As the Australian superannuation industry and its large players grow, the industry should be rethinking its role in the system from a longer term perspective, said Richard Brandweiner, newly appointed director of investment services at First State Super.
Speaking at last week’s ACSI conference in Melbourne in a session on ESG-themed investing, he said his opinion did not necessarily reflect the position of his new employer, but advocated a closer consideration of a universal-ownership approach to investment – that is, being aware of the impact that investment decisions make on the long-term performance of markets.
“Super funds acting as universal owners, and focusing on ensuring well-functioning capital markets, good corporate governance and long-term value creation makes a difference to all,” he said.
‘Universal ownership’ has significance to members, Brandweiner told delegates.
“As universal owners, the requirement to generate long-term sustainable growth in beta matters more to our members than perhaps anything else. And keep in mind of course, that in aggregate, across the system… there is no such thing as alpha. The market is a zero-sum game. If one of us outperforms, probably another one is underperforming,” he told delegates.
Brandweiner said funds spend too much time on manager selection, noting the majority of returns in superannuation funds are driven by asset allocation.
“It always surprises me the extent of focus on manager selection,” he said.
“…It makes me always ask whether we are diversifying the right risks. The reality is that, over the long term, it is the overall economic performance that will influence the future value of your portfolios a lot more than individual stocks or individual sectors that you might own.”
Brandweiner said a focus on generating long-term sustainable returns is also important in order to preserve a degree of equity between the potentially competing claims of different generations of members.
“Very strong returns this year, at the potential expense of longer term returns, is inequitable given the nature of our funds,” he said.
“In fact, with 90 per cent or so of the risk in your portfolios today coming from equity markets, and with sequencing risk so critical as we increasingly move into drawdown phase, smoothing the volatility of equities will become more and more important.”
Not a finite game
Brandweiner said funds can no longer simply allocate into finite markets without a strong understanding of the longer term impact the fund’s decisions and activities will have in terms of the economy, environment and society.
“Traditional ESG tries, perhaps not hard enough, to consider the impact of potential externalities – positive and negative, of course, it’s not all bad things – directly on the share price of the companies that our managers might be looking at.
“But universal owners have to be mindful of the impact of these externalities indirectly on all holdings that you might have across your portfolio. So after the BP accident in the Gulf of Mexico, insurance premiums for all energy companies rose. That’s one little example of what I’m talking about.”
Super funds picking managers, and sometimes stocks, should be doing more to fulfil their obligations, added Brandweiner.
“We need to be active as owners. We need to collaborate in public policy. And we need to be cognisant of the side impacts of every investment decision that is made.”
While Brandweiner said the allocation of capital with consideration of ESG impacts isn’t a “controversial” idea, allocating capital to specifically target an outcome that benefits society “has been a bridge too far for the way we’ve thought about our world”.
“It’s tempting to ask whether it can be done without compromising returns, and so satisfy our fiduciary obligations nice and easily,” he said.
|Looking broadly at ESG, Brandweiner said impact investing allocates capital in ways that maximise the benefit to society at large, and represent investment opportunities that deliver a financial, market-based rate of return and a targeted social outcome.“The financial return distinguishes it from philanthropy and from grant funding, and the intentional design to target and measure the social outcome distinguishes it from more traditional investments.”
Brandweiner said it’s an emerging field in Australia.
“It’s painfully small. In the US and the UK, the idea is more developed, but I think it is still fair to say that thinking around fiduciary capital, universal ownership and impact investing still has a very long way to go.”
Brandweiner said it poses enormous challenges if it’s become a meaningful reality as part of the system, pointing to “a distinct lack of intermediaries and proper research”.
“To date, there’s been a lack of institutional quality investment opportunities, so it’s been hard to prove this idea, which is a theory at best that you can get investment returns and social outcomes as well.”
The lack of liquidity in the early days of a new market is also a challenge, he said, because of a cap on the amount of illiquid assets a fund is likely to hold.
“Once you start playing in that space, people have the expectation, which is a funny one, that you’re going to get high double-digit returns no matter what, just because it’s illiquid. But it makes some of these investments challenging to assess.”
However, despite the challenges, Brandweiner argues investing in this sort of approach is worthwhile.
“We have an enormous responsibility to Australia, not just in looking after the retirement savings of our members, but also as allocators of capital to the community at large. It’s likely, we could argue, that these two ideas might ultimately really be the same thing.”