Home / Analysis / REST investment model under the spotlight

(pictured: Damian Hill and Ken Marshman)

By Greg Bright

REST Industry Super is searching for a new general manager investments. It is not a chief investment officer role; it is a general manager investments role. The distinction is important and it is the main reason the role is currently being filled, pending a new person, by Paul Howard, the fund’s general counsel.

The $37 billion fund is different from the pack in how it governs its investments. The investment committee reigns supreme, to the extent that Ronan Walsh, the former general manager investments who left late last month, a couple of weeks before his six-month probationary period was up, felt constrained in his role.

But, you could argue, the investment committee should reign supreme. That is not really the issue here. The issue was – and is – rather, the influence of the fund’s long-term asset consultant, JANA Investment Advisers. Everywhere Walsh looked, it seemed, there was JANA.

John Nolan, JANA’s founder, who now concentrates on his investment management business, Warakirri Asset Management, has been on the REST investment committee since 2003. Ken Marshman, who is also REST’s independent chair, has been on the investment committee since 2013. He is a former chief executive of JANA.

Walsh wanted to build his internal team and had done so by moving two operational people into more front-office investment roles. But he felt frustrated by his lack of authority compared with the CIOs of other big funds, he is said to have told friends. Walsh did not respond to a request to speak with this newsletter.

REST’s internal investment staff is split into two. The Sydney-based fund, very early to the investment insourcing trend, owns a separate funds management business called Super Investment Management (SIM), based in Melbourne. It started off in Australian bonds and cash, diversified into property and infrastructure and, recently, moved into “growth alternatives” and Australian shares. SIM is paid fees for its services and awarded mandates like external managers. It consists of about 30 people. Its performance is reviewed by JANA along with all other managers. SIM currently manages about 15 per cent of the fund’s assets.

The other team is the Sydney-based one which takes on the traditional role of inhouse investment staff – working on asset allocation and its implementation, manager selection and the generation of investment ideas, reporting to the investment committee. It consists of about 10 staff.

In an interview last Friday, Ken Marshman and Damian Hill, REST’s long-standing chief executive, said that SIM is awarded a mandate when it is seen as having a competitive advantage. They see its assets continuing to grow as a proportion of the fund’s total assets but expect REST to maintain a balance of the internal and external management, as other big funds are doing.

But REST has gone further than most others, such as the similar-sized Sunsuper, with the separation of SIM from its other internal investment staff. Marshman says this is a big debate among super funds – whether or not the internal team should control all of the fund’s assets. “We have adopted the latter [position]. There are pros and cons to both,” he says.

Hill says that REST likes to maintain strong relationships with all its outsource providers, including JANA, and the trustees take their governance of those relationships very seriously; not just with investments. In all the asset classes in which SIM manages money REST also has external managers, Hill notes.

AustralianSuper, which already has the biggest internal staff of both portfolio managers and analysts, in separate teams, which are getting bigger as it continues to insource more assets, has the traditional pyramid structure of CIO (Mark Delaney) reporting to both CEO (Ian Silk) and investment committee. That fund uses two asset consultants for mainstream advice, Frontier Advisors and JANA, as well as specialists from time to time.

The only big fund which has not insourced at least some asset management is the Future Fund, which is prohibited from running money itself under its constitution. This is something that Peter Costello has never adequately explained either when he was Treasurer and set up the fund nor as its current chairman.

Marshman says that JANA has worked for a lot of funds for a long time. The degree of contestability the firm feels means they keep themselves up to best practice in their research and advice. John Coombe, who is JANA’s most senior consultant, tends to be the firm’s main contact point with REST.

“I think about investment governance an awful lot,” Marshman says. “One of the critical elements is that you need a wide range of inputs from the best possible people you can gain access to. We have JANA, our investment managers, our internal team and the investment committee. You have to get a range of inputs… You also need accountability for making a range of decisions. Does it [REST’s investment governance] need to change? Others can ask that question.”

It is not as if REST’s investment model has not been working. According to SuperRatings data the fund is ranked number one over the 10 years to April for its “core” strategy, in the cohort of SF50 Balanced (60-75 per cent growth) Index. It returned 6.70 per cent annual against the index’s return of 5.12 per cent over that period. The fund is ninth over five years and 17^th over three years with the core strategy out of 50 funds.

Marshman says that people can say that REST has an unusual structure and that may be the case. “But to say it is static would be quite wrong. There have been changes in the inputs and in our internal team. And I have no doubt it will evolve further over the next few years. We don’t have to follow a certain model, which may be promulgated by a text book or an academic. But that’s not to say this is the only way of investing. It will probably change over the next three-five years… The model is always open to question. You need to remember that good investing is also about the quality of your people.”

Hill says that REST has worked hard on having fewer, but “more meaningful”, relationships, which is a trend among some of the world’s largest funds, such as the two US bellwether funds, CalPERS and CalSTRS.

He says that as the fund has grown, it has delegated more from the investment committee to SIM and the internal team.

The general manager investments role is a senior executive position where the person has a general leadership role as well, Hill says.  Paul Howard, for instance, has attended most investment committee meetings and is well versed with the position.