With the dislocation in credit markets, new opportunities seem to be presenting themselves just as quickly as they disappear. Can the heavy due diligence obligations and inevitable bureaucracy of large super fund boards keep pace with the demand for capacity-constrained managers? STEPHEN SHORE talks to the chief executives of several super funds about the challenges of juggling good governance with fast decision making.
At Australia’s largest and most sophisticated super funds, strategy decisions are typically the prerogative of the board of directors, while the daily investment decisions are delegated to an internal investment team. Super fund boards describe designing strategy and policy as an evolutionary process that develops as new market conditions and opportunities present themselves.
But before the authority to make investment decisions can be delegated, voluminous research is conducted and a strict set of protocol is applied to any new asset class. Depending on the asset class, this sort of due diligence can take months.
Increasingly, investment teams are beginning to find that some opportunities, such as those arising from the current dislocation in credit markets, cannot wait until the next monthly meeting. In the United States, Pensions & Investments reported last month that in the latest round of specialist fixed interest manager capital raisings, the deadline for commitments was set so tight that many of the pension funds missed out. The article quotes industry sources who believe that the world of institutional investment is about to change dramatically and permanently: “Even after the credit dislocation opportunity is over, competition for capacity-constrained alternative investments like private equity, hedge funds, real estate and infrastructure will remain fierce.
Access to the hottest managers and strategies will be dominated by the most sophisticated institutions with sizable internal staffs, ready cash and streamlined decision-making, leaving the vast majority of investors in the dust.” David Atkin, chief executive at the $13 billion industry fund Cbus, agrees that it helps for investors to be well resourced to take advantage of such narrow windows of opportunity.
But for Cbus, looking into these areas is something that has become a necessity as the fund has increased in scale and it has become harder to outperform. Atkin says Cbus has grown at 25-30 per cent annually for the last couple of years. “[As the fund has grown,] our governance model has certainly changed, and the fund has evolved; we’ve become aware that we need to take advantage of opportunities that require fast decision making,” he says. “One of our key projects at the moment is to determine what is the optimum governance structure to balance due diligence with the need to move quickly.”