Mark Delaney sees an opportunity to make money from Brexit and a bright side to the tumult of US President Donald Trump. Having recently put the brakes on a real-assets shopping spree, AustralianSuper is now topping up on equities.
This comes as the $109 billion fund looks to more than double the proportion of capital its growing in-house team manages.
Last year marked a decade since Mark Delaney, then chief executive of Superannuation Trust of Australia (STA), and Ian Silk, then chief executive of the Australian Retirement Fund (ARF), pulled off a merger to form the country’s largest industry super fund, since known as AustralianSuper.
Silk was named AustralianSuper chief executive, while Delaney, who had been promoted from investment manager to chief executive at STA three years earlier, became his former rival’s second in command, with the dual titles of AustralianSuper deputy chief executive and chief investment officer.
They have proved a formidable duo in their respective roles ever since.
At a time when the Australian Prudential Regulation Authority is nudging sub-scale and troubled super funds to find merger partners, and the slow pace of industry consolidation has been widely blamed on self-interested executives and directors not wanting to cede lucrative positions, it is worth reflecting on the fact that had Delaney not been prepared to give up the mantle of chief executive, AustralianSuper might never have come into being.
Reminiscing on the negotiations, Delaney says he always hoped the deal would leave him in a good position, but was prepared to forge ahead regardless.
“When the STA-ARF merger was being discussed, it was just such a good idea for the members,” he tells Investment Magazine. “I thought to myself, if you’re looked after, well good. If not, no matter, you’ll find another job…and at least you will have achieved something.”
Being prepared to give up a little bit of status in the short-term in order to be a part of something bigger is a trait Delaney credits with shaping his career.
In 1981, the economics graduate started out in the banking division of Federal Treasury. In 1986, he left Treasury and moved back home to Melbourne for a job as an economist at National Mutual.
While still at the firm, which later became AXA, Delaney discovered an interest in investment strategy, qualified as a Chartered Financial Analyst, and made a move into the firm’s funds management division. By the time he left in 2000, Delaney was head of investment services.
It was Paul Costello, who later went on to become the inaugural chief executive of Australia’s sovereign wealth fund, The Future Fund, who hired Delaney to be the lead investment manager at STA in 2000.
The move to the industry super sector was a calculated one.
“Around about the time I was thinking about leaving AXA in the late 1990s, I was doing some work on corporate planning that exposed me to some projections of how big the superannuation sector, and industry funds in particular, were going to become,” he says. “A lot of people focus only on what seat they’ve got on the train, their title or whatever. Probably my strongest piece of career advice is to think instead about where the train you are on is headed. A growing organisation creates opportunities, while a contracting one is very difficult to work in.”
In 2000, Australia’s pool of compulsory retirement savings was worth $484 million, today it is valued and $2.1 trillion and is forecast by Deloitte to hit $9.5 trillion by 2035.
The idea of working in a system with mandated contributions was also attractive because of the opportunity it created to pursue long-term investment goals.
“I liked what industry funds were trying to achieve,” he says.
In 2006, at the time the STA-ARF merger was inked to form AustralianSuper, the combined entity had $18 billion in funds under management. Over the last decade, that has swollen more than sixfold, to $109 billion. It is the largest industry fund in the country.
“Scale brings lots of advantages,” Delaney says.
In 2013, he began bringing responsibility for some of the fund’s asset management in-house, starting first with unlisted property and infrastructure before dabbling in large-cap Australian shares. It is an experiment that is paying off. By mid-2015, it was forecast the strategy would save the fund $150 million a year in costs by 2018.
The proportion of funds managed internally now stands at 22 per cent, a figure Delaney hopes to get to 50 per cent within the next five years. Total funds under management are projected to swell to about $200 billion by 2022.
Internal investment teams are now in place across all major asset classes: property and infrastructure, Australian equities (large and small caps), fixed income, currency and, most recently, global equities.
“We have a target of running internal management to be at least one-third or even a half of members’ assets over a five-year horizon,” Delaney says.
Each team is allocated more capital progressively as they prove themselves. It has been just six months since the new global equities team, headed by Christine Montgomery, got its seed capital, and Delaney is happy enough with their performance to be ramping up their funding.
“We brought global equities in-house last because they were the hardest…but if the team proves to be skilful, then allocating them a large amount of money makes sense.”
Among other large super funds that have been busy building in-house investment teams in recent years – such as UniSuper, Cbus Super, First State Super, and more recently HESTA – there has been a reticence to dive headlong into picking global stocks.
It is often said that Australia’s geographical isolation and out-of-whack time zone puts home-based global equity managers at a disadvantage to those operating in offshore markets.
Delaney thinks such fears are overblown in an era of online updates and webcasting.
“There is a matter of distance, and the global team will have to do a bit of travel, but for a lot of companies, the information comes down through the web. So, they are at no more of a disadvantage than anyone else,” he argues. “And when you’re taking a long-term approach to investing, getting the news six hours late doesn’t make that much difference.”
The sheer scale of opportunities in global equity markets, compared with the local market, is exciting.
“Global markets are very deep, meaning we can run lots of money without running into any capacity constraints,” he says.
Delaney says the biggest challenges in implementing the in-house strategy have been on the people management side of things, rather than in investment management.
“Just before this interview, I was eating my lunch and reading the Harvard Business Review’s leadership edition thinking, ‘I’ve got to get a bit better at some of this stuff,’ ” he says.
AustralianSuper chair Heather Ridout is satisfied he’s got it covered.
“The leadership Mark has shown in building that internal team has been very impressive,” she says. “He’s got a great eye for hiring good people and has been strong at bringing the whole team along with him on what has been a step-change for the organisation.”
Delaney may have been indulging in a bit of false modesty about his leadership skills, but was clearly sincere when crediting those mentors who have helped him.
“Geoff Ashton, who was my chair at STA and then the inaugural chair of AustralianSuper, was the guy who really taught me how to be a C-suite executive. How to manage upwards and downwards,” he says. “Ever since, I’ve tried to emulate his combination of blunt feedback and practical advice.”
Another important mentor was former Reserve Bank governor Bernie Fraser, who chaired the AustralianSuper investment committee for the first 12 years of the fund’s life.
“Bernie taught me a lot about how to understand economies and markets, think about issues and come to decisions,” Delaney says.
“He wasn’t a theoretician, rather he was always big on the importance of seeing what was there, rather than looking for what you hoped to see.”
It’s a mantra Delaney has been coming back to a lot in recent months.
“Volatility is nothing new,” he muses. “Since 2014, global equity markets have had three moves of almost 20 per cent. The Trump phenomenon has really only corresponded to the last half of the last move. But, potentially, he could be more important.
“The orthodoxy of the period since the global financial crisis has been one of very low interest rates, very tight fiscal policy, a free-trade approach, and re-regulation of financial markets.”
Trump wants faster US economic growth, increased fiscal spending, less regulation, and big corporate tax cuts.
“All those things point to an environment that will tend to favour equities,” Delaney says.
Shifting the burden away from monetary policy onto other instruments will, other things being equal, put upward pressure on interest rates, he says.
Trump’s plans to repeal portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act could also be a boon for markets, if done right, he argues.
“I am no expert on Dodd-Frank, but there are undoubtedly parts of it that could be done better,” Delaney says. “After the financial crisis regulators prioritised system stability above system efficiency and capital allocation. We may now be seeing a righting of that.”
Delaney is unfazed by the wildcard element of some of Trump’s unpredictable foreign policy stances.
“The rest of the world is going pretty well. China has bounced off the bottom. Europe is going quite nicely and Japan’s going pretty well. Equity markets were up in 2016 because the world was recovering. In retrospect, we might view 2015 as a classic midcycle slowdown,” he says.
Another market shock of 2016, that on first take seemed likely to be negative for markets but has played out in unexpected ways, was the United Kingdom’s vote to leave the European Union.
“Brexit has had a material impact on the UK economy, the financial services sector in particular. But given the 20 per cent fall in the exchange rate, the competitiveness gains from the change in the currency may compensate for, or even swamp, the competitiveness losses from no longer being part of the EU trade zone,” Delaney says.
“The most important thing about Brexit was that it was the first really large cannon shot about the change in orthodoxy of how to do things. Trump was the second one. Our job as investors is to be opportunistic about how to make money in the world we are in. You can’t wish things were different.”
The fallout from Brexit is important for AustralianSuper’s small London office, which manages its UK property portfolio. In January 2016, the fund took a $900 million majority stake in a 27-hectare mixed-use Kings Cross development.
In October, AustralianSuper in a consortium with IFM Investors, lobbed a $16.2 billion unsolicited bid that the NSW Government accepted in exchange for 50.4 per cent of the state’s electricity poles and wires operator, Ausgrid, on a 99-year lease.
Now Delaney is putting the brakes on what has been a three-year long shopping spree for unlisted property and infrastructure, trimming the fund’s fixed-income holdings, and topping up on equities.
“We were large accumulators of unlisted assets for the period from 2013 through 2016 and we are slowing that down now,” Delaney says.
A combination of unlisted assets being relatively more expensive than they were and low interest rates already being priced in has made the sector less attractive than as it was three or four years ago.
The beauty of having stocked up on property and infrastructure when the price was right is that it can now be held for a long time, providing a source of diversification, capital growth and income.
An ability to give ordinary workers the chance to own a stake in things like Hawaiian shopping centres, international ports, and office towers is one of the things that gives Delaney the most job satisfaction.
“When I started at STA 17 years ago, I put all my super in the fund’s balanced option (which rolled into AustralianSuper’s balanced option following the merger). To this day, that’s the only place I’ve got super and I’ve never once made a single switch.”
And he plans to stay there for a long time yet.
Delaney is a vocal advocate of the need for older members to retain an exposure to growth assets into the retirement years.
“Someone retiring at 60 probably still has an investment horizon of 20 years. They need capital and growth,” he argues.
The imperative to help retirees keep building their balance is huge, given the average AustralianSuper member has a balance of just $47,000. Luckily 98 per cent of them are still in the accumulation phase.