Insourcing investments may be in vogue, but there is one superannuation fund heading in the opposite direction, by setting up funds’ management and consulting businesses with the aim to outsource its portfolio.
While other asset owners have setup investment arms that have morphed into fund managers over time, such as QIC in Australia or Hermes in the UK, this is the first time that a superannuation fund has set up a business with the express intention of seeking external clients from the outset.
For the better part of a decade, Christian Super has run its impact investment portfolio in-house, completing 17 deals in seven jurisdictions, amounting to more than $140 million. It has used nine different investment structures, with more than 150 underlying portfolio companies. The portfolio accounts for up to 10 per cent of its asset allocation.
“Christian Super’s impact portfolio is showing a correlation of less than 0.2 [per cent] over the last six years, which is the period we have had a portfolio that is measurable with every other asset class,” says Tim Macready, chief investment officer of Christian Super, and the managing director of Brightlight, the new fund manager operation.
Christian Super is launching Brightlight as a business to service asset owners who want to access the impact investment universe. An application has been submitted to ASIC for an Australian Financial Services License, with this process expected to be complete by February 2017.
“But we will also be licensed as authorised representative by an existing AFSL holder as well, which will enable us to start launching the services and products from day one,” Macready says.
While the precise timing of ‘day one’ remains unclear – it is open for business from October, and has already received at least two proposals – it will formally leave the Christian Super office from December or January.
The $1 billion superannuation fund is putting in $250,000 from its operational reserves as a loan for seed capital on arm’s-length terms, and will be Brightlight’s first retainer client for impact consulting services.
The plan is that, over time, Brightlight will build out products that mirror certain Christian Super asset classes. At that point, Christian Super intends to transfer those assets into Brightlight, again, on an arm’s-length funds management basis.
“One of the things that this potentially does for Christian Super is take what is essentially a very complex part of its business – running an impact investment portfolio – and free it up to external organisation, to devote more of Christian Super strategic resources back into delivering products that are adding value to members, growing our membership base, and seeing how we can tailor our services to meet their needs.”
Transcending the limits of superannuation
Christian Super prides itself on being a values-based organisation with a mission of seeing that people have financial health and understanding, but Macready says that for some time they have known there is a limit to what they can do to see this vision achieved as a superannuation fund.
“So we have been looking for opportunities to broaden beyond the horizons of just being a superannuation fund in ways that are for the benefit of our members, and see our vision fulfilled.
“At the same time we have been getting a lot of queries from investors about our impact investment strategy in particular, and our responsible investment strategy more broadly.
“There’s lot of demand out there for our impact investments, advice and products, and for faith-based values aligned to our investment products, and therefore we think there is a business to be built there.
“We felt that strategically we were at a point where we could devote some resources to growing the business for the benefit of our members, and in order to see our vision fulfilled and to help a lot more people invest the way that we invest.”
There are also mission-aligned benefits for the super fund in this strategy. Short-termism has been detrimental to the objectives of asset owners, therefore, the theory goes, the more money that is invested along responsible investment and values-based lines, the greater the sustainable economies created, feeding back into long-term returns of other portfolios.
Structure
Aside from the seed loan, Christian Super has 80 per cent equity ownership, with the remaining 20 per cent equity belonging to an organisation called the Brightlight Foundation.
The Brightlight Foundation was established with the same vision as Christian Super – to see people living life with financial health and understanding.
“But it’s going to exist to do so in a much more charitable sense, and in ways that the superannuation can’t,” Macready says.
These two organisations between them own a holding company that in turn owns the individual Brightlight businesses; specifically, an investment advisory and an investment management business.
The investment management side focuses on making available to the broader wholesale institutional market, asset-specific or diversified products that mirror Christian Super’s existing investments strategies.
These strategies include using a pool of four different Australian equities managers, applying screens, engaging with corporates and using proxy voting to achieve its objectives.
Initially, Brightlight is launching investment memorandums in cash, fixed income, Australian equities and potentially international equities.
“As people are interested in getting access into that diversified pool of domestic equities, Brightlight Australian Equities Trust will be opened up,” Macready says, adding the business model on the funds management side was to charge an asset-based fee on the pool of assets that is managed on behalf of people.
“And then we have the investment advisory business, which is essentially doing everything from start to finish to enable asset owners to make impact investments.
“For some people that’s going to be giving a base level understanding of the market type service – how you actually understand impact. Then we can help with designing impact investment strategies: How do I approach impact investment? How do I find deals? How do I understand illiquidity?
“We will be able to help people with deal due diligence. So if they come to us with a specific deal, we will be able to provide advice on whether we think [it] is appropriate or not, with what the risks associated with it are.
“There will be overall portfolio construction, all the way through to if people ultimately want to give up control of their impact portfolio and say, ‘Can we just invest it in a Brightlight fund-of-funds?’ We are intending to offer that as one of our services.”
In terms of the business model on the impact advisory side, Brightlight aims to get a range of clients with a mix of one-off work, retainer fees and asset-based fees to advise on impact portfolios.
Getting the band back together
In addition to Macready, who has been involved in impact investing for 10 years, Simba Marekera, who has been with Christian Super for five years, is going across to Brightlight.
“And we are bringing back a couple of people who worked with Christian Super on the impact side before,” Macready says.
Charles Liu, who worked with Christian Super in the late 2000s and then spent time with KPMG’s social finance team, is joining to help with the deal due diligence and research.
Joining Liu on the research team is Jai Sharma, who worked with Christian Super in 2010-11.
“He has spent the last four years building his own social enterprise and he’s just been freed from that and is coming on board with Brightlight.”
Sam Ung has been providing casual support for due diligence on impact deals for a year at Christian Super, and will also be joining.
“That’s five people from Christian Super in the immediate past or in the medium-term past coming across to Brightlight to work together,” Macready says.
“We are adding two really strategic people to the team as well.”
The first is Matthew Zschech. Zschech resigned from the Christian Super board to go work for Brightlight. He has lengthy experience, firstly with IBM in a project management capacity, then with Alpha Fund Managers in operational asset management, and brings 15 years of experience in managing money in the fund manager environment.
There is one more person joining Brightlight from a well-known global fund manager, but at the time of going to press, the name had not been released.
Bringing in reinforcements
Clearly, the move of Macready and Marekera will affect the Christian Super investment team. Traditionally, Christian Super’s model on the investment team has been to train from within.
“We’ve hired young graduates, really invested in their professional development and turned them into high calibre superannuation professionals.
“But by recognising the challenges that Brightlight is going to bring, we’ve resourced [Christian Super’s investment team] with two [experienced] people.”
Edwin Lo, who has spent 20 years in funds management as a portfolio analyst and manager for Australian equities, will be tackling the bottom-up portfolio construction side, and helping with manager selection and due diligence.
The second person will tackle things from the investment strategy top-down macro side. Lauren Rosborough Watt has a background as an economist and a currency strategist at Societe Generale, Westpac and the Reserve Bank of New Zealand, and will be making sure that the super fund is covering asset allocation.
“We have introduced those more senior resources just to give that belt and braces approach, to make sure the Christian Super’s investment portfolio isn’t compromised,” says Macready.
“The other effect on Christian Super is that it goes from having an internal impact investment team to outsourcing to an external – albeit a highly aligned – party.”
As for Macready, as of January 1, he will have two jobs, under two employment contracts, with two job descriptions. The idea is that his time initially will be a split of 70 per cent on Christian Super, and 30 per cent on Brightlight.
“Obviously, in the start-up phase there is a need to go above and beyond in building the new business, so that 70/30 looks more like 70/50 or 70/60 sometimes, but that is just the reality of building a new business.”
Conflicts of interest
Macready will remain accountable to Peter Murphy, Christian Super’s chief executive, for performance of the super fund’s investment portfolio and everything to do with investment strategy.
“And if I’m not delivering there to his and the investment committee’s and Christian Super board’s expectations, then they have every right to step in and do what needs to be done to make that work.”
Likewise, on the Brightlight side of things, he is accountable to the Brightlight board for his performance there.
Clearly, this is not a long-term sustainable thing to do.
“We think this is probably an 18-month to 24-month solution and we are fully recognising that at that point those roles need to be split and both will revert to being full-time roles,” Macready says.
The real form of potential conflict of interest is that while Christian Super does not use any form of incentive-based remuneration – it is all base salaries – Brightlight will have an equity component.
“The equity component doesn’t kick in until it is profitable, and it’s the profitability point which, for us, is kind of the demarcation line of when those roles need to split.”
The next major challenge for Christian Super comes when Brightlight achieves this sustainability and profitability, and needs to appoint a full-time person to manage its business. It is at this point the board will make an assessment as to where the strengths and weaknesses are, where Macready’s skills are best used, and who is available to fill either a managing director role in Brightlight, or a chief investment officer role in Christian Super.
The start of something bigger
Interestingly, one of the reasons for setting up Brightlight as a for-profit organisation, rather than a not-for-profit, is the ability to retain profits and invest them back into vision-aligned businesses, hinting at possible future plans from Christian Super.
“We see Brightlight as the first of a number of sister organisations for Christian Super that will build out – we don’t know where yet – but are helping people to live with financial health and understanding and making the world a better place by doing so,” Macready says.
