The pursuit of a lean and nimble strategy at Aon Master Trust has led to one person simultaneously holding three vital positions within the fund. Investment Magazine interviews the chief investment officer, head and director, Janice Sengupta.

 

Colorado-born Janice Sengupta serves as Aon Master Trust’s chief investment officer, head and director. While it might be tempting to pass this off as a consequence of Aon Master Trust being relatively small – funds under management are just over $2.9 billion – this could well be a mistake, as the super fund forms part of a that behemoth holds Sengupta in very high esteem.

Aon Hewitt, which globally has over $4.5 trillion funds under advice, places such high value on Sengupta’s skill they have her sit on two of its global committees – the global investment practice committee (focused on consulting) and the global investment committee (focused on research).

Sengupta also has access to an 80-strong fund manager team, who specialise by asset class; and a capital markets research team, led by a PhD economist from Cambridge, that formulates mid-term capital market assumptions.

This confers generous advantages to the super fund – the ability to call on the resources of a giant while being local and nimble, and goes some way to explaining the amount of awards won by the fund the past few years.

Investments

Having the right fundamental structures in place make is what makes it possible to have sustainable success, according to Sengupta.

“That‘s true if you’re looking at the economic structures of a country or having the right systems in place in a superannuation fund,” she says. “Some of it is pretty basic with the governance we have, including the monitoring of the managers, as well as the systems we have for assessing asset allocations, and having sensible asset allocation in the first place. All of this has resulted in consistently strong risk adjusted returns.”

One of her measures of success is rolling five-year returns. She repeatedly asks if those returns are consistent at an appropriate level of risk.

This strategy revolves around diversification, not only at the asset class level but also the sector level, looking at the medium-term environment and where risk has been, and will be in the future.

For example, in an environment with extremely low interest rates, questions abound on the Fed making a move and its implication for the yield curve.

“You can argue that has been largely factored in by the bond market, so there may not be a savage immediate effect,” she says. “Nonetheless, one has to be concerned about rising interest rates in the future. It’s certainly not a 2015 problem, but over the next five years is this going to be an issue? It could impair total returns in a fixed income portfolio, and that’s a risk we have to manage.”

A helpful approach Sengupta has found is having exposure to different types of debt. In 2014 Babson Capital Global was introduced into the alternatives portfolio as a mitigator for interest rate risk.

“The reason Babson Capital Global is a good mitigator is because they invest in what are called bank loans, or a better way of describing it is floating rate debt, which means you have some built-in protection in a rising interest rate environment.

“Having allocations like that in the portfolio that feed into actively managed pre-mixed options becomes a risk buffer.

That’s an example of thinking ahead to risk in the near-term future, so it’s not a reaction to market volatility, (rather) it’s looking ahead to the medium-term environment and making decisions on how to address those risks and opportunities.”

One of the fundamental changes Aon Hewitt sees coming in the next five to 10 years, in common with many others’ predictions, is there will be fairly moderate investment returns across all asset classes.

“Even for global equities whether you are looking at the MSCI or looking at different countries – the US, the eurozone, the UK, Australia – across the board what we are seeing is single digit returns.”

For Sengupta, while opportunities exist in developing markets equities, emerging market debt often provides a better option. By being careful in the debt selection the credit risk can be managed, and generate some attractive yields.

“What we’ve seen following the financial crisis is some emerging economies’ debt-to-offerings are more attractive than sovereign debt of developed countries.

“Looking at the credit risk and risk of default you can sometimes find much more attractive opportunities in emerging market debt, without the volatility you might see in emerging market shares.”

Views on regulation

Looking ahead to other changes, Sengupta says it’s pretty clear consolidation is going to continue. In her view, smaller super funds are going to have an increasingly difficult time surviving, because they lack enough scale to be sustainable at a time when the new requirements under Stronger Super are becoming challenging.

She also foresees tax changes because of the perceived inequitable outcomes from the current system. These outcomes have arisen because of the complex regulation and changes in legislation alongside grandfathering.

Other countries are pretty simple and streamlined by comparison.

“You don’t have the massive resources in other countries devoted to tracking and understanding legislation and communicating it, advising members on very complex strategies to avoid pitfalls or on taking advantages of certain types of manoeuvre such as the transition to retirement,” she says.

The reason other countries are simpler is that most have a tax-free accumulation phase to encourage contribution, and a simple cap on the amount that can be contributed in one year.

“That addresses the equity problem because if you are extremely wealthy you face the same cap as everyone else; it’s a very small percentage of your income and wealth, so you can’t use retirement savings as a tax shelter.

“On the other hand if you are on a lower income that cap can represent a rather significant portion of your income, so if you are able to come close to that or even meet the cap, its making an incredible difference in your wealth accumulation and tax treatment.”

In countries such as Canada, and in fact most of the world, retirement savings are taxed when they are pulled out of the system, which is to say during retirement, and by definition people are on the low tax margin at that point in time.

“That is very simple, and it’s easy to track. We’ve done something of the reverse by creating something very complex.”

She believes this unique approach is the reason for the ongoing debate about the purpose of superannuation and whether it ought to be used as a mechanism for wealthier Australians to have a more tax advantaged portfolio of investments as opposed to providing adequate retirement savings for the average Australian.

“We’ll probably see some changes in that respect,” she says in expectation of having firmer rules on accumulated superannuation balances, and potentially different tax treatment on pension income streams over specified thresholds.

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