of our recruitment is done internally. Our talent recruitment team is instructed to bring a short list of 50/50 [male and female candidates] where possible, and if not, they need a good explanation for why not.” Some asset owners and consultants are actively addressing gender diversity through the way they participate in industry events; for example, many asset owners won’t agree to participate in a panel

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DIVERSIT Y \

session unless there is gender diversity. AustralianSuper chief executive Ian Silk is a member of the Male Champions of Change initiative, in which men participate in public speaking events only if there is equal representation of women. AustralianSuper confirms that on its investment team, there are 131 men, 87 women, for a roughly 60/40 split. Overall, the fund employs 57 per cent men and 43 per cent women. A key focus of the fund’s investment department intern and graduate program is to ensure at least 50 per cent women at each intake. “AustralianSuper has managed to meet or exceed the 50 per cent target for both intern and graduate programs over the last year and continues to develop the women we have recruited into this program over the last five years,” AustralianSuper general manager, people and culture, Margie Hill says. Some asset owners are working to

address the gap more widely through the industry. In March, HESTA – which is the only fund in Australia with a woman in the positions of chief executive, chief investment officer and chair – announced it would survey 70 of its Australian and international investment managers about their workplace gender representation as part of a wider focus on gender diversity through its investment value chain. It’s evidence that asset owners can help push these issues down the investment value chain. The results of the survey are expected in June.

UK MOVES One fund manager that does disclose its own statistics is Colonial First State Global Asset Management. CFSGAM has begun revealing its diversity data in its annual responsible investment and stewardship report. In the 2017 report, the business disclosed that at the firm level, 58 per cent of employees were male

I n s t i t u t i o n a l i nv e s t o r s w i th w o m e n i n s e n i o r p o s i t i o n s ACCOUNT NAME

CHAIR

Accident Compensation Corporation

Paula Rebstock

Australia Post Super Scheme (APSS) AustralianSuper BT Financial Group (BTFG)

CIO

Christine Holgate Heather Ridout Lynn Ralph

BUSSQ

Linda Vickers

CareSuper Club Plus Super

CEO

Julie Lander Tara Moriarty

Gemma Dooley

Commonwealth Bank Group Super Commonwealth Superannuation Corporation (CSC)

Ruwanie Dias Patricia Cross

Energy Super

Alison Tarditi Robyn Petrou

Funds SA HESTA Super Fund

Jo Townsend Angela Emslie

LGIAsuper

Debby Blakey

Kylie Willment Nicole Smith

MTAA Super

Leeanne Turner

MyLife MySuper (Catholic Super) Netwealth Super

Anna Shelley Jane Tongs

NGS Super

Laura Wright

Prime Super QANTAS Superannuation

Jane Kang Anne Ward

REST Industry Super

Vicki Doyle

Super SA

Annette Hurley

Tasplan

Naomi Edwards

VicSuper

Christine Stewart

Victorian Funds Management Corporation

investmentmagazine.com.au

Sonya Sawtell-Rickson

Kate Farrar

Mercer MLC

Suzanne Branton

Dascia Bennett

Lisa Gray

JUNE 2018

\ DIVERSIT Y

and 42 per cent women. Within the operating group, it was 80 per cent men, 20 per cent women; within senior professionals, 69 per cent men, 31 per cent women; within investment management professionals, it was 78 per cent men, 22 per cent women. Clientfacing professionals was where women were in the lead, with 51 per cent to 49 per cent for men. New starts in the previous 12 months were equally men and women, and new starters on investment teams in the last 12 months were 70 per cent men and 30 per cent women. “Now that we’ve been disclosing this for a few years, the numbers are hard to move,” said Pablo Berrutti, head of responsible investment, Asia-Pacific, at CFSGAM. “[While] there’s a determination to move them, there are systemic and market factors that make it difficult as well. The number of women who show interest in funds management as a career isn’t as high as men. There are other, deeper issues that mean it takes a bit of time. We’re up for that challenge.” CFSGAM has investment management operations in the UK and engages in activities there such as gender balanced shortlists. Name-blind CVs have been piloted in parts of the business and that will be extended more widely in 2018. The firm requires at least one woman interviewer for job interview panels, says Rebecca Antonini, head of human resources, Europe, Middle East and Africa at First State Investments, CFSGAM’s international arm. Further initiatives at CFSGAM include: a gender-neutral parental leave program; coaching to support return to work and managing a career as a working parent; parent facilities in key locations; unconscious bias training for UK staff; and membership in industry initiatives that encourage more diverse talent to enter a career in investment management, including the Future A5SET Conference and the Investment 2020 program. In 2017, the firm recruited two women and two men to be investment 2020 trainees as school leavers, Antonini says.

JUNE 2018

FROM ENTRY TO C-SUITE The investment management industry has not done a good enough job of telling its story, particularly to university students, says Mercer diversity and inclusion practice leader Yolanda Beattie. In Mercer’s 2017 study referenced above, it found that less than 20 per cent of finance students aspire to work in investment management, while 41 per cent of female students and 27 per cent of male students don’t know enough about investment management. To combat this, Beattie has developed an employee and career value proposition (EVP) program that has attracted financial support from asset owners, including AustralianSuper, and will start in July or August with Sydney University. “The aim of the program is to increase diversity in investment management,” she says. “We’re looking at diversity in terms of cultural background, educational background, and particularly increasing the number of women who are managing money and leading those portfolios – the portfolio managers, the CIOs, the heads of investment. Most students don’t know much about investment management. There’s no presence on campus, no presence in the community. Most confuse investment management with investment banking and banking more broadly. So part of the message is about what it is to be an investor and what the career pathways are, along with providing the diverse role models to help particularly women see what a career might look like.” The first level of the program is a call to action. “It’s clear from the research that our target – high-achieving, talented women – want real opportunities to connect with real people in the industry and real experience and job opportunities,” Beattie explains. The second step in EVP is to address promoting and retaining women, Beattie says. Mercer is working with Dr Jess Murphy to apply her ‘pathway to your potential’ program, which focuses

on getting partners in investment management to focus on promotion and retention. Beattie says the investment management industry “has a great story to tell”. She notes statistics from the study that found 88 per cent of investment managers say their work is purposeful and 92 per cent say it is interesting and engaging. That empirical data demonstrating that diverse companies perform better includes a 2015 MSCI study that found “companies that had strong female leadership generated a return on equity of 10.1 per cent per year versus 7.4 per cent for those without (on an equal-weighted basis)” and “companies lacking board diversity tend to suffer more governancerelated controversies than average”. Studies on gender diversity in investment management firms are not as conclusive. A March 2018 Morningstar study of US investment management found that women perform equally well as men in terms of fund returns. Helga Birgden, global business leader of responsible investment for Mercer, suggests that drawing more women into the investment management industry can diversify the critical skill set. “There is a gap in the investment industry’s take-up of women’s expertise and there is a critical role that women can play as experts in the area of sustainability and climate change, as part of money management,” Birgden says. “The lack of gender diversity in our industry reflects a lack of diversity of thinking about the complex risk landscape in which investors are operating. These issues are strategic, they are about the highest form of governance, and I really would like to see a much greater take-up of such issues at the board level. Women bring intellectual capital to the table that is contemporary and can help make sure investment decisions are sustainable and, therefore, strategic.”

Companies that had strong female leadership generated a return on equity of 10.1 per cent per year versus 7.4 per cent for those without investmentmagazine.com.au

XXX \

INVESTMENT MAGAZINE

FIXED INCOME AND CREDIT FORUM

JULY 24-25, 2018 RACV HEALESVILLE VIC AN IMPENDING STORM: CENTRAL BALANCE SHEET UNWINDING In a low-interest world, fiduciaries are forced to think beyond traditional fixed income investing in the search for yield. What fixed income strategies adapt well to the current environment of diverging monetary policies around the world, managing the risks of inflation and deflation, and threats of populism? The two-day Fixed Income and Credit Forum is designed for chief investment officers, heads of investment strategy, heads of fixed income and credit, portfolio managers, analysts and consultants. Registration is open to institutional investors, chairs of investment committees and specialist consultants.

fixedincomeforum.com.au CONTACT Alex Proimos

alex.proimos@conexusfinancial.com.au 02 9227 5795

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JUNE 2018

\ EDUCATION

INVESTMENT MANAGEMENT’S

future Students from a variety of fields come together at the University of Sydney to run an investment fund – with real money. By Jean-Paul Pelosi

JUNE 2018

investmentmagazine.com.au

EDUCATION \

This process makes up 30 per cent of the students’ assessment, ensuring their work goes beyond their own stock report and honing skills needed in an actual investment firm.

VARIET Y OF EXPERIENCES SYDNEY UNIVERSITY BUSINESS school is now replicating a real-world investment management firm on campus. The student managed investment fund is a course in which finance students run an equity portfolio for an academic year – with real money. The fund is in its second year and is going rather well, outperforming the ASX 200 by 1 per cent this semester. All profits from the portfolio are used to help fund scholarships for disadvantaged students.

The class of 20 students has about $110,000 to manage and works to assess potential shares in which to invest. The group is divided into economic sector teams, such as industrials, healthcare or IT, and functional teams that are more like those at an investment firm. They work together in these groups and make suggestions about stocks to the full class. “It’s about selling your idea and convincing everyone else of what you’re doing,” senior finance lecturer Andrew Ainsworth says. “There’s rigorous debate, everyone tries to pick apart the idea to see how thorough and robust it is.” The macro-economy team, for example, looks at big-picture factors such as inflation and currency, guiding the overall group with a broad perspective of what’s going on in the economic world. Functional teams also cover quantitative analysis, portfolio construction and performance in forming their investment pitches. By contrast, sector teams dive into a specific industry to find stock opportunities, which are also presented as a thesis to the group. The class then votes to decide whether stocks pitched will be included in the overall portfolio, with 60 per cent of the vote required for the investment to move ahead.

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All of the students are finance majors but there are also those studying other fields such as medicine, law or economics as part of a double degree. This not only helps diversify the knowledge that’s brought into the portfolio but also allows the lecturers to distribute students across their respective fields and cater the portfolio to their interests. “That’s how you’d do it in the industry as well,” senior lecturer Jiri Svec says. “If you worked at an investment bank, you’d be allocated a sector and you’d be part of a team. We thought about breaking it up so the students could interact with different people and do some of the things they need to do in the industry, such as the processes or putting together portfolios and managing risk.” To buy shares, the students use Bloomberg terminals on campus, which also give them the tools of a real investment manager, including financial and accounting information, risk metrics and forecasts. The class tracks the ASX 200, using it as a benchmark, Ainsworth says. He adds that the plan is to outperform the ASX 200 over the long term, though there is no specific target for this outperformance. “The fund combines a number of different investment approaches,” Ainsworth explains. “For example, we have a macroeconomic team that provides guidance on the sector allocations, which is in line with a top-down approach. The individual sector teams put forward their picks based on the stocks within their sector that they think will outperform. “We also have a quant team that incorporates some factor tilts into the portfolio. The quant team provides some screens on different variables, such as PE ratios, past returns and other valuation metrics. So, they come up with a score for all the stocks, ranked best to worst, and that gives a bit of structure.” The lecturers are quick to point out that the students are custodians of a long-term

portfolio and not day traders looking for a quick pay off. Each class inherits the portfolio from the previous year with the same long-term vision, maintaining existing shares and adding to the portfolio only through the class voting system. The 28-stock portfolio, Ainsworth says is actively managed, high conviction and benchmarked against the ASX 200. “We have limits on risk so the fund cannot deviate too far from the ASX 200,” he says. “And we try to limit turnover.” As expected, there have been plenty of successes and failures along the way. When one group pitched software company Aconex, the sudents weren’t aware that a takeover was on the cards. Luckily for them, the transaction resulted in a 20 per cent premium. Meanwhile, when Qantas was pitched last year, it didn’t draw much interest from the group and so wasn’t voted in. It’s share price has since done well. This all provides experience in managing money in the real finance world, Svec says. “It’s their money,” he says. “We’re the mentors but they’re driving it.” The students say they are enjoying the challenge and the collegial atmosphere working on stock pitches together. Chloe William, a fourth-year economicsfinance student, says she’s never had a portfolio of her own. “I worked in the summer in equities at an investment bank and I’ve experienced the industry but was never forced to sit down and look at a company for my own investments,” William says. “There’s a steep learning curve. It’s not like a class with teacher and students, it’s more of a collaborative environment. We were expected from day one to come in with our own ideas and research and keep on top of things. “Everyone in the group is clever. I learn so much from the other students. Everyone is very original in their thinking and I’ve never been in an environment like that.” Bob Jin is a bio-medical engineering and finance student in his fifth year and says he likes being able to see the results of the group’s investments in real time. “It’s not often that you can spend time formulating an investment thesis and then see how it’s panned out over the semester,” Jin says. “Compared with when we first started, we definitely know a lot more – what to look for and how to measure our success. We are doing better now.”

JUNE 2018

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.

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

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LIFESKILLS \

IT’S ABOUT COMMUNICATION BT WILL ADOPT the Insurance in Superannuation Voluntary Code of Practice and encourages all funds to do the same, in the name of helping members make BETTER-INFORMED choices.

MELINDA HOWES GENERAL MANAGER | BT FINANCIAL GROUP

AUSTRALIA HAS A worldrenowned superannuation system but we can’t rest on our laurels, we must continue to improve and drive best practice. At BT, we recently announced we would adopt the Insurance in Superannuation Voluntary Code of Practice (the code) for superannuation trustees and implement the new standards. It’s fair to say the code has been controversial. We also know there’s a general lack of awareness in the community of the value of insurance, and many Australians don’t realise insurance comes with their MySuper unless they opt out. At BT, we’ve seen numerous examples of members contacting their banker or BT to say they are experiencing financial hardship due to illness or injury, and having their lives turned around when they discover they have valuable insurance they can claim. In a default system, it’s important to balance the provision of this valuable cover

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with the cost of it, so members’ super benefits are there for them in retirement. That’s why BT supports the code, and why we are continuing to provide default cover to all our members, especially the younger ones, for whom the impact of a major illness or injury can be most severe, in terms of future

insurance in superannuation. We undertake annual reviews of our offerings, and in our insurance designs we consider characteristics such as age, occupation and salary to provide cover tailored to individuals’ needs. Our default designs recognise insurance needs differ, which means, for younger members, we provide higher levels of total and

BT has chosen to lead the superannuation industry by calling on all participants to make the code binding for all funds lost earnings. BT has chosen to lead the superannuation industry by calling on all participants to make the code binding for all funds. This will ensure members have the comfort that, no matter which fund they choose, certain important standards will be met. BT already meets or exceeds many of the code’s standards. We already communicate to ensure members are aware of the potential impact of premiums on their account balance, yet we very much approve of the increased communication requirements in the code, as they will help more Australians make betterinformed choices about their

permanent disability cover and lower death cover. For older members, the amount of cover may reduce, recognising the different needs for this segment, due to their growing super balances. At BT, our philosophy is about ensuring more Australians have access to the best possible life insurance cover and service at the most sustainable price. We believe that transparency leads to better claims outcomes. More than 600,000 of our 1 million superannuation members have insurance. We paid more than $200 million in claims in financial year 2017.

IMPLEMENTATION This may be especially relevant

for the situation in which, under the code, a member’s insurance cover may be automatically cancelled if no superannuation contributions are made to their account for 13 months. Premium cessation and the potential resulting loss of valuable insurance cover for people taking extended leave will predominantly affect women with parenting responsibilities. A person may be on parental leave for up to two years but insurance cover may be cancelled after just 13 months of no super contributions to their account. It’s important that anyone who is planning a break from the workforce advises their fund they may wish to keep their cover. Similarly, it will be important for members to be able to regain access to their default insurance cover if it is automatically cancelled. The code will give rise to complex implementation considerations that will need to be worked through in order to ensure they do not result in unintended consequences for the super fund members it is aimed at protecting. Our focus will also be on further enhancing our insurance designs and supporting service model, including through technology and functionality enhancements. We believe Australians should have appropriate and affordable cover. The code will help ensure the right balance between providing that and protecting savings for retirement. LIFESKILLS Lifeskills is a regular section in Investment Magazine. Each month, we publish an independent column from an industry leader with insights into best practice in the group insurance sector. This page is produced with thanks to advertising support from AIA Australia.

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\ TECHNOLOGY

Data CURE S ARE N ’ T E NOUGH It’s not sufficient to have the fix for IT errors after they happen, best practice requires having the system in place to provide prevention, detection and correction. By Mark Vaughan

IF DATA IS the new oil – and has become the world’s most valuable resource – then we are all in a bit of trouble. There are major spills everywhere, very little clean-up equipment, and many of the owners are blissfully ignorant of the true value of the resource they hold, and the importance of keeping it clean. What’s more, data isn’t like oil in that it doesn’t run out. It is ubiquitous, continuous and can be reused and reworked in countless ways. But that’s a story for another day. Data volumes are exploding. More data has been created in the last two

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years than in the entire previous history of the human race. Numerous studies quote that bad data costs US businesses alone $600 billion annually, a mindboggling number, although perhaps based on bad data, so who really knows?

THE COST OF ERRORS Whatever the overall numbers, there is no doubt that data errors are costly for institutions in many respects – remediation expenditure, compensation payments, and reputational damage just to name a few. Not only that, but the longer a data quality error goes undetected and unresolved, the greater

the harm to bottom lines for institutions and members. The exponential harm that the proliferation of data errors can cause can aptly be characterised as the ‘disease effect’. If data quality issues are not detected and remedied soon after they occur, there is a tendency for the error to spread and contaminate other data, even jumping to other systems. Data quality issues are not just an IT or technology issue, there are all too real financial consequences as well. And they are pervasive. The financial harm of poor data typically follows some variation of the 1-10-100 rule. The traditional

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TECHNOLOGY \

interpretation of this rule suggests that verifying the quality of a data record costs $1. Remediation by cleansing and de-duplicating a record costs $10. Working with a record that is of poor quality and inaccurate costs $100. However, in QMV’s experience, it is closer to a 1-5-50 rule, whereby if the error is identified after: • One day, the remediation cost is minimal. While the errant data requires correction, the error can be quarantined to minimise any external visibility and further impact. • One month, there is a five-fold increase in the cost to remediate. The error may have filtered into several monthly processes (fees, premiums), some investors may have left or transferred products (super to pension), and the remedial costs begin to escalate. • One year, and there is a 50-fold increase in the cost to remediate. By then, the error has probably filtered into several annual processes (member statements, taxes, Australian Prudential Regulation Authority reporting), and may now be a breach that requires compensation and additional reporting to various external stakeholders. The costs aren’t only financial. The damage poor data quality can do to customer service and an institution’s reputation is profound. There is nothing more likely to break the trust Australians place in financial services institutions than stuffing up people’s hard-earned savings. The impact of poor data quality also extends to the compliance obligations of financial institutions. Poor data can cause a specific breach of laws, fund rules or policies. Even worse, systemic issues can lead to major breaches and regulatory intervention. In terms of financial, reputational and non-compliance costs, it is clear that time makes things worse.

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The key is to break the endless cycle of manually fixing defective data by transitioning from a reactive approach to one that finds the appropriate balance between all three classifications. In this way, corrective controls become more targeted, helping to mitigate the spread of problems.

HOW TO IMPROVE QUALIT Y GROUNDHOG DAY At QMV, we sometimes refer to the data migration process as the Groundhog Day of quality errors. Bill Murray’s Phil Connors perishes at the end of each day in the seminal ’90s cinematic classic and most migration processes follow a similar path. The recurring mistake is the timing of the data quality effort. Quality should always represent the first phase of a migration but it is too often dealt with it as a post-migration activity. The blinkered focus on project deadlines often leads to the scaling back of data quality efforts; identified errors are reclassified as less severe and get overlooked. Then, 18 months after the migration, funds get cornered into a costly, painful major data remediation program because the problem gets way out of hand.

PSYCHOLOGY How much do we spend on data quality? Well done to anyone who can confidently answer this question, because you are absolutey in the minority. For everyone else, the answer is probably: more than you think and more than you need to. We can look at the spending on data quality through three classifications: Prevention: controls designed to stop errors from happening Detection: controls to identify once an error occurs Correction: remediation and restoration of data. Most executives view data quality as an expense, rather than an investment. This may seem like an innocuous play on words, but it is an important distinction. Not understanding or measuring the return on investment that data quality can deliver, leads to the reactive approach, in which data quality spending becomes heavily geared toward correction.

What can be done to improve data quality, and reduce related risks? There are a few key initiatives that can help eliminate the disease effect: Develop data quality metrics: You cannot manage what you do not measure. Metrics will provide a factual basis on which to justify, focus and monitor efforts, while acting as a leading risk indicator. Determine ownership: Efforts to improve data quality will not succeed without the oversight, collaboration and accountability of all key stakeholders. Invest in a system: Break the cycle of Word documents, spreadsheets and SQL scripts. An integrated system can help drive the real costefficiencies and risk management that true data quality can deliver. Measure return on investment (ROI): the key to measuring ROI is choosing the metrics that matter most to the business – those that can be measured and offer the biggest potential for improvement. Addressing the points above should help an organisation find the appropriate balance between prevention, detection and correction. This will lead to more $1 verifications and fewer $100 corrections. Of course, each data error is different and there is no one right way to measure the associated cost but the key theme is clear: the financial and reputational costs of data errors spread like a disease. Prevention is better than a cure and remains the optimum solution, and early detection is a critical tool that can lower the cost and impact of errors.

2 3

MARK VAUGHAN IS MANAGING DIRECTOR OF QMV.

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MEMBER SCENARIOS

POLICY

ONE CIPR DOES NOT FIT ALL The government’s plan to force funds to offer a flagship retirement income product puts members and trustees in an uncomfortable position. size-fits-all retirement product offering, which largely ignores the role of the age pension.

LOAN BAL ANCES EVA SCHEERLINCK CHIEF EXECUTIVE | AIST

FEW RETIREES FIT the stereotypical image of the silver-haired, yet impossibly youthful, cashmere-clad couple strolling hand in hand along a windswept beach. Similarly, most older Australians approaching retirement might find it hard to relate to some of the thinking behind the government’s recently revealed retirement incomes framework. As outlined in the May Federal Budget and confirmed a few days later in Treasury’s Retirement Income Position Paper, the government plans to introduce a new Superannuation Industry Supervision covenant that will require super fund trustees to offer members a flagship CIPR (Comprehensive Income Product for Retirement) with built-in longevity income protection. While longevity protection is needed for retirees, we are very concerned about the government’s focus on a one-

The super balances of most older Australians approaching retirement are still low. Most older workers did not receive super in their early working life and it was only in their last decade of employment that the super guarantee reached 9 per cent. AIST estimates that median super balances of Australians aged between 60 and 64 – which give us a good picture of the distribution of super across older workers – could be as low as $37,000 for women and $114,000 for men. The government itself has acknowledged that a CIPR would have limited benefit to someone with a very low superannuation balance and that the age pension would provide such individuals sufficient longevity protection. Its position paper also notes that for low-balance members, “costs associated with the administration of the CIPR and the need for flexibility may outweigh the additional income benefits the CIPR could deliver.” Under the proposed retirement income framework, trustees would not have to offer CIPRs to members with balances of less than $50,000. AIST believes this threshold is far too low.

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In 2015, AIST commissioned the Australian Centre of Financial Studies to model a range of retirement income scenarios for members with balances from $100,000 through $500,000. The findings suggested that retirees with balances of $250,000 or less would be better off investing in an account-based pension, as opposed to either an annuity or a combination of both products. In one scenario, the retiree was nearly $70,000 better off after 25 years in retirement when choosing an account-based pension. Account-based pensions provide the greatest flexibility for access to capital, which will be crucial for many seeking to meet health or aged-care costs. Retirement spending patterns are not smooth.

Add to this a probable hike in advertising spending by commercial providers of annuity products following the recent budget move to treat annuities more favorably under the age pension asset test, and we can expect more retirees to opt for retirement products with longevity protection, regardless of whether this is their best course of action. Research Alliance Bernstein commissioned in 2010 on the product decisions of retirees found that most acted more by default than considered choice. The researchers noted that, at retirement, individuals had “a propensity to accept whatever is put in front of them”. This is particularly worrying for low-balance members who can’t pay for comprehensive financial advice. Like insurance, products offering longevity protection tend to be complex, opaque and difficult to exit.

Many trustees will be in the unacceptable position of having to promote a flagship retirement product that they don’t think is appropriate Forcing trustees to offer a flagship CIPR raises questions about their fiduciary responsibility to act in the best interests of all members. At the very least, many trustees will be in the unacceptable position of having to promote a flagship retirement product that they don’t think is appropriate for a large swag of their membership. The plan to require funds to have a flagship CIPR makes that product, in effect, the fund’s default retirement income product.

The biggest problem with the government’s retirement income product framework is in its timing. A decade or two from now, when our super system is more mature and super balances are significantly higher, there may be benefit in funds offering a flagship retirement product with longevity protection. In the meantime, a great many retirees could end up in expensive products that are not in their best interests.

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ASI2018

SUPER INVESTMENT CONFERENCE

Cairns Convention Centre

5-7 September 2018

REGISTRATIONS ARE NOW OPEN ASI 2018 will bring together some of the world’s top investment minds for three days of discussion and debate with the key decision-makers behind Australia’s $1.2 trillion proﬁt-to-member super industry, and we invite you to be part of it.

Sir Rod Eddington J.P. Morgan

Cassandra Mathews KordaMentha

Anthony Pratt Visy Australia

Del Irani

ABC News

Each year ASI delivers an excellent event which provides an important platform to hear from a range of global and domestic thought leading speakers, along with valuable opportunities to network with my peers and other industry professionals. SAM SICILIA CHIEF INVESTMENT OFFICER HOSTPLUS

For more details and to register, visit aist.asn.au/asi

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MEMBER ENGAGEMENT

LET CONSUMER GUIDANCE DRIVE POLICY Helping most Australians get the best outcomes in retirement requires a commitment from the system to supporting good member decision-making.

PATRICIA PASCUZZO FOUNDER AND EXECUTIVE DIRECTOR | THE COMMITTEE FOR SUSTAINABLE RETIREMENT INCOMES

lives cannot be expected to navigate the complex choices they suddenly face in the next stage of their lives. We need our fully funded contributionsbased superannuation system to deliver outcomes akin to defined benefits. That is the purpose of the government’s new retirement income framework, as announced in the 2018 Federal Budget.

LOOKING AHEAD AUSTRALIA’S DEFINED CONTRIBUTION superannuation system asks individuals to manage financial risks beyond their capability. Australians have shown a great reluctance to pay for financial advice and the revelations at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry would appear to make that prospect even less likely in the near term. Regardless of the government’s eventual response to the royal commission, the case for a consumer-centric approach to meeting Australia’s retirement income challenge is strengthened. Individuals who have been in default funds all their working

Whether default super has served consumers well to this point is an interesting debate, but the real question is whether it will serve them well in the future. Given the rising numbers entering retirement and the diversity of their needs relative to the accumulation phase, a one-size-fits-all default will not work. Giving people a laundry list of options only confuses them. But taking these decisions completely out of their hands risks further stifling engagement and leaves them open to being exploited. A balance is required. In this context, fund performance is not just about delivering high investment returns, it is also about how well funds guide people to make smart decisions, particularly as they approach retirement.

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Empowering consumers does not require turning them into financial experts. It means giving them practical tools, meaningful choices and appropriate nudges. While there are complex issues to resolve, they are not insurmountable if we tackle the following areas: • Reducing complexity: We must de-clutter the system, standardise options and simplify the interaction between super and the age pension. Offering individuals meaningful choices encourages them to consider options actively and makes them more receptive to being engaged. • Clearer communication: Focus on practical retirement outcomes, instead of on the technicalities of getting there. Better quality, independent, targeted communication can help individuals take charge of their retirement planning. Showing individuals their projected retirement income changes the framing and helps them focus on the result. • Understanding the consumer: Generate a richer understanding of individual and household circumstances and preferences by leveraging consumer transaction data and sophisticated data science. • Product innovation: Introduce pooled lifetime income streams to help retirees manage the risk of outliving their savings. The Federal Budget announcement of means testing rules represents a critical first step. Working with behavioural biases: Research commissioned by Choice and Financial Literacy Australia shows that consumers do not want more information,

they want to be shown what to do. Smart defaults in retirement that work with human inertia and artificial intelligence decision support tools offer scope to guide individuals towards better outcomes. Already, new players like Grow Super are employing digital design and the positive reinforcement used in the nudge concept to help people make betterinformed decisions. • Effective safeguards: Given the stickiness of defaults and the diversity of consumer needs and preferences, safeguards are needed to ensure that nudges are designed in the best interests of consumers and mitigate the risk of mis-selling. • Improved benchmarks: Recognise the limitations of investment returns and track performance across wider criteria. A new Committee for Sustainable Retirement Incomes Sustainable Retirement Income Index will help shift attention to broader consumer needs and outcomes. • Integrated view of retirement: The separation of policy for the accumulation and retirement phases stifles the industry’s ability to ensure individuals a smooth transition to retirement. The Productivity Commission should shift the focus from employers to members and include post-retirement planning within the scope of any alternative default model. For the nation, these changes would represent a substantial, long-term investment in making our market work more effectively, making our retirement income system more sustainable and making the lives of millions of Australians better.

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

an AWAYSIDE day A TEAM EXPERIENCE LIKE NO OTHER

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

QIC GLOBAL REAL ESTATE. REINVENTING RETAIL. Where most see shopping centres, we see opportunities to transform communities into thriving lifestyle, entertainment and retail destinations. For over 27 years, we have focused on identifying the right retail assets, ready for growth, and maximising their potential for our clients. With $20.5 billion real estate assets under management*, our established platform in the U.S. and proven track record in Australia have equipped us with the specialist expertise to reinvent the strongest local retail opportunities. We do this to deliver investors the outcomes they seek. QIC. Global Diversified Alternatives.

Global Real Estate Global Infrastructure Global Private Capital Global Liquid Strategies Global Multi-Asset To learn more about QIC Global Real Estate, please visit www.qic.com or contact: Leonie Wilkinson Director, Investment Specialist, Global Real Estate T +61 434 079 357 E leonie.wilkinson@qic.com

Grant Brady Director, Investment Specialist, Global Real Estate T +61 435 966 707 E g.brady@qic.com

QIC Limited ACN 130 539 123 (â&#x20AC;&#x153;QICâ&#x20AC;?) is a wholesale funds manager and its products and services are not directly available to, and this communication is not intended for, retail investors. Past performance is not an indication of future performance. For more information about QIC, our approach and regulatory framework, please refer to our website www.qic.com or contact us directly. *As at 31 March 2018 and in Australian dollars.