Other than Cochlear and CSL there are not too many world beating companies from Australia, but one billion dollar globally successful idea that might be overlooked is Mercer Superannuation.
Launched from Melbourne in 1996 by Bruce Cook, it has turned into a business that looks after US$50 billion in North America, US$25 billion in Europe and US$25 billion in Australia and New Zealand.
Russell Clarke, chief investment officer for listed assets tells of how, back then, there were numerous funds that lacked sufficient scale to optimise their governance on investments, and how for 10 years the business grew consistently at a double digit rate. Now, client growth in Australia has slowed, as such small clients are rarer and the market is largely about re-bids and larger clients realising they lack scale.
Since 1996, the business has seen the definition of a “sub-economic” institutional investor start out at $20 million and rise to $500 million and constantly upwards. “You could see as clearly as night follows day that larger and larger clients would do it,” says Clarke.
The proposition of outsourcing investment arrangements has evolved too, to reflect these changes. For the smaller clients, as Clarke tells it, the desire is to get “better returns at lower fees”.
For larger clients, usually corporate clients, the need can be more strategic.
“A large client may decide that rather than spend 80 per cent of their time on all the ‘below the table’ aspects of running a large fund, they can outsource and focus their governance budget on higher value add activities,” he says.
The appeal, or perhaps it would be best summed up as the safety, of clients big and small in joining Mercer’s global operation is the access to the largest manager research database in the world and the investment team spans three continents.
Clarke himself sounds in awe of the spread of Mercer’s knowledge. “We have got a global investment management database which is unbeatable and has 25,000 strategies of it, of which, more than 5000 are rated in significant detail. It is just an incredible system which has decades worth of deep research available at the touch of a button. That gives us a strong competitive advantage.”
The strength of this research has been borne out in equity performance. “Most of our equity funds have added material value over a period of time,” says Clarke. “By and large it is the high quality fund manager research, the thought into putting the portfolio together that is driving that.”
This surety is why the fund has become popular with blue chip clients that are used to offering their employees a premium employment package. “Clients are often with us for a long period of time,” says Clarke. “If they are fully outsourced they do not want something that works one year and does not work the following. For a master trust arrangement it is very messy to change. They need to know people are going to be organisationally stable, so they can sleep at night.”
Mercer’s portfolio management team in the US is centred in Boston with most of the manager research team in Chicago and St. Louis. European research is based in London, where Bill Muysken, global CIO for alternatives, is based, with European portfolio management based in Dublin. In total, there are close to 50 people working in portfolio management for the funds.
This transcontinental coverage can bring a reality check to what is happening in the world. The economist sitting in an office in America or Europe who makes pronouncements on the relative health of the Chinese economy is a staple of the investment news output, but some prognosis can get lost without nuanced local knowledge.
Clarke recognises this issue. “People write about the Australian resource sector from overseas, but when you live here you realise how shallow a lot of that analysis is. There might be an element of truth in what they are saying but they may have missed the other third of the story that is really important.”
The large business clients dotted around the globe provide another less expected source of data. “From a macro standpoint our clients are a great source of information. They are often in the front line industries where if you want to know if the economy is slowing down, well go and talk to the person in that industry to see if it is.”
Largely, the same globally sourced capital markets and fund manager research is used for the $25 billion managed for the Australian clients as is used for the global operation. Roughly around 10 per cent of investments are placed in alternatives and property, with the remaining amount split between equities and fixed income assets.
This is also overlaid with a fair amount of experience of dynamic asset allocation, with Mercer’s implemented consulting operations having run dynamic asset allocation for longer than most institutional investors.
The Mercer operation shares more than best investment ideas globally. The Mercer Smart Path lifecycle product was born from the ideas and best practice of Europe, Australia and the US. Its stated proposition is that it will guide the member through retirement, rather than to retirement.
It goes further than most lifecycle funds by incorporating social security modelling in the post retirement phase. “This can have a material impact on the way that you can build a post retirement portfolio, whether you do or you do not include social security modelling,” says Clarke.
Part of the idea is around maximising the longevity of funds in retirement and Clarke promises more innovation to follow. “We are working towards quite a clever longevity solution in our retirement phase in due course. That is something that is coming and will really stand out in the market place.”
Clarke’s job as global chief investment officer for listed asset classes and regional chief investment officer is like no other job in institutional investment. Much of his role involves organisation and talking to the team around the world, rather than being an inspirational, investment guru per se. This involves late evenings most nights to match up with American and European time zones.
His job also entails people management – “attracting, retaining and engaging good people is a really tough job”, he says – and chairing of the strategic research committee.
It is a role of significant influence, but at the same time, it is very much a team role. Not least, because much of the organisation is run based on existing research; “It is not reliant on one or two key individuals”, he highlights. Though, he admits it is not an easy role to fulfil. “You can find real visionary people, but often they are not very good at making things happen. They have great ideas, but its not their nature to be process driven,” he says. “The best people are reasonably good at both.”
Chant West statistics for Mercer Superannuation
Returns to June 2014 (% pa) – Growth Fund
1 year 12.6
3 years 9.0
5 years 8.8
10 years 6.3
Net of investment fees and tax, before administration fees.