Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Super threatened by Lib backbenchers. Enough is enough.
Comment by Greg Bright
Liberal backbenchers Andrew Bragg, a Victorian-born NSW senator, and Tim Wilson, the member for Goldstein in Victoria and, interestingly, a former human rights commissioner, both appear hell-bent on destroying any chance of bipartisanship over Australia’s superannuation system. You could also say they both appear hell-bent on destroying the whole system.
A level of bipartisanship existed under John Howard as Prime Minister, and Malcolm Turnbull. They both realised the long-term importance of super, which represents most workers’ savings, in coming to terms with the fiscal implications of our aging demographic. They both realised that not-for-profit super funds, which make up about 36 per cent of the total of nearly $3 trillion in superannuation in Australia, and about two-thirds of the Australian workforce, are not the enemy. They are allies who need some consideration and maybe a little duchessing.
At the worst possible time for the country’s longer-term future, Senator Bragg and Tim Wilson MP, neither of whom has a cabinet nor cabinet-assist portfolio, have recently launched attacks against industry funds in particular. Bragg, an accountant and former policy officer at the Financial Services Council, the insurance company and retail funds management lobby group, is simultaneously promoting his first book: ‘Bad Egg’. Wilson is also a small business co-owner, with his husband Ryan, who has campaigned for various environmental issues in recent years. He is not an arch conservative. Prime Minister Scott Morrison and Treasurer Josh Frydenberg should take responsibility for the behaviour of their ambitious backbenchers. Remember, Bragg tried to gain pre-selection for Malcolm Turnbull’s safe seat of Wentworth prior to the last election, but was rejected. Here are the developments over the past few weeks, courtesy of investment industry titles Financial Standard, Money Management and Investor Daily.
Harrison Worley reported in Financial Standard on June 9 that the Labor Party had called on Prime Minister Morrison to finally put an end to the war on superannuation waged by government backbenchers, in an effort to ensure Australia rebounds from COVID-19 “faster and better”. It would only ever be a war of attrition.
Worley was reporting on a speech to the Chifley Research Centre by the Opposition’s Finance Minister, Stephen Jones, during which Jones accused the Prime Minister of trying to convert super savings into “bank accounts”, destroying the ability of super funds to make long-term investments, and “nobbling” super growth by cancelling legislated rates of higher contribution levels.
“The war against universal superannuation is real,” Jones said. “By storm or by stealth the objective is to destroy that part of our economy which has done so much to see us through the worst of the crisis and is critical to building our future,” Jones is quoted as saying. “Make no mistake, if the opponents of universal super win, the consequence will be the destruction of jobs, the crippling of economic growth, an increase in taxes and a less secure future. The Prime Minister’s inability to subdue the wreakers in his own ranks puts us all at risk.”
Jones warned that the Government’s repeated attacks on the superannuation guarantee would lead to “higher taxes, lower productivity, fewer jobs and a bleak future for retirees. Inequality will grow with a monstrous distortion of existing tax concessions … The wealthiest 1 per cent of Australians who already receive twice as much taxpayer support for their retirement income as the poorest 10 per cent will continue to do so.”
Then in July, with the pandemic biting deeper, especially in Victoria. Sarah Simkins of Investor Daily reported that Senator Bragg had criticised a response by the regulator, APRA, to his questioning of a Sunsuper-sponsored table at a Queensland Labor Party function. The response – from APRA deputy chair, Helen Rowell, which involved words to the effect “we don’t have a view” – was “troubling”, Bragg said. Rowell described the amount of money as “immaterial”. Bragg referred to the $11,000 cost for Sunsuper to sponsor a corporate breakfast as a “donation”. One wonders whether Senator Bragg has ever visited Queensland. Sunsuper is about to merge with QSuper and alongside the Queensland Government-owned QIC will be the biggest financial mover and shaker in the State.
Simkins wrote that Bragg said his focus was primarily on APRA and its interpretation of the sole purpose test, calling it the most “troubling part” for him. “I’m surprised by the letter they’ve sent me, which effectively… gives a green light to political donations even though the fund itself has pulled back” he said. “We, as a government, and a country are heavily invested in this scheme. I don’t want to see breaches of the sole purpose test and APRA’s judgement that this is not a breach… I think is wrong. And if that is their position based on the current law, then we clearly need [a] new law.”
In his book, ‘Bad Egg’, Bragg has published projections based on Australian Electoral Commission data on the superannuation sector’s donations to trade unions, forecasting industry funds are set to become the largest political “donors”. The ‘Bad Egg’ is unlikely to be a best seller. He told Investor Daily: “I think it is inappropriate for super funds, particularly those without shareholder capital to be making these sorts of donations. It’s very hard to see how a political donation could satisfy the sole purpose test. If APRA’s view of the sole purpose test is that it permits political donations, that is wrong. And it shows that either APRA or the law, or both, are failing superannuation members, the people of Australia.”
APRA’s Rowell said: “Based on the information available, and taking into account all of the circumstances, APRA’s view is that it would be difficult to demonstrate objectively that the payment breached the sole purpose test.” She had also stated in the letter that under its supervisory work, the regulator routinely assesses whether the “material actions by RSE licensees meet the requirements of the sole purpose test… Licensees need to weigh up the cost of any proposed expenditure and the benefits the expenditure is proposed to deliver and be able to demonstrate such consideration.”
She said: “In circumstances where an RSE licensee expends or invests members’ money in good faith and can point to analysis that supports the outcome the expenditure or investment is expected to provide and its connection to superannuation purposes, the RSE licensee’s action is unlikely to breach the sole purpose test.”
Subsequently, Tim Wilson, who readers will recall was embroiled in the issue of franking credits reform proposed by former Opposition Leader Bill Shorten prior to the last election, put questions on notice to several big industry funds as chair of the House of Representatives Standing Committee on Economics. Those questions were to do with whether any of the industry funds mentioned had borrowed money from other industry funds recently. Wilson’s involvement in the franking credits drama was controversial because he, as it turned out, is related to the fund manager Geoff Wilson, who led the charge against the proposed reform. He also did not disclose that he was a shareholder in a Geoff Wilson-related company until he was questioned on the subject.
Mike Taylor, the long-time editor of Money Management and Super Review, wrote: “The chair of the House of Representatives Standing Committee on Economics, Tim Wilson, has asked major superannuation funds whether they have provided liquidity to REST or HostPlus or “any other superannuation fund”. The questioning has been associated with the committee’s current review of the four major banks and other financial institutions and comes amid the perception that REST and HostPlus have been particularly affected by early release drawdowns because of the number of their members affected by COVID-19 lock-down impacts on the retail and hospitality sectors.
“Wilson’s questions, which have inevitability generated negative responses from major funds such as UniSuper, have not only asked about the provision of liquidity to REST and HostPlus but whether other funds have loaned them cash and, if so, what amount, the date and the terms. REST and HostPlus are being counted amongst the Top 10 funds affected by the Government’s hardship early release regime but both funds have satisfied the Australian Prudential Regulation Authority (APRA) that they are more than capable of meeting the drawdown requests,” Taylor wrote.
Investor Daily’s Simkins said: “Answers from UniSuper, Intrust Super, BT and Energy Super published on Monday and Tuesday came back with a resounding ‘no’. Maritime Super also responded with a negative answer, in its document released last week. However, BT allowed some ambiguity in its response, stating it may have facilitated cash flows to other funds by allowing its super members to invest in external products via its Panorama Super, SuperWrap and Asgard platforms. “These investments could potentially provide liquidity to REST, HostPlus or any other superannuation fund,” BT stated in its written answer. Super funds are permitted to borrow only for a 90-day period and then only to cover member withdrawals.
Sarah Simkins also reported last week (on July 17) on a conversation Senator Bragg had had with Michael Rice, of Rice Warner fame, during an FSC-organised webinar the previous day. Senator Bragg claimed that the super system “costs” $36 billion a year while it “saved” $9 billion. As you’d expect, there was no detail as to those calculations, which seem, intuitively, to be wrong. Hopefully we don’t have to read ‘Bad Egg’ to find his answer. More hopefully, Treasurer Frydenberg or Prime Minister Morrison, will order him and his colleague Tim Wilson to move on to a different topic of less importance to the future of Australia. It may well be that Senator Bragg is, in fact, the ‘bad egg’.
