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.
Record returns no balm for Wilson’s wrath
Last week was a big one for the chief executives of AustralianSuper and Cbus. Their funds announced record-setting returns for the financial year and the next day they both took another hammering from a Commonwealth parliamentary committee.
The House of Representatives Standing Committee on Economics, chaired by Tim Wilson, a Liberal MP, is often enlivened by partisan mudslinging – sometimes between members of the committee – and last Thursday’s (July 8) was no different in this respect.
The first witnesses were Ian Silk, AustralianSuper’s chief executive, and Justin Arter, the chief executive of Cbus. They faced a barrage of questions from Wilson about their decision, now several years in the past, to “invest” in ‘The New Daily’ online newsletter.
Of greater relevance, Wilson also questioned why AustralianSuper had seen fit to provide the details of about 800,000 members to the publication in an incident that is now being scrutinised by APRA and the Office of the Australian Information Commissioner.
Silk responded, as he had done previously, by quoting research conducted with AustralianSuper members who said that ‘The New Daily’ had improved their financial literacy – the nominal purpose for which the initial support for the publication was given.
Silk said: “The motivation is twofold. One is to enhance the financial literacy of AustralianSuper members, and secondly to extract member engagement benefits from it.”
Silk later guided Wilson through the intricacies of AustralianSuper’s engagement policy after the committee chair raised fresh controversy around the IFM Investors-backed Tandem Group, which has been put into administration by IFM in a move that will likely see Tandem avoid paying entitlements it owes to thousands of workers and which have been the subject of an ongoing class action. AustralianSuper is one of the industry fund shareholders in IFM.
Silk said that his first impulse would be to engage rather than divest – standard practice across financial services – and that while he had already requested more information from IFM, the manager also had a reputation for its ethical approach to investing.
Silk said: “I would say, without pre-empting the facts of that matter, that IFM is one of the world’s most respected investors… I do want to know what’s happened in this particular instance, but I come from a position of some informed view about how the organisation operates and the way it generally operates is not consistent with what’s alleged to have happened here.”
On the matter of ‘The New Daily’, which has grated on both Wilson and fellow Liberal Senator Andrew Bragg, Silk repeated that AustralianSuper did not “invest” in ‘The New Daily’. The publication is owned by Industry Super Holdings. Silk pointed out that there was “an enormous amount of time” being spent on the issue.
Senator Bragg is chair of the Senate Select Committee on ‘Australia as a Technology and Financial Centre’ (formerly known as the committee on ‘Financial Technology and Regulatory Technology’).
IFM was invited by Wilson to appear before his committee but opted not to, Wilson told attendees. Labor members objecteded that the invitation was extended only the day before.
AustralianSuper had delivered last week the best one-year return in the industry’s modern history, with its MySuper option earning 20.43 per cent. Cbus was a whisker behind with a return of 19.34 per cent, also a record. Both Scott Morrison, the Prime Minister, and Josh Frydenberg, the Treasurer, are members of AustralianSuper. Tim Wilson shares an SMSF, Wilson-Bolger Superannuation, with his partner.
Aware Super, appearing before the committee for the first time, faced questions over the ongoing StatePlus fees-for-no-service court case. While Deanne Stewart, the chief executive, declined to answer many on the basis that she didn’t want to prejudice the court case, Aware is to some extent in uncharted territory with the case, with it still unclear where a potential fine would be paid from.
Wilson questioned whether Aware would potentially raise fees to cover the cost, but Stewart conceded only that Aware was seeking legal advice and will “certainly have something in place” if a fine was handed down. There has not been an internal provision made.
Maritime Super, appearing in the late afternoon, also revealed that it may yet consider a true merger as it works through the aftermath of its decision to enter into a pooled superannuation trust (PST) with Hostplus, with CEO Peter Robertson saying that the board would now focus on how the fund managed administration costs, further simplification of the fund, and whether “a merger is the best option for us going forward”.
“Those are the things we’ve got to look at now, but it has to be in the best interests of members, and it can’t reduce the services that our members demand. It will be a big project,” Robertson said.
The $5.8 billion Maritime announced it would enter into the PST with $53 billion Hostplus in February 2021, and has faced questions ever since on whether the arrangement is in members’ best interests and what ongoing role the board should play. Robertson defended the arrangement against repeated questioning from the committee, saying that the “sheer complexity” of Maritime – which has 27 different benefit categories, including five defined benefit funds – had made a true merger difficult to pull off in the near-term.
“What we have found in the past in looking at mergers was that the complexity of our fund created time and cost to get there that meant it just wasn’t in the financial interests of our members to do so… this doesn’t preclude a merger with Hostplus or anybody else for that matter. But what it does is give us a more efficient, more easily implemented and much more cost-effective solution to what we perceived were the headwinds for our fund going forward.”
Robertson conceded that Maritime will struggle to bring costs down further. It already runs on what is effectively a skeleton crew of 75, with all administration done in-house, but will look for cost-saving in areas such as online engagement despite members preferring face-to-face and the automation of some admin processes with an eye to get related fees below 20 basis points. It currently charges 22 basis points and $1.25 a week.
The PST will also allow the fund to invest in more illiquid assets like infrastructure and private equity, with Robertson saying that while Maritime had once had “priority access” to private equity deals, it no longer had the scale to compete with “the Hostpluses (sic) of the world”. The fund is currently in a cashflow negative position due in part to the cyclical decline of the maritime industry, with the pension division accounting for 24 per cent of the fund.
“Both of those problems are now gone,” Robertson said. “Hostplus has almost the opposite demographic to what Maritime has. It’s a younger membership base, with high contributions and lots of liquidity – which are exactly the tailwinds you need to produce better long-term returns.”
“We’ve always outsourced to fund managers. We’ve always outsourced the asset management advice. We’ve always outsourced the custody arrangements. And we’ve always outsourced the investment of the underlying funds. All we’ve done with the Hostplus PST is package that up to one provider.”
