In 2012, superannuation funds would do well do learn from some of their overseas contemporaries, writes Amanda White.
Australian institutional investors like the sense of community that exists in the industry. It provides benefits, such as a sense of comfort, the sharing of ideas and the potential to co-operate.
But too much group thinking can cause herding behaviour, limit new ideas and prevent funds from developing their own sense of mission. On many occasions I’ve heard the domestic industry described to offshore service providers as a “club”. It’s who you know, not what you know.
In fact there is an argument that Australian institutional investors over-emphasise peer comparison to the detriment of their beneficiaries. While there are a number of standout funds that buck this trend – the $30 billion QSuper comes to mind – it would be fair to say that Australian pension funds would generally prefer to wait until their neighbour acted first on anything outside the norm.
They are happy to adopt new ideas but only if they’re not first.
Learning from offshore pension funds is a good way to stay in touch with global “best practice”, which even in itself is being questioned by many leading pension thinkers around the world.
Collaborative ethos
So what have overseas pension funds been thinking about?
For many of the large funds offshore, risk management has been a key theme for some time.
In North America, the US$225 billion CalPERS, the US$146 billion CalSTRS and the US$83 billion Washington State Investment Board (WSIB) have focused on risk. This year, they will measure investment risks and integrate new ideas.
For CalSTRS, the overriding theme is that risk is not a single number but a multi-faceted concept.
The fund considered 24 different measures of risk before introducing risk-based portfolio management, in the form of overlay analysis, into its asset allocation. Fund staff recognised that dividing the portfolio into four or five discrete risk buckets may not be optimal because different investments can be exposed to different risks, whether partial or whole, and are very difficult to isolate.
The analysis also found risks existed in different time periods, including “day risk” (one minute to multiple days), short-term risks (three to 18 months) and long-term risk (three to five years or more).
CalSTRS’ work shows the collaborative ethos of pension funds offshore. It engaged Danish fund ATP, the Alaska Permanent Fund and CalPERS in developing its new approach to risk.
