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.
‘Alpha isn’t enough’: Tough lessons for funds on engagement
Member engagement is starting to rise from a very low base. But the industry is still “net nowhere” when it comes to winning their hearts and minds.
It’s widely acknowledged that member engagement remains unacceptably low. Try as they might, super funds can’t seem to get members to care about their retirement savings, as evidenced by the rush to withdraw them under early release and the growing consumer interest in opening super for a house deposit, an idea also championed by Liberals Tim Wilson and Andrew Bragg.
“I’m constantly blown away by the perpetual degree, in quantum and scope, of member apathy. Superannuation is easily the second biggest asset on personal balance sheets, yet people have constantly shown a desire to not really care about it,” Sam Hallinan, CEO of Schroders Australia, told the Calastone Connect Forum on Thursday (December 2).
“That’s changing, and it’s changing slowly, but it’s still changing off a low base and it’s not anywhere near where it needs to be… The superannuation industry has been doing it for thirty years and it’s still not doing a great job of it.”
Engagement will be a particularly bloody battleground as funds are tasked with getting members excited not only about their brand, but about returns that will likely be lower due to a move to low tracking error strategies and the wider macroeconomic environment. But a discussion about the broader managed funds universe also offers insights into what they can be doing better.
“The overarching objective needs to be to narrow the distance between the point at which the money is handed over and the point at which that money goes to work,” Hallinan said. “If you look at our industry – financial services in its glory – it is a manufactured machine designed to maximise the opportunities for people to clip the ticket.”
“And as a result of that, the gap between the investor who hands over a dollar, to the point at which that dollar goes to work in some capacity, is so far away from each other that the client has no connection to that experience at all.”
For the most part, managers have only ever been asked to beat the benchmark or achieve some other return objective. Those skills are “fundamentally different” to creating an emotional connection for an investor to understand how their money is working for them and to “feel good about it”. Hallinan attributes the popularity of ETF providers not only to their solid, relatively safe returns but to their ability to tap into that dynamic through products built around thematics. Still, Hallinan says that “he’s not seeing anybody do this well yet.”
“Alpha isn’t good enough. You have to create a connection to the process of how that alpha is extracted, and the role in which that money plays in a broader society. For the most part, asset managers aren’t good at that.”
One part of the answer is likely to do with the one theme to rule them all: ESG. It’s in this area where many super funds have focused their efforts, and a new report from the Responsible Investment Association of Australasia found that it’s been a winner. Over the last two 13 funds – including Active Super, Australian Ethical Super, Aware Super, and AustralianSuper – have taken a much larger market share due to their status as leaders in ESG.
“Two years ago, we were publishing ESG content from fund managers and it wasn’t resonating. And I couldn’t see how it would, and how ESG as a topic could become mainstream. 18 months later I was totally wrong,” said Tim McGowen, managing director of The Informed Investor and founding director of Australian hedge fund Fortitude Capital.
“You started to see investors associate ESG with the clean energy transition, particularly with electric vehicles. Tesla was there as a success story, and then they started gravitating they understood pretty quickly that petrol driven cars were going to change forever – were going to be gone forever – and they saw the headlines from Volkswagen or BMW or Ford, and those headlines took a topic like ESG and made it mainstream.”
Another part of the answer is “content” itself. Many fund managers offer monthly or quarterly insights into their investment strategies and individual assets, and even occasionally invest in media outside their organisation, as Magellan has recently done with podcast “Equity Mates”. The efforts of some super funds are middling, and are constrained by the sole purpose test. Some of their attempts – including AustralianSuper’s decision to sign new members up to “The New Daily” – have even attracted regulatory scrutiny.
“For us, the connection comes from content. Fund managers put out good content, good fund managers will discuss a stock that they own, because it helps them articulate their investment process and put it into a practical experience for a client to understand,” McGowen said.
“What we need to see and need to understand is that there has to be better content to educate that client and connect them to ownership, whether that’s from a fund manager perspective or a listed company perspective, which also has that responsibility. There’s a real gap in the market for that.”
One other area where managers generally could take inspiration from is the travel industry. Over the last twenty years, the industry has shifted away from hotel accommodation and into boutique and experiential accommodation through platforms like Airbnb in recognition of the fact that travellers want an experience that fits their own personal values.
“In Schroders, we’re spending a lot of time thinking about that, and it’s certainly a trend that I think is directional and permanent. And I think from a manufacturing perspective, the only way in which you can provide that type of experience to the end investor is through technology,” Hallinan said. “At the moment, to rely on the mechanisms that we’ve given people to access mutual funds and managed funds just aren’t going to cut it.”
Then there’s the rise of new voices to contend with: the finfluencers, leveraging social media to provide anything from crypto tips to research on passive products. Much of the most useful content here is around behaviour – not trying to time the market, and recognising when it might be at its peak.
“We know full well that the human is wired to respond to fear and greed when it comes to investing; it’s the fight or flight principles, so I think it’s as much about the investments themselves as the investor behaviour that becomes an important discussion point in allowing people to learn about their own response mechanisms to hopefully control those urges at times when it’s very difficult,” said Nathan Krieger, co-head of client group at Dimensional (photo at top).
“It’s when things are really tough that we see those responses, which can be quite catastrophic. What can we do? It’s about providing more insights, and using technology-aided platforms to communicate… and working with partners in the industry to try and help deliver what messages that we can to an audience and educate them.”
