The challenging investment environment coupled with a CPI +4 per cent for default members over 10 years has led HESTA to rethink its portfolio, says Angela Emslie, chair of the $33 billion super fund for health and community services sector workers.

“Most of our members will retire on the pension or part pension, so we think of that almost as the bond part of their portfolio, so we can take a bit more risk,” Emslie says. “But at the same time we know that our members are risk averse, and we’ve always been a fund that performs better in down markets than in strong markets, because we are really concerned about negative returns and the impact that has on members.”

To better navigate these factors and get every basis point of return, HESTA has changed the focus of the chief investment officer, Rob Fowler, as well as doubling the size of the investment team from nine to 18 over a two-year period.

In July 2015, HESTA appointed James Harman to the role of general manager of listed assets and Andrew Major to the new role of general manager of unlisted assets. Then, in August 2015, Gary Gabriel was hired as general manager of investment strategy and risk.

For Emslie and the board, the addition of team members has freed Fowler up from management and day-to-day investment work so he can focus more on strategy, while enabling a more granular focus in terms of implementation on asset classes.

“It’s skilling up and providing capability for the size of the organisation we now require. We’ve now got resources to look at asset allocation strategies, put option protection strategies and other types of strategic things we didn’t have before,” Emslie says.


Increased focus on fees

Fees are the other side of the equation for achieving the CPI +4 per cent – an area that has HESTA’s focus now more than ever.

Since 2010, HESTA has used an internally developed MER for Alpha framework, which is an asset class by asset class methodology for assessing the fees paid to a manager compared with the alpha generated.

It gives HESTA’s investment team a whole-of-portfolio view of its active management costs, as well as a systemised approach to evaluating manager value. The purpose of this is to provide greater insight into how much outperformance the super fund is prepared to give up in fees (base and performance) to access a manager, and puts this in the context of the role these managers’ investments have in the overall portfolio.

Calculating MER for alpha also involves systematically evaluating both how confident the investment team is that a manager can achieve the required excess returns and also what diversification benefits their investments are expected to bring to the portfolio.

“That’s been quite a rigorous methodology. We’ve sat down with each manager and walked them through this,” Emslie says. “But fees are still too high and our concern, as is the industry’s concern, is that the benefits of scale are going to fund managers and not members. In a low-return environment, we are much more focused on ensuring those benefits of scale go to members.

“That’s something we can’t do alone, and we’ve been batting along for number of years on it. In fact, we have sacked managers for their fees and, on the flipside, managers have effectively sacked us because they wanted to raise their fees, we’ve said no, and they’ve said they can get those fees elsewhere.

“That is why we need the industry to work together on this issue.”

Emslie added that this concern about fees is why HESTA has ceased committing to hedge funds and private equity fund of funds.

“We’ve already done a lot, but in this environment we do need to put pressure on both sides of the ledger, even though our focus is still on net returns.” 


Women and the Senate inquiry 

The focus on net returns is given added impetus by the nature of HESTA’s membership (84 per cent are female) and the fact they are frequently negatively impacted because the superannuation system was setup based on a full-time male worker.

The result of this is around 90 per cent of women will retire with inadequate savings to fund a ‘comfortable’ lifestyle in retirement, according to research by the Association of Superannuation Funds of Australia (ASFA). It adds, on average, that women retire with $92,000 less in superannuation savings than men do.

The failures of the system were further explored in the Senate’s 2016 report A husband is not a retirement plan – achieving economic security for women in retirement, a report Emslie describes as an indictment on both industry and government policy.

“Clearly there’s a lot more to be done, but we are at the point now where the issues have been recognised and the first step in any change is recognition. HESTA has been a strong advocate and will remain so because if our members are to retire with adequate incomes, they need to have better inputs,” Emslie says.

Angela Emslie-19The Senate report recommended the payment of the Superannuation Guarantee (SG) on parental leave; abolishing the $450 per month threshold for SG; maintaining the low income superannuation contribution; increasing the SG to 12 per cent as soon as possible and amending the Sex Discrimination Act 1984 to allow higher superannuation contributions.

Emslie was particularly keen to see the removal of the $450 (per month) salary threshold.

“That’s a real barrier to women in our sector, especially those that may be part time in a number of different jobs and never get over the threshold.”

Paradoxically, super funds have been “nurturing” for women working in the superannuation sector, something made possible by some of the early founders, such as the late Mavis Robertson.

“Mavis was certainly a formidable force and she left a legacy. She was very collectivist in her spirit and people have learnt to nurture women in the industry and support each other,” Emslie says. “Interestingly, quite a few women got into super in the early days because it was a small sector and men had not necessarily appreciated it for what it was going to be, so women rode the rising tide and have been quite the success in the industry.”

This said there are still five industry super funds without any women on their board: AMIST, Christian Super, NESS Super, TWU Super and the SA Firefighters Super Scheme.

“But there’s been a big decrease in past three years of boards without women,” Emslie said. “AIST research shows that in 2015, approximately 27 per cent of trustee directors are women, and that’s up from 20 per cent in 2013.”

“Initially we were concerned that the independent directors that were being appointed were not female, but that’s changed completely now. Thirty-five per cent of independent directors were women in 2015 and that will increase in 2016. That’s been a big step up and shows the industry is taking this seriously.”

At HESTA, seven out of the 13 directors are female and in the leadership group, which includes executive and general managers, 54.34 per cent were female. 


Evolution of boards 

As well as being the chair of HESTA, Emslie has previously served on the boards of three industry funds (CareSuper, Vision Super and VicSuper), and is currently a director for Frontier Advisors and is a director of the Principles for Responsible Investment (PRI). She was also president of the Australian Institute of Superannuation Trustees (AIST) to March 2016.

Although Emslie simultaneously served on the boards of the three industry super funds between 2004 and 2009, she does not believe this is a practice for the future.

Angela Emslie-8“Back then, for me personally, it certainly made me a much better director because I was able to see how different funds thought about things. I was able to see a myriad of investment manager presentations – you can’t believe the amount of investment manager presentations I sat through – it was certainly a good way to come up to speed on the industry. To see different advice from different asset consultants was incredibly valuable and just to see how different funds were approaching things,” Emslie says.

She added that those involved in one super fund do not necessarily understand how different the culture is, how different issues are, how different the products and services are, and even how different investment strategies need to be so they can be tailored to member groupings.

“Twenty years ago, we were very much a cottage industry – we were learning on the job. There were very few staff and directors were much more involved in the investment level. Now, the days of the beauty parades of investment managers are gone. Funds are much more focused on asset allocation and asset structures. There are much more complex issues than just seeing a few managers and choosing the right one.”

For Emslie this has been the biggest change – that the board is more strategic than it was – and the key issues she identifies going forward will be making sure directors have the time commitment and the skills.

“And they are not necessarily investment skills. You do need to come with an interest in economics and investments, but it is not necessary to have been an investor. And in some cases being an investor might be a disadvantage because you’ve been in a specific asset class and have [a] particular bent,” she says.

“The trustee on the board in the future will need breadth and strategic thinking, as well as the ability to have oversight of [a] bigger and more complex organisation.”



In March, Emslie also finished her term as president of AIST, serving a total of 14 years in that role, and as a director.

“AIST has really been a strong voice for trustees, because trustee directors are very different from company directors.

“We are directors of a trust structure, so educating and, dare I say it, professionalising trustees – bringing them along on the journey – has been really important for AIST. And that role is not being served by other industry groups, such as ASFA, which are more of an industry association.”

After having served on Australian boards for the best part of two decades, she has now entered the global stage, having taken a positon on the PRI’s board in January 2016.

“We are in the process of developing what our blueprint will look like for the next 10 years and there is a lot of consultation that’s gone into that. There are questions about whether we should be making signatories more accountable, as well as the role of asset owners as opposed to the role of asset managers – there is a lot of complexity in there.

“It is really thinking about how we would do that [blueprint] with the challenge of the PRI being a broad church. We are talking about signatories across the diverse global base, not only asset owners, but asset managers and service providers with different cultures and in different countries.

“Clearly, the PRI has achieved a lot in the terms of awareness in the last decade, but there really is a feeling or a sense that we need to put our foot on the gas a bit more now, to really step it up if we want to make an impact over the next 10 years.”

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