Richard Brandweiner’s passion is deep and pervasive and he naturally reflects the over-riding philosophy of everyone who works at the $54 billion First State Super – that there is a higher purpose in what they do; that managing money for other people is a privilege and a responsibility.
“What struck me most when I came to work at First State Super – and I knew it intellectually, but didn’t get it emotionally – is that having a single focus on the member is liberating,” he says. “The sense of purpose is palpable.”
Brandweiner, who came to the job from Perpetual in April 2013, says his strength and skill is in creating change and bringing the vision to bear. He also clearly has the courage and ability to create change – in investments, processes, and team management.
He says he is fortunate to work in an extremely rewarding environment, with support from the board and chief executive Michael Dwyer to develop a framework for a large asset owner to be best of breed. “I’m excited by the fact we can do things differently and get to the point where we are one of the best in the world,” he says.
Brandweiner’s impact has been immediate, and a lot has changed in the First State Super investments approach in the three years since his arrival, including the building out of a highly skilled team; adding diversification to the portfolio via a significant private assets allocation; systems for risk management, analysis and decision making; a new operating system; and the move to internal investment management.
“I see that there are three major challenges of a large asset owner: the benefits of scale are absorbed by agents; agency risk – there are seven or eight levels between the member and the widgets; and information asymmetry where the asset owner is removed from capital markets,” he says.
Brandweiner and the team are presenting part three of their “roadmap to $70 billion” to the board this year, and they started that process by understanding how the fund could deal with these three challenges. “We looked at what was culturally aligned and what was the competitive advantage of our own organisation,” he says.
Internal investment management emerged as one way to deal with these issues alongside the restructuring of fund manager partnerships; direct relationships with companies is another way.
First State Super will be managing Australian equities by the end of the year, and having the options to execute ideas in various ways is key to their strategy.
“We will always be both – internal and external – because it’s about options. Internal is about giving us different ways to execute on an idea through exposure management starting from strategic asset allocation, active asset allocation, factor exposure management, long-term strategic holdings in infrastructure; unlisted and even listed companies. Those things should be a core skill of us; the generator of alpha doesn’t have to be within the fund,” he says.
The fund, under Brandweiner’s steer, is not afraid to go direct to companies, and will even take strategic stakes in listed companies. It already does – owning 41 per cent of a listed Australian company, through a private equity turnaround.
Inefficiency is a key focus for Brandweiner, and this is not just about portfolio construction but also implementation and addressing the agency risks and the restructuring relationships with intermediaries.
The process for new relationships started with the fund’s large relationships, and it has done co-investments with Lend Lease on Barangaroo and the CBA building in Sydney.
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“We want to build networks to get a competitive advantage, and that will be with managers but also investment banks, legal firms, and peers,” he says.
When Brandweiner arrived at First State Super, the fund’s asset allocation was pretty vanilla, and in the past three years he, and his team, have been building out the portfolio.
“When I got here, it was a good, clean portfolio but it was largely equity risk and cash, [with] little exposure to alternatives. My primary objective was to improve portfolio diversification away from equity risk and to lengthen the asset dates to anchor the portfolio,” he says, pointing to infrastructure and private equity as areas of focus.
“The challenge is in the past three years is, we have seen huge demand for illiquid alternatives – particularly infrastructure and private equity – which has pushed valuations higher. It is competitive and uncertain, which is not an ideal time to commence an illiquid program.”
In addition to the competitive environment, First State Super was building from a standing start, and Brandweiner says it takes around seven years before an illiquid portfolio is full and well priced.
With that timeframe in mind, Brandweiner has been building processes that are subtle, and has put together the ingredients, and partnerships, to underpin a platform that will be built over time.
“FSS grew up quickly because of the merger, and didn’t have the processes to understand deals before they came to market. From a portfolio construction view we had to demonstrate the capability we have to do some deals. Even if we think the investments were overvalued we have to be in the market and have some beta exposure,” he says.
Performance has been front-and-centre all the way through this process, particularly as many assets are overvalued.
Given this environment, the fund has been parking assets in big real return strategies that have a CPI+5 per cent real return; these are liquid and can be drawn down for illiquid opportunities. “Then it is a higher hurdle to overcome, before we decide to buy an illiquid,” Brandweiner says.
The investments team is growing from around 31 to 50, and a large part of that is operations and middle office.
“We are a long way down the path of setting up our team and systems and processes and having the right culture and risk management,” Brandweiner says. This has required a complete rebuild of the operational platform, and phase one of the front-office technology (Bloomberg’s AIM) has also been finalised.
The team trades derivatives and cash, and asset allocation is a synthetic overlay, trading the main betas of Australian equities, US equities, and Australian rates.
Universal ownership
Universal ownership is an input into the decision-making at First State Super, and Brandweiner believes that whether asset owners like it or not, they will have an impact on the future. So they may as well embrace it.
“This is an interesting point of evolution for asset owners as they are more sophisticated and corporate Australia is looking for capital. Historically there was a range of intermediaries between them, which meant leakage and not necessarily alignment. Companies are now realising we control the capital.”
The investment team is developing a scoring mechanism to filter ideas, and universal ownership is one of eight levers.
“We have to be responsible for the world in which members retire; you have the influence regardless,” he says. “We need to be mindful of it.”
Brandweiner is a member of the Australian Advisory Board for the International Social Impact Investment Taskforce. He is also an immediate past president of the CFA Society (Sydney), taking a week out of every year to go to Virginia to mark Level III exam papers, and he speaks fondly of what he learns in that process – being exposed to different answers, points of view and people from all over the world.
His “hero” is Emilio Gonzalez, who served on the board of the CFA Institute for seven years, and was its first Australian chair. The two worked together at Perpetual, and also have a shared passion for the CFA designation.
“Anyone who can work in an environment that’s listed and still maximise value to shareholders is amazing. The BT stock price since he joined has increased 300 per cent. I’m so proud of him.”
Over 10 years the First State Super balanced fund has returned 5.2 per cent per annum; and in the past three years, to January 31, it has returned 7.1 per cent.
