Investment Magazine March18_Issue 147 by Conexus Financial

INTELLIGENCE FOR INSTITUTIONAL INVESTORS

ISSUE 147

MARCH 2018

Too many voices

ON THE HILL With more than 30 industry bodies, the financial services sector projects a fractured voice in Canberra

CIO PROFILE

GOVERNANCE

GLOBAL INSIGHTS

GENDER GAP

KYLIE WILLMENT IN

AIST PRESIDENT

COMPARE THE

SUPER FUNDS NEED

HER FIRST INTERVIEW AS

DAVID SMITH EXPLAINS

VALUE OF EXECUTIVE

TO STEP UP TO HELP

MERCER CHIEF INVESTMENT

HOW A CAREER AS A TRADE

REMUNERATION POLICIES

WOMEN TAKE CONTROL

OFFICER, PACIFIC

UNIONIST SHAPED HIM

AT PENSION FUNDS

OF THEIR RETIREMENT

THIS ISSUE \

CONTENTS MARCH 2018

COVER STORY

OPINION

ASSOCIATIONS

SELF-REGULATION

With more than 30 industry bodies, the financial services sector is arguably overrepresented. And at what cost?

AIST CEO Eva Scheerlinck has high hopes for the Insurance in Superannuation Code of Practice

29 FEATURES

22 TRUSTEES AIST president David Smith says 2018 will be about focusing on the basics

30 REMUNERATION Compare the pay practices of two of North America’s largest pension funds

34 SUPER’S GENDER GAP Super fund members often need a nudge to seek advice and get engaged, especially women

GROUP INSURANCE AustralianSuper has changed default life cover to offer better value to young members, Rose Kerlin writes

32 FINTECH Zuper boss Jessica Ellerm is on a mission to improve super consumers’ financial literacy via technology

36 DIVERSITY The CFA Institute wants to boost the number of women in investment management, Maria Wilton writes

38 PHILANTHROPY

Future Generation CEO Louise Walsh encourages financial services leaders to find innovative ways to give

CIO PROFILE

“It is important to be more mindful of the risks in markets and have more scenario- and stress-testing of portfolios” KYLIE WILLMENT | CHIEF INVESTMENT OFFICER, PACIFIC | MERCER

\ FROM THE EDITOR

EDITORIAL EDITOR

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

Sally Rose DIRECTOR OF INSTITUTIONAL CONTENT

Amanda White HEAD OF DESIGN

A LETTER from the editor

SO MANY ASSOCIATIONS

Kelly Patterson ART DIRECTOR

Suzanne Elworthy SUB-EDITOR

Haki P. Crisden PHOTOGRAPHER

Matt Fatches matt@mattfatches.com.au CHIEF EXECUTIVE

Colin Tate

ADVERTISING

HIS MONTH’S COVER story (“Who speaks for super?”, page 6) explores the question of whether some of the more than 30 industry bodies seeking to represent the financial services sector should merge. There has been much talk in recent years about whether there should be more consolidation of superannuation funds in the market, so it is fitting to question duplication elsewhere in the value chain as well. One leg to the argument for fewer associations is that the multiple sets of membership fees funds pay are an unnecessary drain on their members’ retirement savings. Then there are the indirect costs of paying for airfares and hotel rooms to send delegations to numerous conferences and events. Potentially a greater drain is the lost opportunity cost from allocating staff time, out of the office and away from business as usual, to participate in these professional development and networking events. But perhaps the most compelling argument in favour of the proposition that some of the industry associations should merge is that the plethora of voices is producing a cacophony, and failing to project a clear policy agenda to Canberra. We heard from politicians, political staffers and former industry association heads alike that the super industry’s habit of sending numerous emissaries, each pushing a factional barrow, to meet with policymakers results in the industry as a whole

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failing to be heard on critical issues. Most representative bodies have to keep so many stakeholders happy that they become hamstrung in their ability to say anything meaningful. So now we have a situation where the largest super funds, despite being paid up members of two or more industry associations, often are also pouring internal resources into producing their own submissions to policy consultations. The Association of Superannuation Funds of Australia, the Australian Institute of Superannuation Trustees, Industry Super Australia, and the Financial Services Council are the four main bodies aiming to speak on behalf of the industry. It’s pretty clear that if the vested interests of both the unions and the banks were taken out of the equation, there’d be at least two fewer industry associations. Frankly, I don’t see it happening any time soon. None of the associations has any incentive to consider orchestrating its own demise. So, it is up to funds to ensure they are satisfied with the value they are delivering to members as a result of maintaining a relationship with each of the different industry bodies they support. As the Australian Prudential Regulation Authority strengthens its push for funds to show more robust decision-making processes around expenditure, expect to see more scrutiny around the value delivered via industry associations.

BUSINESS DEVELOPMENT MANAGER

Karlee Samuels

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

Sean Scallan

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

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reshma.gupta@conexusfinancial.com.au (02) 9227 5714 CLIENT RELATIONSHIP MANAGER (EVENTS)

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Special T Print

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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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LET’S MAKE THE WORLD OF INVESTING AS DIVERSE AS THE ONE WE LIVE IN. LET’S MEASURE UP. Diversification is a hallmark of an effective investment strategy, but too often the investing profession fails to apply that approach to building teams. Through our Women in Investment Management initiative, scholarship programs, and other efforts, CFA Societies Australia advocate for diversity in our industry. Let’s stop talking about diversity and actually be more diverse. Demand the best. Demand a CFA® charterholder. Get started at letsmeasureup.org © 2018 CFA Institute. All rights reserved.

\ COVER STORY

WHO

S PE A K S for

s u p e r?

MARCH 2018

investmentmagazine.com.au

COVER STORY \

By Simon Hoyle

There are more than 30 INDUSTRY BODIES vying for the superannuation sector’s support, and the attention of government, at an estimated cost to members of $100 MILLION OR MORE A YEAR. The time is ripe to question whether some of the financial services industry associations should merge.

UPER FUNDS ARE on notice to think more carefully about how many financial services industry representative bodies they support. The regulator is focused on ensuring all expenditure is truly in members’ best interests, and some say fewer voices would communicate industry interests more clearly in Canberra. All these factors point to a building case for mergers among some of the dozens of associations. In December, the Australian Prudential Regulation Authority issued a warning to super funds that every dollar they spend must be carefully considered and justified as contributing to outcomes in their members’ best interests. This includes how much financial and other support is poured into the plethora of industry bodies and associations. Investment Magazine’s ‘back of the envelope’ calculations indicate more than $100 million a year of super fund members’ money is supporting industry associations. APRA’s current discussion paper, Strengthening Superannuation Member Outcomes, notes super funds should “adopt sound governance and business management practices commensurate with community expectations”. The paper calls on funds to “move beyond a focus on just meeting minimum prudential requirements in order to meet these expectations”.

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While the paper does not explicitly single out spending on representative bodies, it states that rigorous decisionmaking processes on all expenditures enable funds “to respond to these challenges without compromising the outcomes provided to their members”. The Minister for Revenue and Financial Services, Kelly O’Dwyer, gives an even clearer signal, telling Investment Magazine that “given the superannuation industry has the privilege of managing the compulsory deferred wages of millions of Australians, the government is concerned with ensuring that funds spend members’ money only in the best interests of their members, including where that expenditure is on involvement with industry representative bodies”. Some argue the financial services sector is grossly over-represented by associations and representative bodies. There are more than 30 (see table, page 9). Some are focused on lobbying, others on continued education or professional networking. All are vying for the money, time and attention of industry participants.

TALLYING THE COST Putting a dollar value on the amount of members’ money that flows into supporting the industry body machine each year is tricky. Some bodies do not publicly disclose the relevant financial reporting; and some association membership fees are borne by funds, while others are paid by individuals. Another complicating factor is the question of how far along the value chain to consider these costs. For instance, most retail wealth managers pay dues to the Financial Services Council, while their

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\ COVER STORY

Having multiple groups that focus on specific and even time-limited issues can be very worthwhile. But once a body is established, it is often hard to close it

parent companies also fund the Australian Banking Association. Likewise, while the industry bodies servicing the advice sector were once quite detached from the super fund sector, this line is now blurred, as big funds now employ a number of advisers. That said, analysis by Investment Magazine suggests it might be a conservative estimate to say at least $100 million a year is flowing into industry bodies servicing the superannuation industry. The Association of Superannuation Funds of Australia (ASFA) pulled in $13.8 million last financial year, while the Financial Services Council (FSC) collected $8.7 million. The Australian Institute of

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Superannuation Trustees reports on a calendar year basis, and its 2017 accounts were not yet available at the time of writing. However, AIST generated revenue of $9.1 million in 2016 and Investment Magazine estimates it raised about $9.2 million in the year to December 31, 2017. Industry Superannuation Australia (ISA) does not publicly release its financial reports but was forced to reveal to a Senate Economics Committee hearing in October that its revenue for the previous financial year was $21.7 million – a seemingly modest sum in the context of its massive ‘fox in the henhouse’ television campaign, launched in March 2017. The Australian Council of

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COVER STORY \

including Conexus Financial publisher Investment Magazine. FINANCIAL SERVICES SECTOR INDUSTRY ASSOCIATIONS yy Alternative Investment Management Association yy Association of Financial Advisers yy Association of Superannuation Funds of Australia yy Australian Banking Association yy Australian Council of Superannuation Investors yy Australian Custodial Services Association yy Australian Finance Industry Association yy Australian Financial Markets Association yy Australian Institute of Superannuation Trustees yy Australian Private Equity & Venture Capital Association yy Australian Securitisation Forum yy CFA Societies of Australia yy Chartered Accountants Australia & New Zealand yy CIMA Society of Australia

Superannuation Investors (ACSI) yy reported $3.9 million in revenue yy in the financial year ended June yy 30, 2017, while the Fund Executives yy Association Ltd (FEAL) raised yy $900,000. yy The Financial Planning yy Association (FPA) reported yy revenue of $13.5 million for the yy period. Meanwhile, the Self yy Managed Super Fund Association yy (SMSF Association) collected yy $6.2 million and the Association yy of Financial Advisers (AFA) brought in $5.1 million. yy Collectively, the nine associations listed above − ASFA, yy FSC, AIST, ISA, ACSI, FEAL, yy FPA, SMSF Association, and AFA yy – garnered about $82.9 million of support from the retirement industry last financial year. And that’s before we even consider membership dues paid to the other 20 or so industry bodies.

LESS-VISIBLE COSTS Of course, in the context of a $2.3 trillion superannuation industry, $100 million is a drop in the ocean. Leakage to industry association fees is absolutely dwarfed by the investment fees paid to fund managers. But just as funds have been forced to respond to pressure to bring down investment fees in recent years, they are

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Committee for Sustainable Retirement Incomes CPA Australia Customer Owned Banking Association Finance Brokers Association of Australia Finance & Treasury Association Financial Planning Association of Australia Finsia Funds Executives Association Ltd Industry Super Australia Institute of Actuaries of Australia Insurance Council of Australia Mortgage & Finance Association of Australia National Insurance Brokers Association

of Australia

Self-managed Independent Superannuation Funds Association SMSF Association Tax & Super Australia Women in Super

now under increased pressure to reduce other business costs. Rice Warner chief executive Michael Rice says that in addition to the direct cost of funding the associations, there are many “less visible add-on costs that arise”, including executive and staff time spent traveling to and attending multiple events throughout the year. This is before even considering money and time dedicated to industry education, training and conferences produced by a number of commercial suppliers –

DOUBLING UP O’Dwyer’s words demand that super funds consider carefully which associations they back, how much they spend and why, and challenge the associations and industry bodies to prove their value and demonstrate they are worthy of continued support. For years, there has been consistent debate within the industry about whether it can, and should, continue to support multiple bodies in light of the potential for duplication of activities including multiple major events – and compromises to the industry’s advocacy and efforts to develop broadly supported policy proposals. Former ASFA chief executive Pauline Vamos, who is now chief executive of governance research and engagement firm Regnan, says overlap of activities arises from the inevitable “scope creep” that occurs after a body is established. “Having multiple groups that focus on specific and even time-limited issues can be very worthwhile,” Vamos says. “But once a body is established, it is often hard to close it − as we see with many committees, for example.” Vamos says history has shown the super industry is in agreement on “about 90 per cent of issues”, but where there is not consensus “there is often violent disagreement”. “So, let’s focus on the areas where we do agree. Have one body focus on getting the detail right on the issues we agree on,” she says. “More than once, I saw good policy debate and regulatory outcomes undermined because others around the table did not have the expertise in that area.” Vamos says the super industry is potentially putting its social licence to operate at risk if it can’t demonstrate an ability to move quickly and cohesively to self-regulate and lift standards. She points to the Insurance in Superannuation Voluntary Code of Practice, released late last year, as one example of a good initiative that simply took too long to execute, due in large part to the number of stakeholders involved.

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\ COVER STORY

EVA SCHEERLINCK AIST

“It [the code] took a lot longer than it should have,” she says. “We are not practised enough on establishing best practice standards. There were also far too many derailments with SuperStream negotiations and the Standard Risk Measure. We could not even agree on the purpose of the system”. “I am not sure we understand what this makes us look like to external stakeholders, including the community. We are a long way off any kind of self- or co-regulation [and] I think this is something we should try to change.”

CONTRADICTORY VOICES Another former head of a different financial services industry association, who spoke to Investment Magazine on condition of anonymity, recalls the process of lobbying the government as being like “taking a ticket at the deli counter”. Ushered into the minister’s presence through one door as other association representatives left through another, association representatives didn’t know what had been said to the minister before they arrived, and didn’t know what would be said after they left. It was, they recall, a disconcerting process and it was clear that the message the association was seeking to get across was at risk of being directly contradicted or diluted by myriad other voices clamouring for attention on the same issues. “You have to rely on [a minister’s] ability to work through that,” the former association head says.

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DAVID WHITELEY ISA

KPMG partner Paul Howes, a former Australian Workers Union national secretary and former AustralianSuper deputy chair, says the existence of multiple organisations representing different industry interests is “a reflection of how politicised superannuation has been since the day it was invented”. But Howes says super funds, whether retail, industry or self-managed, have more issues where they’re united than where they disagree. Where there is unity – for example, on defining the purpose of superannuation – he says justifying the existence of multiple associations is difficult. “In terms of policymakers, when I was an industry fund trustee and union leader and lobbied government on issues around superannuation,” Howes says,

MARTIN FAHY ASFA

“one of the frustrations of the government, at that time, was the lack of a clear, united voice from the industry on these major reforms. “ASFA does a very good job in trying to provide that [single] voice, but unfortunately the number of associations doesn’t necessarily benefit the debate as a whole.” One senior political staffer, also speaking on condition of anonymity, agrees that it is a perennial source of frustration for elected representatives covering the super sector that there are so many different industry associations to hear from. This is complicated by the fact that some of the larger industry bodies are often hamstrung by internal conflicts: “Large bodies that incorporate several different voices in the industry, some of which are competing against each other, can end up being able to say nothing,” the staffer says. The case for association rationalisation was highlighted in December last year, when Industry Funds Forum (IFF), a group representing the chief executives of 18 industry funds, merged into AIST. IFF executive officer Chris Matthews tells Investment Magazine that he increasingly found himself attending the same meetings and events as the other association representatives, and it was “becoming a bit of a challenge” to differentiate IFF from other representative bodies. He says IFF wanted to avoid duplicating work being done elsewhere. “We would often start a project, and then stop it because someone else was doing it,” Matthews explains. AIST chief executive Eva Scheerlinck says the association is not shying away

SALLY LOANE FSC

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COVER STORY \

from other mergers in the future, although there are none on the cards. “We have done our analysis and talked to members about it,” Scheerlinck says. “It’s thought that, at this point in time, what AIST delivers is still important to the membership, and they could not see sufficient synergies [in merging].” Scheerlinck says associations must constantly reinvent themselves and stay relevant. She says AIST was created because “ASFA wasn’t necessarily delivering everything” that AIST’s members need. While ASFA seeks to represent all APRA-regulated super funds, including the bank-owned and other retail funds, AIST solely represents the non-profit funds sector.

COMPETITION FOR IDEAS Many fund executives and staff perceive benefits in being active participants with more than one industry organisation. First State Super chief executive Michael Dwyer sits on the boards of both FEAL and ASFA, for example; while HESTA chief executive Debby Blakey sits on the boards of FEAL and AIST. Dwyer says his involvement in two associations allows him to make contributions to the industry in different ways. “As a director of ASFA, I can help shape thinking about the big issues for our industry at a macro level. Through FEAL, I can support the individual executives who are the current and emerging leaders of our industry,” he says. ASFA chief executive Martin Fahy says the super industry is big enough to support multiple associations, which generate competing ideas and insights. “Competition for ideas is everything… it produces the best public policy,” Fahy says. “I do think concentration risk is an issue. And I’m a big fan of diversity in the ecosystem.” In fact, he sees room for more associations across the wider financial services industry, saying that when it comes to representation of the banking sector, the Australian Banking Association “looks like a monopoly”. FSC chief executive Sally Loane says the financial services industry broadly, and the superannuation industry more specifically, is not unusual in supporting multiple associations.

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As long as individual associations remain relevant to their respective members and are not duplicating the work of other associations, they will continue to receive support

In her previous role, Loane was director of media and public affairs for CocaCola Amatil and notes there are eight organisations representing different interests within the beverages sector. Loane recalls an attempt to establish an association-of-associations for the beverages industry, which failed because a single body could not represent the interests of all participants. She believes the same is true in financial services. “In financial services, some companies have got specific issues, which we can obviously advocate for in a specialised way,” Loane says. “Others have a broader remit, so they might be members of two or three organisations. I think it’s more up to the companies in our sector to decide.”

NICHE REMITS FEAL chief executive Joanna Davison says that as long as individual associations remain relevant to their respective members and are not duplicating the work of other associations, they will continue to receive support. But she does not discount the possibility of rationalisation in the future. “[Would] it mean [our members] are all professionally developed and they’ve reached a point where they don’t need us? That would be good,” Davison says. “Maybe one day FEAL won’t be needed. But I don’t know when that will be – I cannot foresee a time when we’re not.” ACSI was established in the early 2000s to share among its members the cost of corporate governance as super fund investors began taking a more active, and activist, ownership approach to investments. At the time, associations did not adequately address these issues. ACSI chief executive Louise Davidson says its mission is “so distinct from the purposes of those other organisations, it makes sense for it to be separate”.

ISA chief executive David Whiteley says there is arguably a greater need today than ever for a united industry approach to what seems to be “a negative policy agenda from the current government”. “When we attended the Senate hearings on the various bills before Parliament [last year], we weren’t asked by the government senators a single question about our submissions, we were not asked a single question about the evidence we presented to the hearing,” Whiteley says. “We were asked about our funding, about our staff numbers and about the cost of sponsoring Game of Thrones [on Foxtel].” He says that on big-picture issues and those fundamental to the longevity of the system – such as increasing the super guarantee, ensuring the tax system is fair and equitable, and the evolution of retirement income products − the sector “tends to work quite well together, even where there are differences of opinion”.

CALLS TO CONSOLIDATE The question of whose interests are being served will continue as long as there are multiple associations and the potential for overlap in activities and the inefficient use of resources as a result. Rice Warner’s Rice says he would support amalgamation among the major super industry associations, arguing multiplicity of bodies makes it “very difficult for the industry to lobby government”. “If there were one voice in super, I think it would strengthen the industry in a number of ways,” he says. Former ASFA chief Vamos says how to address this “has been discussed” within the industry. “But we need an open an honest conversation on what we are trying to fix and agree on? “Are we about what is best for the community, or about what is best for us, or a particular sector?”

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\ CIO PROFILE

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CIO PROFILE \

B R AC E D

for R A PI D

CH ANGE

TOP OF THE TO-DO LIST for Mercer’s new regional chief investment officer is crunching the time it takes to implement decisions, as she remains WARY of choppier markets ahead.

By Sally Rose Photos Christopher Pearce

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KYLIE WILLMENT IS well aware that she has taken on her first CIO role at a time when the long-term outlook for markets is extremely challenging. But she sees big opportunities in being part of a global team with a shared vision to embed the concept of ‘stewardship’ into mainstream investment practices. Sydney-based Willment sat down with Investment Magazine in February, just a few months after joining Mercer as its CIO for the Pacific region in October 2017. She replaced Russell Clarke, who departed in May 2017 to step into the CIO role at Victorian Funds Management Corporation (VFMC). Willment says: “One of the things I’ve come to appreciate quite quickly about working at Mercer is being part of a global organisation and the depth and breadth of the resources that affords me.” Mercer is a wealth-management and asset-consulting firm with US$200 billion ($253 billion) in funds under management globally. The firm has more than 1000 investment staff in 44 countries and is a wholly owned subsidiary of NYSE-listed Marsh & McLennan Companies. Sitting within such a large global

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It comes back to really having the belief that sustainable investment practices will have an impact on your long-term risk and return organisation “brings huge scale benefits”, says Willment, who previously spent 17 years at NSW Treasury Corporation (TCorp). She held numerous roles at the state government’s $90 billion institutional investment arm, culminating with senior manager investment advisory and stewardship.

PROMOTING STEWARDSHIP Willment is a true believer in the importance of embedding considerations of environmental, social and governance (ESG) factors in investment decisions. Mercer’s position as one of the leading exponents of responsible investment practices globally was a major factor in attracting her to the role. “It comes back to really having the belief that sustainable investment practices will have an impact on your long-term risk and return,” she says. “Once you believe that, which I do and Mercer does, then you see it not as a side activity but actually something that’s really integral to your investment process and framework.” That’s critical to ensure the commitment to investment stewardship isn’t abandoned in tough markets. “We still think the global growth environment is supportive of reasonably strong equity returns from here, but we’re also conscious that markets just don’t go up in a straight line forever and we’re in one of the longest-running bull markets seen for a number of decades,” Willment says.

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CIO PROFILE \

Kyl i e Wi l l m e n t MERCER | CIO, PACIFIC Appointed October 2017 PREVIOUS ROLES

NSW Treasury Corporation VARIOUS ROLES

2016-17: Senior manager, investment advisory and stewardship 2015-16: Senior manager, hourglass funds and policy development 2013-15: Senior manager, investment management 2003-13: Senior investment specialist 2000-03: Portfolio analyst OTHER ROLES

CIMA Society of Australia 2014-present: Director QUALIFICATIONS

Master of applied finance 2001-04: Macquarie University Certified Investment Management Analyst 2010:

Investment and Wealth Institute

Mercer Mercer is a wholly owned subsidiary of NYSE-listed Marsh & McLennan Companies, with US$200 billion ($253 billion) in funds under management globally. The firm has more than 1000 investment staff in 44 countries.

HISTORICAL PERFORMANCE

9.77

8.94

9.21 7.34

8.33

6.38

1 YEAR

3 YEARS

5 YEARS

(% PA)

Mercer growth SuperRatings master trust median SOURCE: SuperRatings as at December 2017

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She wants to act now to ensure the portfolio is positioned to demonstrate resilience in a downturn. Our interview took place in midFebruary, about a week after finance headlines around the world proclaimed volatility’s return; however, Willment says her team did not make any significant trades around that time. “We really don’t see any major change in fundamentals at this point and, pleasingly, we were pretty well-positioned for that event going into it.” She credits that in part to some changes made in the preceding few months.

TRIENNIAL REVIEW When Willment arrived in October, the Mercer Pacific investment team was “right at the pointy end” of completing its triennial strategic review. Mercer Pacific deputy CIO Philip Graham, who was acting as interim CIO prior to Willment’s arrival, led the review – very capably she notes. “It was a great opportunity for me to very quickly become immersed in the portfolio and process,” she says. Tweaks have now been made to the portfolio where holdings were inconsistent with the house view on the investment themes that are expected to be the most important in the three years ahead: the move from quantitative easing (QE) to quantitative tightening; the late-stage corporate earnings and market cycle; and an increasingly fragmented geopolitical landscape. “We considered what each of the themes was likely to mean from a portfolio construction and investment strategy perspective, and how we needed to adapt the strategy to be positioned either to benefit from those themes or manage their risks.” Willment says investors obviously have to be cautious as the experiment of unwinding unprecedented amounts of monetary stimulus plays out. “Unwinding QE has to be recognised as one of the key points of risk over the next few years, because central banks have never done it before,” she says. However, Willment believes many people’s fears about how markets will respond to quantitative tightening are too simplistic.

She’s not convinced that just because the proceeds of QE fuelled bull markets in certain asset classes, such as shares, those markets will deflate as the stimulus is unwound. How it all plays out will depend on a range of factors, demanding that investors remain vigilant about monitoring the risks in their portfolio. “It is important to be more mindful of the risks in markets and have more scenario- and stress-testing of portfolios,” she says. “You need to be thinking about the portfolio’s sensitivities to interest-rate risk and inflation, making sure there are processes in place to help navigate through those changes as they occur.” These processes need to be solid enough to empower investors to “look through the noise” and identify when changes are cyclical or more structural, she warns. “Otherwise, you get over-reactions like we saw [in early February] in response to one or two single data points.”

RETHINKING FIXED INCOME Reflecting the magnitude of the risks associated with quantitative tightening, the most significant change in the portfolio following the recent review was to rethink the role of traditional defensive fixed interest. “Cash and bonds have both obviously got challenges, from both a risk and return perspective, so we have moved out of some of those traditional defensive assets and into strategies that are more skills based,” Willment says. “Things like absolute return funds or multi-asset credit strategies, where you’re not just at the whim of duration exposure but managers are really using the skill to manage through bond market volatility and challenges.” Another outcome of the review was that some additional capital was deployed into unlisted assets, although Willment notes that valuations were stretched across unlisted asset classes, meaning this had to be done cautiously. Options-based risk-management overlay strategies are also running across the portfolio, a decision Willment tips will prove valuable when, sooner or later, volatility ticks up. Ensuring foreign exchange exposures are right has been another a priority.

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BECOMING MORE NIMBLE But potentially the biggest impact of the review will come not from new investment decisions but from changes in how those decisions are executed. A top priority for Willment is to reduce the lag between when investment decisions are made and implemented. “It’s not a major overhaul, we’ve already got a good DAA [dynamic asset allocation] capability,” Willment says. “There is still some work to be done from an operational perspective to make sure the lag time between decision and execution is as small as it possibly can be.” Willment was coy about revealing what the lag time is now, or what she hopes it will be eventually. “It’s never going to be quite in realtime but you certainly want to make sure that gap is as small as it can be,” she says. “Particularly if you are doing market-sensitive trades, or trying to be opportunistic in response to market movements.” Those sorts of scenarios are likely to become more frequent as market volatility ticks up. “We’re not trading the portfolio. I mean, even our DAA views are one-to-three-year positionings, but when you get significant

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There is still some work to be done from an operational perspective to make sure the lag time between decision and execution is as small as it possibly can be market moves, that is a good time to work out whether it is time to readjust.”

RAISING STANDARDS Asked to share what she would most like to achieve as a CIO, Willment says simply that she hopes to have a positive impact on the lives of those people whose money she is entrusted with investing. “I think for any investment professional with fiduciary responsibility, that is what it all boils down to; it’s a really privileged position and it comes with a high level of responsibility,” she says. “If we remind ourselves of that every day, it can hold us in really good stead.” She says the broader industry has more work to do to lift educational and professional standards. “We need to ensure those people in trusted positions of advising people on their investments, and making decisions on behalf of other people, have actually

got the skills and knowledge they need to be able to do that in the best possible way,” she says. Willment holds a master’s degree in applied finance from Macquarie University and is a Certified Investment Management Analyst (CIMA). She has been a director on the local arm of the CIMA Society of Australia (previously the Investment Management Consultants Association of Australia) since 2014. “The CIMA certification is specifically targeted at people who are advising on or constructing portfolios at a multi-asset, multi-manager level,” she says. “I think it has got incredible application within the Australian industry, right across the institutional funds space but also for financial advisers. “From a CIMA Society perspective, the minimum adviser standards are not high enough…and the impact of that on real people’s lives can often be significant.”

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INTELLECTUAL PROPERTY AS A REAL ASSET Barings believes that certain intellectual property (IP) assets have investment characteristics that make them suitable for inclusion in the definition of real assets and, where appropriate, investors’ real asset portfolios. The understanding of “real” assets has evolved over time and while there is no standard definition today, there is an identifiable set of characteristics that are generally accepted, including:

• • • • •

INFLATION HEDGE Positively correlated with U.S. or European inflation INTRINSIC VALUE Likely to preserve value in periods of macroeconomic instability SCARCE INPUT Should stand to benefit directly from increasing scarcity of production inputs ECONOMIC INFRASTRUCTURE Are often essential to economic infrastructure LONG-TERM MATCHING May offer riskand-return properties that match longterm liabilities

In our view, having a multi-dimensional understanding that incorporates all of these real asset characteristics makes particular sense for investors seeking to mitigate inflation risk (and other investment risks), as it addresses the fundamental weakness of strategies narrowly focused on specific asset classes: i.e. that inflation can have many causes. We believe that taking a multi-dimensional approach naturally leads to the inclusion of certain IP assets within the scope of real assets. Increasingly, institutional investors and economic bodies such as the U.S. Bureau of Economic Analysis (BEA) have moved to consider certain types of IP as real assets. OUR APPROACH Barings’ approach to investing in IP complements the broadening in the definition of real assets. We emphasize investments with the below characteristics: Operating risk profile similar to tangible assets. We target investments in proven IP, such as established pharma technology, existing media assets and established patents or technological IP. We typically avoid IP assets that perform little economic function, are not scalable, or which have uncertain use, indeterminate value, or obsolescence risk.

Likely to preserve value in periods of macroeconomic instability. In general, IP products have low beta to the overall market. For example, we calculated five-year (since 2008) rolling betas using Ken French’s data to the Fama-French market factor and found that the drug sector has beta in the lower half of all sectors, and that generally it is in the lowest quartile of sector betas. Are often essential to economic infrastructure. The long-lived IP products Barings targets are considered essential components of U.S. GDP. In particular, “Intellectual Property Products,” as defined by the BEA, are of growing importance. A 2013 revision to include fixed investment in long-lived IP assets increased estimated U.S. GDP by $560 billion. COMPARING CHARACTERISTICS In this section we compare the investment characteristics of typical IP assets and several traditional real asset classes using the multi-dimensional definition. INFLATION HEDGE Our analysis does not find clear evidence on the correlation of stand-alone IP assets and inflation. This also pertains to certain other assets that have been classified as real, such as real estate. It is likely that the IP assets that we target have low correlation with inflation and represent a diversifier to inflation risk, unlike other core assets in institutional portfolios, such as equities and nominal bonds. INTRINSIC VALUE As suggested above, there is empirical evidence that suggests IP assets like pharma have low correlation to the macroeconomic environment. Elevated intermediate cash flows—available from many of the types of IP assets Barings targets—are de-risking and also reduce sensitivity to exit risk in a temporarily unfavorable market environment. SCARCE INPUT It is unlikely that IP assets targeted by Barings have any correlation with scarcity of inputs in certain sectors such as energy, manufacturing and agriculture.

INFLATION HEDGE

INTRINSIC VALUE

SCARCE INPUT ECONOMIC INFRASTRUCTURE LONG-TERM MATCHING KEY real estate infrastructure

commodities

timber

intellectual property

For illustrative purposes only

ECONOMIC INFRASTRUCTURE As the changes to the calculation of U.S. GDP indicate, long-lived IP products, such as those targeted by Barings, are considered to have an enduring significance for the U.S. economy. LONG-TERM MATCHING The focus on IP products with low operating risk, ready transferability or license, and long economic life, provides a basis for the generation of relatively stable cash flows that may be suitable for funding long-term liabilities. CONCLUSION In our view, understanding of the economic role of IP assets is essential for properly assessing their investment characteristics and inclusion in portfolios. While long-lived IP is a growing universe, it is not easy to directly access through public markets. Investments in IP usually are linked directly, through private markets rather than public securities, to corporate cash flows, as they are frequently associated with licensing, royalty or profit interests in specific assets. We find that the specific types of IP that we target are complementary and consistent with our real asset investment strategy across other asset classes. These assets are all the more complementary when considering the benefits in protecting long horizon investors from inflation risk and other forms of macroeconomic instability, while generating significant intermediate cash flows.

This article is for use with investment professionals for informational purposes only and does not constitute any offering of any security, product, service or fund, including any investment product or fund sponsored by Barings, LLC (Barings) or any of its affiliates. The information discussed by the author is the author’s own view as of the date indicated and may not reflect the actual information of any fund or investment product managed by Barings or any of its affiliates. Neither Barings nor any of its affiliates guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. An investment entails the risk of loss. 18-426768

1. Kenneth R. French - Data Library. Available online at: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html 2. Source: U.S. Bureau of Economic Analysis. As of August 6, 2013.

LE ARN MORE AT BARINGS.COM

\ SPONSORED ROUNDTABLE AN INVESTMENT MAGAZINE ROUNDTABLE, sponsored by QIC

LIQUID ALTERNATIVES

COMING

AGE

A demanding market and a better selection of high-quality products are leading more institutional investors to take up this MATURING ASSET CLASS, to fill a variety of needs.

By Alexandra Cain + Photos Matthew Fatches

TEN YEARS ON from the global financial crisis, institutional investors are grappling with how to ensure their portfolios are sufficiently diversified to be resilient in the event of another liquidity crisis or major market downturn. For Australian superannuation funds, the challenge comes amid increased pressure to improve transparency and reduce the costs that make traditional hedge funds and private equity funds less attractive. In this context, liquid alternatives-style strategies are finding favour with a number of leading funds, attracted to their liquidity, transparency and simple fee structures. At a recent roundtable, hosted by Investment Magazine and sponsored by QIC, experts from a range of institutions exchanged insights into how they are using liquid alternatives and managing

the associated risks. It became clear that the phrase ‘liquid alternatives’ means different things at different funds. Colonial First State senior investment manager Guneet Rana is responsible for the $44 billion multimanager’s roughly $1 billion alternatives portfolio. This includes alternative risk-premia, volatility, and macro strategies. The fund’s mandate prohibits investing in illiquid assets. “To define what we mean by liquid, assets have to have a price valuation that is available daily,” Rana said.

LIQUIDIT Y The main role of Colonial First State’s liquid alternatives strategy is to diversify against traditional equity risk. Rana noted that genuine diversification is difficult to observe in benign equity markets.

QIC LIQUID ALTERNATIVES FUND.

SPONSORED ROUNDTABLE \

PA R T I C I PA N T S ANDREW FISHER Portfolio manager, Sunsuper ROBERT GRAHAM-SMITH Senior investment analyst, Mine Wealth + Wellbeing SCOTT PAPPAS Senior portfolio manager, Cbus Super GUNEET RANA Senior investment manager, Colonial First State

and volatility but a key differentiator is the implicit equity risk in various strategies. It will manifest itself differently, according to the type of equity market environment involved, and clients need to understand that. Mercer director of portfolio construction research, Nick White, advises the investment management and asset consulting firm’s clients on how to build multi-asset portfolios with liquid alternatives. He has found the biggest challenge for investment chiefs in building out a liquid alternatives portfolio is to set and communicate realistic expectations of how these types of assets might perform in different market conditions. This discipline can also help fiduciaries prioritise the types of defensive strategies for which they are prepared to pay a

TROY RIECK Executive officer, investment strategy, Equip Super

ANDREW FISHER Sunsuper

MICHAEL SOMMERS Consultant, Frontier Advisors ROBERT SWAN Head of liquid alternatives, QIC NICK WHITE Director of portfolio construction research, Mercer CHRIS WILLIAMS Investment manager, Statewide Super NEIL WILLIAMS Investment director, QIC

CH A IR SALLY ROSE Editor, Investment Magazine

GUNEET RANA Colonial First State

Australian based, global capability.

premium, and make the most of their fee budget.

CLEAR PURPOSE In White’s view, the rising popularity of liquid alternatives reflects not just increasing demand for unique assets at a time when mainstream assets are more correlated, but also an improvement in what’s available. “For instance, some of the early alternative risk-premia strategies were pretty unsophisticated,” he explained. “Now there’s a decent universe of sophisticated funds at a decent price point.” QIC’s Williams, and others at the roundtable, noted that the Australian Securities and Investments Commission’s updated regime for fee and cost disclosure, known colloquially as RG 97, had sharpened many super funds’ focus on fees. Swan said he hoped the regime wouldn’t lead to trustees becoming so distracted by management fees and transaction costs that they lose sight of the importance of evaluating strategies based on their expected return net of fees and costs. All roundtable participants agreed that, given the complexity of liquid alternatives, it is particularly important to take extra care when communicating with stakeholders about strategies. Not only is it critical to manage external stakeholder communications to ensure fund members’ expectations are realistic, but also internal exchanges with the investment committee and board must address their expectations. Swan said this was because liquid alternatives strategies may exhibit different characteristics to more traditional investments, and are often perceived as more opaque. Manager presentations to the board, investment committee workshops, concise documents with plenty of informative graphics, and, above all, unflinching honesty about associated risks were among the ways fiduciaries around the table said they ensured they explained liquid alternatives strategies effectively.

\ PRESIDENT ’S SE AT

Q: WHAT POSITIVE SIGNS HAVE YOU SEEN SINCE THE AIST GOVERNANCE CODE WAS INTRODUCED ON A VOLUNTARY BASIS ON JULY 1, 2017? A: More than 30 funds have already signed up to the Governance Code, and a substantial number of these have already made some changes. The feedback is that engaging with the code has been a thought-provoking process, both during the consultation phase and now the implementation phase. A number of funds have stepped back and reviewed their internal governance processes, resulting in better member outcomes. Q: WHAT ARE YOUR TOP PRIORITIES AS AIST PRESIDENT IN 2018? A: My goal is to avoid being too distracted by the current political environment − in which responses will likely be required to the Turnbull Government’s legislative agenda, the Productivity Commission and potentially a royal commission – and refocus on AIST’s four strategic areas: embedding the profit-to-member ethos; advocacy for a better superannuation system; enhancing members’ education and skills; and governance improvement and monitoring. We will have to wait and see if the government gives us the clear air space to achieve this. The adoption of the AIST Governance Code and the Insurance in Superannuation Voluntary Code of Practice, both introduced in 2017, will also be a major focus for our member funds in 2018. Q: WHAT DO YOU SEE AS THE BIGGEST CHALLENGE FOR THE PROFIT-TO-MEMBER FUND SECTOR IN THE YEAR AHEAD? A: Profit-to-member funds need to stay

focused on their key objective. This means working on long-term outcomes for fund members, net returns and how we improve retirement outcomes for our members. This will need some attention in an environment of continuous change, so we don’t get caught up and distracted by the white noise about the industry that unfortunately appears to [be turning into] the norm from our politicians and the media.

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Q: AHEAD OF THE JULY 2018 DEADLINE FOR COMPLIANCE WITH THE AIST GOVERNANCE CODE, WHAT ARE THE ISSUES FUNDS MOST NEED TO BE FOCUSING ON? A: Funds need to examine their existing governance practices to identify whether any changes are necessary to meet the objectives of the Governance Code. This includes paying attention to the requirements that contain new disclosure obligations for funds. They may initially need to allocate additional resources to monitor fund performance against the 21 requirements in the code and to implement any necessary changes. Q: WHAT HAVE BEEN THE MOST POSITIVE DEVELOPMENTS YOU’ VE WITNESSED ACROSS THE INDUSTRY SINCE THE INTRODUCTION OF THE INSURANCE IN SUPERANNUATION VOLUNTARY CODE OF PRACTICE IN DECEMBER? A: AIST is very confident that our member funds will embrace the code and that this will lead to improvements in the way insurance in super is offered and claims are handled. Some AIST member funds have already signed up to the code and made changes to their insurance offerings, including addressing account erosion for certain member cohorts, such as the under25s. It’s been great to see that the code is being supported by organisations like SuperRatings.

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PRESIDENT ’S SE AT \

FOUR PILLARS – against the –

W IND

In this Q&A with Investment Magazine, Australian Institute of Superannuation Trustees president David Smith outlines the areas where the organisation must stand firm amid a swirl of distractions in the year ahead. The Energy Super trustee and trade unionist is a proud advocate for the profit-to-member funds sector. Edited by Sally Rose + Photos Nicole Cleary

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MARCH 2018

\ PRESIDENT ’S SE AT

Q: WHAT IS YOUR TOP TIP FOR INVESTMENT PROFESSIONALS ABOUT HOW TO MAKE THEIR COMMUNICATION WITH THE BOARD MORE EFFECTIVE? A: Don’t presume all directors understand the industry jargon. Always keep your board aware of all options available and the potential outcomes. The fewer surprises a board is confronted with, the better the relationship with your investment managers and advisers. Q: WHO HAVE BEEN SOME OF THE MOST IMPORTANT MENTORS IN YOUR BOARD CAREER? A: There have been a few, and mentors change as your skills and knowledge expand. When I joined the Energy Super board, it was a fellow director, John Bird. Further on in my career, and whilst I’ve been involved in AIST, Cate Wood, Angela Emslie and Garry Weaven have been the most influential on my thinking. Q: WHAT IS THE MOST VALUABLE PIECE OF EDUCATION OR PROFESSIONAL DEVELOPMENT YOU’VE DONE TO DEVELOP AS A TRUSTEE?

Q: HOW HAS THE INSURANCE IN SUPERANNUATION VOLUNTARY CODE OF PRACTICE SHAPED THE BOARD’S APPROACH AT ENERGY SUPER, WHERE YOU ARE A TRUSTEE DIRECTOR AND CHAIRED THE CL AIMS COMMIT TEE? A: I have just completed an extended

period as chair of the insurance and claims committee at Energy Super and was involved in the consultation process during the development of the insurance in superannuation code. This has helped the board and the committee challenge our insurance offering to ensure its appropriateness for the sectors in which our members work. We have also used this period to re-examine our claims and complaints process in conjunction with our insurer. I am confident that over the coming period this will lead to a better and more robust insurance offering and claims-handling process for our members.

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Q: YOU CHAIR ENERGY SUPER’S REMUNERATION COMMIT TEE. WHAT DO YOU BELIEVE IS THE MOST IMPORTANT CONSIDERATION IN THE STRUCTURING OF INCENTIVE BONUSES? A: During my seven years as chair of

this committee, there has been much discussion about incentive bonuses versus base salary for executive positions. Once a bonus payment is seen as just part of your salary, then it ceases to be an incentive. The key performance indicators and targets over time can become more like business-as-usual, rather than real stretch targets that help drive outcomes in the strategic directions the board sets within its risk appetite. Bonuses can be an effective tool in executive salary packages to help deliver substantially above-average performance, but they must meet the board’s key requirement of acting in the best interest of members and improving member retirement outcomes.

A: It was extremely valuable to complete AIST’s Trustee Director Course Level 2, ‘Enhancing Your Excellence’. You can never really complete your training in the role of a trustee director; this type of training was thought-provoking and made me rethink how best to develop and refine strategic planning. Q: HOW HAS YOUR CAREER AS A TRADE UNIONIST SHAPED YOU AS A TRUSTEE? A: Perhaps more than any professional development I have completed, my work as a union official for the Australian Services Union is what has most shaped my approach to the role of trustee director and president of AIST. The concept of doing what is in the best of interests of members and advocating on their behalf was embedded in me in my role as a trade unionist. This ethos is directly transferable to serving as a trustee director of a super fund. Looking after members is the reason I got involved in union work. I didn’t need legislation to tell me that it is the right thing to do and it informs the decisions I make at board level at Energy Super and in my role at AIST.

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SPONSORED CONTENT \ THIS REPORT IS sponsored by MFS INVESTMENT MANAGEMENT

Fixed income’s active age MFS Investment Management’s fixed income expert Pilar Gomez-Bravo reminds investors of the importance of an allocation to long-dated bonds and urges an active approach to credit. By Ben Hurley

AFTER A LONG period of eerie quiet, volatility finally returned to global bond markets in early February. And with the ‘great unwind’ still to play out over the coming months and years, as unprecedented amounts of central bank stimulus are unwound, the outlook for traditional fixed income is tough. Institutional investors should not veer away from fixed income, but must be ready to react swiftly to market dislocations, argues Pilar Gomez-Bravo who is the head of fixed income for Europe at MFS Investment Management. With the lessons of the GFC fading in investors’ memories, and in response to some disappointing returns from fixed income in early 2018, Gomez-Bravo has been concerned to see some institutions pursuing riskier fixed income strategies in a search for yield and losing sight of the important role bonds play in portfolio diversification and capital preservation. “Avoiding long-dated bonds due to concerns about rate rises misses the point of what fixed income is about,” she says. “Fixed income has traditionally acted as ballast in a diversified portfolio, and investors need to keep this in mind and preserve their capital.”

SUPPORT FOR BONDS In her view, concerns about the current environment leading to another ‘taper tantrum’ seem unlikely to play out. “In 2013, markets reacted ahead of the potential for a sudden change of Federal Reserve policy. We now have far more transparency around both the pace and quantity of balance sheet reduction,” Gomez-Bravo says. “Furthermore, markets are priced for two to three further hikes by the Fed in 2018. This means sharp losses from fixed income are far less likely although volatility can be expected to increase.” At the same time, more traditional bond portfolios will continue to provide diversification and protection to other asset classes, such as equities and commodities, she predicts. The recent rise in US yields now means that the average dividend yield on the S&P 500 is lower than the two-year US Treasury for the first time since the financials crisis a decade ago. Bond returns are also supported by funding gaps at pensions funds, which will favor rebalancing of portfolios away from equities and into fixed income, she says. “Demographics and an expanding global

savings pool should also provide longer term technical support.”

BONDS PROVIDE ‘BALLAST’ Uncertainty about monetary policy and the maturity of the US corporate earnings cycle mean risks abound. In the event of an equity market downturn, fixed income can help preserve capital and diversify a portfolio. But like in any asset class, individual investments must be chosen carefully, Gomez-Bravo says. Corporate bonds, when risk-adjusted for quality and duration, tend to be “priced to perfection” with little upside and little room for anything to go wrong, she warns. MFS Investment Management is a A$628 billion* Boston-based funds management house that has been managing fixed income assets for more than 40 years with around A$78 billion* invested in the asset class. The firm has a focus on collaboration among adherents to different investment disciplines; embedding credit analysts alongside equity analysts. This allows MFS to take a dynamic and nimble approach to fixed income markets and take advantage of dislocations global markets are likely to start seeing.

ACTIVE APPROACH TO CREDIT Their house view is that it is now more important than ever for investors to engage in active security selection and prudent risk management to ensure they are adequately compensated for risk. “Given that volatility has been suppressed for so long due to central bank interventions, we think active management will be more important going forward, as central banks start withdrawing liquidity from the system,” Gomez-Bravo says. “We advocate for being active. Think about the capital preservation that fixed income can provide – the anchor – but make sure you are dynamic and liquid so you can take advantage of [market] dislocation.”

*Disclaimer: Source MFS as at 31 December 2017. This article is directed at investment professionals for general information use only with no consideration given to specific investment objective, financial situation and particular needs of any specific person. Investment involves risk. Past performance is not indicative of future performance.

investmentmagazine.com.au

MARCH 2018

\ COLUMN

S E L F - R E G U L AT I O N

MANDATORY OR NOT, IT’S A BIG STEP FORWARD AIST is confident many funds will adopt the Insurance in Superannuation Voluntary Code of Practice, leading to better member outcomes.

EVA SCHEERLINCK CHIEF EXECUTIVE | AIST

IT IS NO secret that the release of the Insurance in Superannuation Voluntary Code of Practice late last year drew a mixed response. As one of four industry bodies involved in establishing the new Code of Practice, the Australian Institute of Superannuation Trustees (AIST) is confident that it will produce many positive changes around the group insurance offerings provided via superannuation funds. The code is a first for the industry and sets much higher standards. It provides greater understanding, clearer accountability and consistency of delivery across the super industry. It will require some funds to overhaul their insurance offerings completely, from both a design point of view and with regards to claims handling. Yet there is no escaping the fact that some commentators were disappointed that the code was not mandatory. While it is certainly the case that the code’s owners

− AIST, the Association of Superannuation Funds of Australia and the Financial Services Council − initially supported a mandatory code, expert legal opinion raised critical questions about the ability to force trustees to adopt such a code. The code is structured similarly to the ‘if not, why not’ model of the ASX Corporate Governance Guidelines. Super funds will be expected to have a rigorous process in place to determine the trustees’ position regarding each measure within the code and the rationale for that decision.

STRONG INCENTIVES The issue of whether an industry code is voluntary or mandatory is relatively minor compared with whether the code is widely adopted and drives the desired outcomes. Moreover, there are plenty of examples where best practices set out in voluntary industry codes eventually become mandatory or codified in law.

AIST expects that our member funds – which include industry, public sector and corporate funds − will subscribe to the code. There are strong incentives to do so. Ratings agency SuperRatings – which had previously raised concerns about the cost of insurance offerings in superannuation – has strongly endorsed the code, noting it provides a uniform framework for insurance design and disclosure and has the potential to lead to more efficient engagement strategies and operational processes, with better understanding from members. In a competitive market where industry awards from ratings agencies are highly valued, most funds will find it hard to ignore the marketing advantage in subscribing to the code.

REGUL ATORY THREAT The threat of mandatory regulation is another incentive for funds to get on board.

In a competitive market where industry awards from ratings agencies are highly valued, most funds will find it hard to ignore the marketing advantage in subscribing to the code

MARCH 2018

The Productivity Commission, a royal commission, and a separate Parliamentary inquiry are each considering the pros and cons of insurance offerings in superannuation. The spotlight on insurance will only get brighter. Arguably, a lack of support for the new industry code from funds and insurers could lead to more radical policy reform. The current government has mooted moving to an opt-in model for insurance, something AIST and others in the industry strongly believe would be in the best interest of neither members, nor the wider community of taxpayers.

CHANGE AFOOT Super funds have been asked to indicate their intention to subscribe to the code by the end of March. Many AIST member funds have confirmed that the code is high on their agenda for the first round of board meetings this year. Even before its release, a number of funds were already working to improve their insurance offerings to members. Industry funds like AustralianSuper (the first signatory to the code) and Cbus Super have already made changes to help address account erosion for key member cohorts. AIST is confident that many more funds will follow suit and deliver improved insurance outcomes for their members.

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SUPER NEWS APP KEEP YOUR FINGER ON THE SUPER PULSE Download the AIST Super News app to get the latest industry news right from the palm of your hand. The app pulls news stories from a range of sources including mainstream press, trade press and industry speciďŹ c journals and turns them into your own custom super news feed. The more stories you read, the better our app is able to understand your interests and provide you with articles that are most relevant to you. Personalise your newsfeed further by following over 1,000+ publishers and industry topics and share content with your colleagues or friends.

More information?

For more details on how this works and how to download, visit aist.asn.au/super_news_app

IN YOUR MEMBERS’ MOMENT OF NEED, WE’RE HERE. In 2017 alone, we paid over $1.3 billion in claims to both Retail clients and Group members. That’s over $5.3 million every working day. Because we’re here for your members when they need it.

ADV3895 02/2018

AIA.COM.AU

LIFESKILLS \

MAKE THE PROTECTION FIT THE COHORT The country’s biggest superannuation fund has signed on to the Insurance in Superannuation Code of Practice, and made bold changes to prevent account erosion for low-income members.

ROSE KERLIN GROUP EXECUTIVE, MEMBERSHIP | AUSTRALIANSUPER

AUSTRALIANSUPER ANNOUNCED CHANGES to our group insurance offering that reflect our commitment as the first signatory to the Insurance in Superannuation Code of Practice. These changes are the scrapping of default insurance for under-25s and introducing a new Super Only product for members employed under the Supported Employment Services Award and seasonal or intermittent employees working less than six months. AustralianSuper already exceeds many of the minimum standards the code sets out but we are constantly working to go even further for our members. This includes already meeting most service levels outlined in the code in relation to claims; and where we are not up to the code’s standard, we aim to be there by the end of 2019 – more than 18 months ahead of the timetable. The average cost of default insurance provided to our members equates to about

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0.8 per cent of their lifetime salary, exceeding the code’s target of 1 per cent or less. While the code was being developed, AustralianSuper was rolling out a new rehabilitation model that has helped almost 200 members who were on income protection payments return to the workplace in the last 12 months.

FIT FOR LIFE STAGE From November, there will be no default insurance for new members joining the fund who are under the age of 25. We have made this change to help address account erosion for young people. Life insurance is primarily of benefit to people who have dependants or financial

We need to adjust our assumptions about what people need at various stages in life LOWER PREMIUMS In February, we were able to announce the fund will be delivering even better value − especially for young members – without any reduction in cover. From May, AustralianSuper’s insurance premiums will decrease, resulting in members paying $100 million less in premiums over the next financial year. Premiums will decrease by an average of 14 per cent for death cover, 6 per cent for total and permanent disability and 20 per cent for income protection. These reductions will apply to the overwhelming majority of members who hold an insurance policy via the fund. No member will pay higher premiums.

commitments that may be affected by death or total and permanent disability. With people getting married or having kids later in life, we need to adjust our assumptions about what people need at various stages in life. Our data shows that of claims paid for members under 25, only 10 per cent go to financially dependent spouses or partners and children. In light of that, it is important to weigh up the benefits of insurance against the cost. People under 25 starting out in the workforce tend to be on relatively low incomes and need to be building a base for their retirement savings. By not defaulting members aged under 25 into group insurance, we will reduce undue account erosion

due to premiums on policies that are likely to be of very limited value to them. When this change happens in November this year, we will roll out a multi-channel communications campaign to educate affected members about their insurance options and make it easy for them to opt-in or change their coverage. The Super Only product, for employers who have employees on very low incomes and seasonal staff, will ensure there is no erosion of those members’ accounts from premiums.

SAFET Y NET Affordable and appropriate insurance provides members and their families with peace of mind and support. AustralianSuper provides insurance to roughly 1.4 million of our 2.2 million members. Over the last 10 years, the fund has paid more than $2.6 billion across 45,000 claims to help members and their families. It pays about $500 million in premiums each year and expects to pay insurance benefits to 25,000 members over five years. As the country’s biggest super fund, we have the scale to provide the best cover by negotiating bulk rates. Our focus is on providing the most appropriate and best value insurance options.

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.

MARCH 2018

30 \ REMUNERATION

IT’S HOW YOU SPEND IT

Ontario Teachers’ Pension Plan pays its investment staff top dollar and gets top results. A comparison with global giant CalPERS can provide insight for local funds on how to get value for money.

By Amanda White

AN EXAMINATION OF the salaries and pay structure of Ontario Teachers’ Pension Plan, arguably the world’s best pension organisation, supports the adage that you get what you pay for. This is worth noting and considering locally. The 2018 Investment Magazine Super Fund Salary Survey, published in February, highlighted how more and more Australian superannuation funds are rewarding their most senior executives via incentives. While this trend makes some local industry stalwarts uncomfortable, a look at the Canadian experience indicates the approach can deliver great value to fund members. In 2016, Ontario Teachers’ Pension Plan (OTPP) paid staff more than C$360 million ($363 million). This is a huge number in anyone’s world. But when it comes to salaries, the OTPP story is one of value, not absolute figures, and is a good case study for Australian investors. OTPP has the advantage of being a relatively new organisation, at least compared with some pension funds globally, such as the largest fund in

MARCH 2018

the US, the California Public Employees’ Retirement System (CalPERS), which is more than 100 years old. The benefit of this was a clean sheet of paper to design an organisation that can be fit for purpose and capitalise on governance best practice. Since it was formed in 1990, OTPP has maintained many of the elements of what is now known as the Canadian model, including independence, strong governance, direct investing with worldclass teams and the ability to attract and retain talent. These have been identified as tenets of good organisational design and investment practice. The Australian superannuation industry is a similar age to OTPP but has grown up with more complexity, more legacy issues and in some areas more naivety around these tenets. The attitude towards recruitment and retention of talent in Australia is comparatively immature, for example. OTPP argues that its people are its edge, and only through hiring and remunerating good investment professionals has it been able to implement the ideology that has

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REMUNERATION \

made it so successful. The organisation has 80 per cent of its assets managed in-house. OTPP is 105 per cent funded and has C$180 billion ($182 billion) in assets. The fund’s investment strategy is built on innovation and a bedrock of strict risk management, with a large allocation to private assets managed directly. Over the last 10 years, OTPP has returned 7.3 per cent against a benchmark of 6.3 per cent. Since inception, it has posted an annualised return of 10.1 per cent. The top-performing Australian super fund over the 10 years to June 30, 2017 is REST, with an annualised return of 6.2 per cent, Chant West data shows.

SAL ARIES AND INCENTIVES OTPP’s investment expenses are dominated by salaries. In 2016, salaries for investment staff made up 64 per cent of investment expenses at OTPP – C$290.1 million out of a total investment expense of C$451.2 million, its annual report states. OTPP paid a further C$33.1 million in compensation to key personnel, including the chief executive, chief investment officer and key investment staff. That’s C$323.2 million in salaries, benefits and incentives. To put this in perspective, CalPERS spent only US$69 million ($88 million) on investment salaries in 2017. In trying to uncover value for money, it’s worth exploring the differences in these two funds a little further. The US$345 billion CalPERS – which

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admittedly has a very different governance structure, including a lay-person board and having to adhere to the governmentimposed cap on salaries – has the vast majority of its assets managed externally and does not have anywhere near as much in direct or private assets as OTPP. CalPERS has only 20 per cent of its portfolio in private equity and real assets, compared with OTPP’s 65 per cent. In 2017, total investment expenses for CalPERS were US$871.3 million because, while internal investment personnel and administrative staff were paid US$69 million, CalPERS spent a whopping US$598.8 million on external investment managers and a further $6.6 million on consultants’ fees. To be fair, CalPERS has reduced its external manager fees from more than US$1.34 billion in 2014. But the point remains, on every measure, OTPP outflanks CalPERS: CalPERS’ total costs are much higher than OTPP’s; CalPERS is only 68.3 per cent funded; and its 10-year return is an annualised 4.4 per cent versus 7.3 per cent for OTPP.

SAL ARY STRUCTURES In 2016, the chair of OTPP, Jean Turmel, received C$170,000 in compensation. In the same year, fund CIO Bjarne Graven Larsen received C$3,153,728 and chief executive Ron Mock earned total compensation of C$4,087,974, making him the highest-paid executive in pension management globally (at least from what can be gleaned from publicly available information). But it’s the way OTPP structures its salaries, including strict benchmarking and design principles, that makes this an interesting story. The plan’s salaries are made up of a base, annual incentive plan (AIP), deferred incentive plan and long-term incentive plan (LTIP). For senior leaders, a higher percentage of pay is variable. For the chief executive and CIO, the mix is LTIP (37.5 per cent), AIP (37.5 per cent) and base salary (25 per cent).

Each employee’s incentive pay is designed around the risk budget and the board approves the active risk allocations, which establish performance goals for dollar value added each year. There are other design rules as well, like an upper limit on annual payments and clawback provisions for wrongdoing. Depending on the job function, the AIP for executives is a combination of: fund performance; division performance; four-year total fund performance; four-year investment department performance; and individual performance. Further, in a feature that’s rare among pension funds, employees of OTPP have the opportunity to allocate all or part of their AIP to the fund for up to two years, aligning them with investment decisions. Each year, a small percentage of the total fund’s net value added goes into an LTIP pool, which is allocated to individuals’ notional accounts. Each year, 25 per cent of individual account balances are paid to active employees. So of chief executive Mock’s total compensation of C$4,087,974 in 2016, the largest component was the LTIP of C$2,208,000. At the beginning of 2016, Mock’s notional account balance was C$7,237,730. The account earned 4.24 per cent, consistent with the total fund performance that year. In 2017, Mock was paid C$2,208,000 from this account and was left with a balance of C$6,623,805. There’s no question the staff at OTPP are paid handsomely, but the incentive structure is a sophisticated alignment of interests. This has produced stellar investment returns, reduced costs and sustained good performance. But the model is also successful by another measure of value. In 2016, the average starting pension for an OTPP member was C$45,000, this is a shift from when the fund started, in 1990, when the average starting pension for a teacher in Ontario was C$29,000. After all, it’s what goes back to the members that matters.

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

MARCH 2018

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TECHNOLOGY

EARNING WHILE EDUCATING A more financially literate populace is good for business. FINTECH FIRMS are well positioned to TAKE ADVANTAGE of this opportunity by engaging with younger clients on their terms. to be educated, but on their terms. The 2015 S&P Global Financial Literacy Survey found that two-thirds of the world’s population is financially illiterate. And while a large proportion of that is made up by the economies not built on banks, it might surprise you to learn only 64 per cent of Australians passed the study’s financial literacy test.

JESSICA ELLERM CO-FOUNDER AND CHIEF EXECUTIVE | ZUPER SUPERANNUATION

BIG OPPORTUNIT Y

CONVERSATIONS OUTSIDE OF numbers – they’re the hardest thing in finance land. Discussing a product without jumping straight to dollars and cents is something few have mastered. To avoid directly referencing risk and return or percentages and per annums when trying to explain how a financial instrument works is one of the toughest challenges. But if you’re a super fund facing a Baby Boomer decumulation avalanche and want to reach a new audience, that’s exactly what you’re going to need to do. You have to find a way to talk about money without talking about money. Ironically, that’s the way you’ll win new customers. Younger clients are hungry

Shifting the dial on financial literacy isn’t just about the feel-good factor, or acquiring more customers either. Even a 1 or 2 percentage point increase in financial literacy could boost GDP, wage growth and living standards. To address this problem, we have to rethink the entire system, along with the products inside it and the language we use. Only then can we hope to move from a conflicted and dependencyoriented advice landscape to one where individuals are empowered to evaluate and decide for themselves. This is where establishing new advice delivery models based on behavioural thinking becomes a critical first step to influence change. This should form the foundation for the technology and communication that addresses the next

MARCH 2018

Even a1 or 2 percentage point increase in financial literacy could boost GDP, wage growth and living standards

generation’s expectations. It should also encourage more progressive regulation, to empower the industry to provide it. Doing this has the potential to help Australia catch up on the literacy front. Central to helping people learn about money is better leveraging their own personal financial data, to nudge them in the right direction, whenever and wherever they access advice. The days of going to a planner or adviser’s office twice a year are over. The mobile phone is now the meeting room. Lower-cost products built on this best-of-breed technology, paired with fintech-friendly regulation, form the seeds of an advice revolution governments would do well to encourage, if they ever want to see broader systemic change, not to mention a healthier buffer on their pension kitty. This is the opportunity on which fintech businesses will start to stake a claim, and superannuation is certainly

in their sights. Wouldn’t it be exciting to see a new superannuation business that innovated not only in how it technically built and delivered a product, but also in how it helped people become more financially literate, pursuing ideas and products that made people smarter?

BOLD VISION That would come pretty close to being a fundamental innovation, rather than just tinkering at the edges. It would have an enormous impact on literacy and savings rates, and the potential to shift the economic course of history. It would treat member engagement with their money not as an afterthought but upfront. It would make us smarter about money. It would use fintech to become a finance business that added value for its customer community every time it signed up a new member. This is what we hope to do at Zuper.

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INVESTMENT MAGAZINE

POST RETIREMENT CONFERENCE MARCH 20, 2018 AMORA HOTEL JAMISON SYDNEY, NSW RETIREESâ&#x20AC;&#x2122; REALITY IN THE AGE OF RADICAL UNCERTAINTY We live in an era of VUCA â&#x20AC;&#x201C; volatility, uncertainty, complexity, and ambiguity. The post-retirement industry needs to be more forward-thinking than ever. Here is your opportunity to get ahead of the pack by future-proofing how the financial industry adapts in an evolving landscape of uncertainty for retirees. The 10th-annual Investment Magazine Post Retirement Conference presents 27 industry leaders and specialists at the forefront of the sector. This is your ticket to mastering the ever-evolving expectations for retirement. WHO SHOULD ATTEND Senior personnel from retail, industry, public and corporate super funds, SMSFs, insurance providers, banks, government agencies, policymakers, regulators, legal and taxation advisers, retirement income and investment product providers, university department heads, analysts and researchers, strategists, IT and software vendors and consultants.

postretirement.com.au CONTACT events@conexusf inancial.com.au

Ph 02 9221 1114

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The super savings gender gap is showing no signs of closing. As funds advocate for policy reform, they also have a duty to help women members become more engaged.

By Claire Stewart

REACHING – out for –

WOMEN RUNNING ERRANDS AT her local pharmacy recently, Helena Gibson came face-to-face with a reminder of why many ordinary Australians feel disillusioned with superannuation. Gibson, who is head of public policy and technical services at BT Financial Group, was compelled to step in and offer to help a stranger after overhearing her become frustrated on the phone to her super fund. “She got off the phone visibly distressed,” Gibson recalls. “I asked what was wrong and she apologised for being upset and told me

MARCH 2018

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P OST-RETIREMENT \

she thought her super fund was trying to rip her off by reducing the level of insurance cover without telling her.” The woman was upset that the super fund customer service staff had said it was her responsibility to read all the information in the Product Disclosure Statement. “She kept saying, ‘I’m not a lawyer, how do I know what I’m meant to read, or understand how this is going to affect me?’ ” Gibson recounts. The incident rammed home to her just how far the industry has to go before average members understand how super works and feel engaged and empowered about their retirement savings. Better engagement with female members is particularly critical, given the super savings gender gap. Women in Super figures indicate that, on average, Australian women retire with 47 per cent less super than men.

STRUCTURAL DISADVANTAGE In 2016, the final report from the Senate Inquiry into Economic Security for Women in Retirement concluded a persistent gender pay disparity was the main driver of the super gap. The measures to help make the super system fairer for low-income workers, reasoning that because women are overrepresented among the lowly paid, such measures could help close the super gender gap without discriminating against men. Changing taxation to a family or spousal level, introducing lifetime contribution caps rather than annual caps, legislating for the super guarantee to be paid on parental leave, and changing when and how super has to be paid to casual workers are just a few of the policy ideas Gibson believes could be helpful. Sunsuper head of advice and distribution Anne Fuchs is another advocate for policy reforms to address the super gender gap. “These are the things that need to be explored, because everyone at the moment is pussyfooting around the real issues,” Fuchs says. “Unless we do something quite dramatic and brave, the trajectory doesn’t change.” In the meantime, Sunsuper and BT are committed to investing in advice and member engagement, with one eye to offerings designed to target women.

POWER OF ADVICE As major super funds become bigger employers of financial advisers, whether in-house or via a partnership model,

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they are learning from the retail advice sector. Integra Financial Services founder and director Deborah Kent – a Sydneybased adviser who receives referrals via Sunsuper – says facilitating access to financial advice is a key way super funds can help all their members. She notes that sometimes extra steps need to be taken to nudge women to become engaged with advice. “Every client I see, I make sure I also talk to the wife, to make sure they understand it just as well as the husband,” especially, she says, if the wife is disinclined to step into what she views as the husband’s territory. “We [also] need to encourage more women to be advisers because we see that women tend to go to other women for advice,” she says. “Women want someone who is really going to listen to them. Most women come to me, they’ve already been to see someone else and they say, ‘I didn’t actually understand what they were saying because they weren’t listening to what I needed.’ ” Seeking advice can help clients understand their options with regards to a range of the more obscure super rules, such as spousal contributions, or how casual workers (many of whom are women) can make personal deductible contributions. Committee for Sustainable Retirement Incomes executive director Patricia Pascuzzo notes that women are likely to live longer than men, and argues the push for funds to offer Comprehensive Income Products for Retirement is particularly important for women, given their greater need to manage longevity risk. But as Gibson notes, there’s a long way to go before post-retirement products alone are the solution to the super gap. “[Even with] the greatest products in the world, if we haven’t got that engagement and we haven’t got the recognition that this is important and it’s important today, then there will be no market,” she says.

STRIKING THE RIGHT TONE In their mission to help women become more engaged with, and empowered about, their financial future, super funds must tread a fine line. Well-intentioned but imperfectly executed campaigns can be quickly and loudly lambasted with accusations of victim-blaming.

VicSuper’s five-week Super Woman Money Program, which has had 12,000 participants over the last three years, bore the brunt of a social media backlash late last year, after it was lampooned in a Melbourne Fringe Festival show by comedienne Elizabeth Davie. At the time, Davie told national newspaper The Australian that the tips provided on the VicSuper website − which included re-using tea-bags, making use of happy hours and avoiding divorce − made her feel like it was her attitude that was stopping her from having a bigger super balance. VicSuper executive manager of marketing, insights and experience, Sara Daymond, says that, despite the bad press, the fund has seen great results from its Super Woman Money Program. She says the fund did “an enormous amount of work” to research how to help women feel more comfortable and in control of their super, with the five-week program developed in direct response. “What we’ve found is that women in particular like communities, they like to feel supported and also learn from each other. So what’s been particularly successful is online forums where they can share information, or [having them come] in and talk with various financial experts that we bring in, and learning from each other,” Daymond says. “There was an enormous sense of relief, we found, with women when they came in and recognised that they weren’t the only one who didn’t understand super.”

BET TER ENGAGEMENT Cate Wood, who chairs both CareSuper and Women in Super, says she sees super funds working harder than ever to engage members, and women in particular. This includes initiatives to make communication with members more targeted and relevant to individuals’ circumstances, whether segmenting by gender, account balance, age, income or spending behaviour. Wood says it is important to focus on the positive impact of small changes, and warns against tactics that may make low-income savers feel like closing their super savings gap is impossible. “We’re constantly going back out saying, you don’t need a million dollars to make a big difference,” Wood says. “HESTA, in particular, has been very strong in those messages. Even by adding $70,000, you can make a difference.”

MARCH 2018

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CFA INSTITUTE

ERA OF WOMEN AND PROSPERITY Data shows gender diversity improves investment outcomes. Achieving it will mean getting the word out that the old ‘blokey’ days are long gone.

MARIA WILTON CHIEF EXECUTIVE | FRANKLIN TEMPLETON INVESTMENTS; CHAIR | THE CFA INSTITUTE OF AUSTRALIA’S DIVERSITY COMMITTEE

BUILDING PROFESSIONALISM AND confidence in the investment industry is a priority for financial services companies and government alike. Success will have benefits for investors, the industry and our society in terms of improved outcomes for retirees and a larger pool of capital invested in the Australian economy. The CFA is the largest global association of investment professionals and is committed to raising the bar across all facets of the industry in order to improve investor outcomes; therefore, raising awareness of the contribution diversity can make to professionalism and confidence in the industry is an increasing and natural focus of attention. We know numbers talk, and the evidence that more diverse teams tend to deliver better

results is strong. McKinsey & Co’s January 2018 report Delivering through Diversity revealed that companies in the top quartile for gender diversity in their executive teams were 21 per cent more likely to achieve above-average profitability than companies in the fourth quartile. The report showed Australian businesses leading the way. Australia topped the charts with respect to women’s share of executive roles (21 per cent vs the US at 19 per cent and the UK at 15 per cent). And in terms of board positions, 30 per cent were held by women in Australia, compared with 26 per cent in the US and 22 per cent in the UK. That’s the good news – if you can call it that, given that women make up half of the population! The bad news is that the gender mix of the investment industry falls way behind those summary executive and board statistics. Only 18 per cent of CFA Institute members globally are women, and that figure is 15 per cent in Australia. As AustralianSuper CIO Mark Delaney put it at the 2017 CFA Australian Investment Conference: “That’s ridiculous!”

TIMES CHANGE Unconscious bias in hiring and promotion is likely to have

MARCH 2018

played a role, but how women perceive the industry is also a barrier. A survey sponsored by the Financial Services Council and BT Financial Group indicated that the time taken to fulfil the educational requirements, and the perception of financial planning as a sales-driven profession, are deterring

processes, need to justify and document their decisionmaking and are subject to significant scrutiny. There is nothing blokey about this! Men have no competitive edge over women in identifying the fundamental and structural drivers of markets and stocks. Many financial services companies are proactively supporting women (and men) by offering flexible working arrangements for family needs. Likewise, women are now actively sought after for distribution roles because they are good listeners (now there’s some gender stereotyping!) and offer deeper customer insights. Women are increasingly occupying senior leadership positions and breaking down the old stereotypes, providing positive female role models

Men have no competitive edge over women in identifying the fundamental and structural drivers of markets and stocks women from pursuing careers in the investment industry. In reality, the nature of the industry has changed over the last 30 years, and it offers flexibility and reward. Notions that investment decisions are made in dark, smoke-filled rooms, or on the golf course, are far from the truth today. Women looking for analytical and technical investment roles don’t need to ‘sleep under their desks’, as was the perception of people working in investment banks in the 1980s and 1990s. Professional investors follow disciplined investment

along the way. Recognition of the importance of culture and the many diversity and inclusion programs that are in place also augurs well for the increased participation of women in the investment industry. The launch of the CFA Institute’s Women in Investment Management Initiative aims to increase the number of women in the industry and provide support to them, to build the business case for diversity and improve investor outcomes as a result.

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Masters Program Executive Education for professionals in the superannuation and financial services industry. FEAL and Melbourne Business School have developed a unique postgraduate program for executives in the superannuation and financial services industry. The flexible program structure comprises 12 residential modules. Executives can undertake individual subjects or combine four or more modules to receive a Grad Cert., Grad Dip. or Masters in Organisational Leadership. Apply now to undertake the 2018 module: TOPIC: MBS Program - Managerial Decision Making DATE: 29 April - 4 May 2018 VENUE: MBS, 200 Leicester Street, Carlton, 3053, VIC LECTURER: Jill Klein

For more information contact FEAL on (02) 9261 5155 or visit:

www.feal.asn.au

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SOCIAL IMPACT

SMARTER GIVING A new type of business-philanthropic model is being implemented in the US, Australia and the UK – with fantastic results. To raise the money, participating fund managers will donate their investment fees and shareholders will donate 1 per cent of the company’s total assets each year. LOUISE WALSH CHIEF EXECUTIVE | FUTURE GENERATION INVESTMENT COMPANY AND FUTURE GENERATION GLOBAL INVESTMENT COMPANY

AUSTRALIA LEADS

A NEW WAVE of philanthropy is here. In January 2018, a collaboration between Johns Hopkins University and a US investment management firm dedicated to improving healthcare through investment and philanthropy was announced. The collaboration, known as Bluefield Innovations, is set to provide up to US$65 million ($83 million) to support the commercialisation of earlystage therapeutic research at Johns Hopkins over five years. It is hoped the work will lead to transformations in cancer treatment.

Many Australians think our nation is behind its peers when it comes to innovation. The truth is, from the Cochlear implant to black-box flight recorders to Wifi technology, we are a country of innovators. While it may be true that we are behind the US in terms of our history and culture of philanthropic giving, people within the Australian financial services industry have been bringing their unique perspective and strong ability to innovate to the field of philanthropy for a number of years. In fact, the model underpinning Bluefield Innovations is very similar to how we operate the Future Generation companies. Wilson Assessment Management chair Geoff

We also have a unique opportunity to contribute by doing what we do best – creating wealth and helping people MARCH 2018

Wilson set up two listed investment companies − Future Generation Investment Company (FGX) in 2014, and Future Generation Global Investment Company (FGG) in 2015 – after reading about the Battle Against Cancer Investment Trust and meeting with its founder in the UK. Wilson was inspired by an exciting question – Could Australians invest with the intention of generating a measurable social and environmental impact and reaping a financial return? He believed they could.

SOCIAL RETURNS What is unique about the Future Generation model is that it prioritises and delivers investment and social returns. We have mandates with top fund managers who, in effect, donate their investment fees to allow the Future Generation to donate 1 per cent of total assets each year. Our shareholders benefit because the forgone fees exceed the donation. Investors have access to the best Australian and global fund managers without paying management or performance fees and receive capital growth and income. Charities gain a donation stream they desperately need, and Future Generation fund managers use their expertise to make a real difference. In October 2017, Future Generation companies provided $6.8 million to Australian charities.

FGX invested $3.8 million in charities focused on children and youth at risk, such as Act for Kids, Australian Children’s Music Foundation, Australian Indigenous Education Foundation, DEBRA Australia, Diabetes Kids Fund, Giant Steps, Kids Helpline, Lighthouse Foundation, Mirabel Foundation, Raise Foundation, Variety, United Way, Youth Focus and Youth off the Streets. FGG provided $3 million to charities supporting children and youth mental health, including: beyondblue; Black Dog Institute; Brain and Mind Centre; Butterfly Foundation for Eating Disorders; headspace; Orygen, the National Centre of Excellence in Youth Mental Health; ReachOut Australia; and SANE Australia. These are just some of the projects the social investment funds are supporting. Many people in the financial services industry already support good causes the traditional way, by donating. That’s great, but as a professional community we also have a unique opportunity to contribute by doing what we do best – creating wealth and helping people. Future Generation has enabled thousands of Australians to benefit from the pro-bono support from fund managers, service providers, board and committee members, simultaneously providing a social return and benefiting shareholders with lowvolatility, risk-adjusted returns through capital growth and fully franked dividends. I am confident that innovative Australians will continue to punch above their weight and the financial services sector is well placed to make a real difference for shareholders and the community.

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INVESTMENT MAGAZINE

FIDUCIARY INVESTORS SYMPOSIUM MAY 21-23, 2018 BLUE MOUNTAINS, NSW

SYNCHRONISED GLOBAL GROWTH AND THE GOLDILOCKS YEARS Managing assets as a fiduciary comes with a complex range of responsibilities and commitments. It is imperative that asset owners remain current in this changing and complex environment, to better meet their fiduciary responsibility. The 10th-annual Fiduciary Investors Symposium brings asset owners, consultants and investment managers together to hear the latest research and thinking related to asset allocation, risk management, alpha generation, and investment operations. Experience the latest thinking, expert opinions, thought-leadership and unrivalled networking opportunities.

fiduciaryinvestors.com.au CONTACT alex.proimos@conexusf inancial.com.au

Ph 02 9221 1114

QIC LIQUID ALTERNATIVES FUND. WELL-DIVERSIFIED. MINIMAL EQUITY RISK. AUSTRALIAN BASED, GLOBAL CAPABILITY. Equity market risk continues to dominate institutional portfolios. Diversification from equities is a high priority for investors and is core to QIC Liquid Alternatives Fundâ&#x20AC;&#x2122;s construction. At QIC, we believe factors harvested from traditional asset classes can deliver a more resilient portfolio, built to withstand a range of market events. As an Australian wholesale funds manager, we uniquely understand the priorities and sensitivities of Australian clients whilst having the vision and implementation capability of a global manager. QIC. Global Diversified Alternatives.

Global Multi-Asset Global Liquid Strategies Global Infrastructure Global Real Estate Global Private Capital

www.qic.com QIC Limited ACN 130 539 123 (QIC) is a leading investment provider for sovereign wealth funds, superannuation funds and other institutional investors. Its products and services are not directly available to retail clients. For more information about QIC, our approach, clients and regulatory framework, please refer to our website www.qic.com or contact us directly.