Representatives of $1 trillion of assets have been provoked to question whether they have taken the right approach with complex portfolios, left-tail hedging strategies, ESG and disruption.
A panel of chief investment officers – Paul Kessell of Kinetic Super, Janice Sengupta of Aon Master Trust and Tim Macready of Christian Super – share their key learnings from the Fiduciary Investors Symposium in the Blue Mountains that featured topics including smart beta, risk management, liquid alternatives, ESG, infrastructure and macroeconomics.
For Kessell, the increasing complexity across asset classes in terms of their management was cause for thought, and a point worth raising with his investment committee.
“Do we actually need to increase our complexity or, conversely, go back to basics and have a more simplistic approach to managing our investment strategy? Less asset classes, less managers, and control over our fee structure [might be better]. While there is no certainty over the future, we would understand the levers we are managing and the impact they have on the portfolio,” Kessell said.
He also questioned whether it was better to be an early adopter of ideas that sound compelling, or if it was better to “sit back” and look the ideas appropriateness after it became mainstream?
Sengupta found it “most astonishing” that there is a consensus about there being a low-growth, low-yield environment for the foreseeable future.
“This is something that was a question mark in recent years. Now it seems to be an underlying assumption that shapes investment strategies, so this is a profound challenge and change in the industry,” Sengupta said.
She added it reinforced the view taken at Aon Master Trust that it was very important to have realistic investment objectives and very clear communication with members.
“It also underscores the importance of some default options that have been created, for example, life cycle options, for those [members] not actively making these decisions and attempting to navigate the very complex world in which we live,” Sengupta said.
She pointed out the move from a unipolar world to multi-polar world and the complexity that entails raised questions about risk and risk management.
“How do we develop systems that enable us to have meaningful risk-reporting for the various stakeholders?” Sengupta asked.
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One of the biggest questions Macready has been asking, is how to allocate assets so that retirement incomes can be delivered to members.
“I ask myself how far are we moving away from the realities of the macro-environment, the realities of assets that we invest in?” Macready said.
“I don’t know about you, but when I get thinking about the strategies, it gets me thinking less and less about what I own and more about the factors I am exposed to, or the market movements that I might be exposed to.
“When in reality what generates retirement outcomes for our members is cash flow; whether that is companies repaying the fixed interest they’ve borrowed, [or] whether that’s companies generating profits and returning those profits to shareholders as cash flow.”
“This is not to say factor investing or liquid alternatives don’t form a reasonable part of the portfolio; they have a place, but I ask myself as an industry how much are we actually looking at the companies we are investing in and how sustainable those cash flows are.”
While heartened by ESG entering mainstream discussions, Macready questioned whether the industry is on the right track with the issue.
“I wonder if with fiduciary duty we focus extensively on the financial responsibilities, without also taking into account the representative responsibilities we have as fiduciaries, to create society as a place where they [members] want to live and to do things with their money that they want.”
For example, Macready said it was laudable a number of super funds had divested from cluster munitions as members did not want to invest in a product had the sole purpose of killing and maiming.
Other questions Macready has been grappling with include: whether the industry is ready for disruption? And who was standing outside the left-tail outcome positions super funds had been taking?
“Who is actively increasing their exposure to left-tail outcomes and how much money are they demanding for the privilege? How much are they extracting by way of a premium? And is what we are paying for these tail-risk protection strategies worth it?”