In 2014, Media Super was in bad shape. More than three-quarters of all MySuper funds in the marketplace were beating it in terms of investment performance, while redundancies swept through the big employers of its membership base, hurting inflows.
The situation prompted the board to take control of the investment committee, oust the chief investment officer, and undertake a root-and-branch review of the fund’s investment strategy.
Today, the $5 billion fund for Australia’s print, media, entertainment and arts workers is in the top quartile for returns. SuperRatings’ SR50 Balanced fund survey for December 2016 ranked Media Super’s MySuper option in the top 10 for the calendar year, with an annual return of 6.72 per cent. The fund has also lowered its investment management fees by 15 per cent.
“It took quite a long time to turn the fund’s fortunes around,” Media Super’s longstanding chair, Gerard Noonan, tells Investment Magazine. “Super funds are a little like aircraft carriers: hard to move from their current direction [and] equally challenging to get back on course.”
Noonan recalls that, back in 2014, the board “became aware over a number of months” that the fund’s position was slipping sharply, relative to almost a dozen other funds that its asset consultant, Frontier, advised. Frontier director of consulting, Fiona Trafford-Walker, has been the lead adviser since Media Super was formed via a merger in July 2008.
“We needed to do something to arrest that sharp decline,” Noonan says.
The first change was to disband the investment committee and put that suite of responsibilities on the shoulders of all the fund’s trustees.
“I wanted everyone on the board to own the problem and feel its seriousness firsthand,” Noonan says.
The next step was to make the chief investment officer role redundant, leading former CIO Dr Jon Glass to leave
Going overweight equities
Since March 2014, chief executive Graeme Russell has had direct executive responsibility for investment performance. Russell, who is a chartered accountant, joined the fund as chief executive in March 2013.
A year into his role, in the first three months following the exit of investment chief Glass, Russell oversaw a redesign of the portfolio, with implementation of the new strategy completed by December 2014.
“We looked at our Australian equities configuration and we had quite a concentration in the ASX 20. That meant we had a fair slice of money invested in four banks, three mining companies, two supermarkets and a telco,” Russell says.
The board agreed with his assessment that this presented a concentration risk, and approved a plan to take money out of the 20 biggest local stocks and redeploy it across the next 80 stocks in the ASX 100. Media Super also made an allocation to domestic micro-cap stocks around this time.
“The bigger funds really can’t get into micro caps; that’s the advantage of our size,” Russell says.
He also piled the fund into international shares. Since the 2014 review, Media Super has held a 7 per cent overweight allocation to developed market equites, compared with its long-term strategic asset allocation benchmark. Tail-risk hedging was put into place early as downside protection, in case the assumptions were wrong.
“We were very early in with the tail-risk hedging strategy and, because of the timing, put options were very reasonably priced,” Russell says. “We started a program of a rolling quarterly purchase of put options and because we got in early we started at very good value for money.”
Getting tough on fees
Russell says the options strategy paid off during the downturn following Brexit.
From July 2014 to December 2016, there was a net contribution of about 1.5 per cent to returns from the overweight.
As another form of downside protection, the fund left about 20 per cent of the balanced fund exposed to foreign currency. Back in 2014, when the decision was made, the Australian dollar was 94 cents to the US dollar; today it is 74 cents, marking another good call.
The fund’s improvement in investment performance relative to peers is only one side of the turnaround; cost reduction is also critical in a low-return environment. Since 2013, Media Super has lowered the investment management fee it charges members by 15 per cent. The biggest driver of this has been getting tough on manager fees.
“We have been very persistent in negotiating more competitive fees from our fund managers, custodian and asset consultants,” Russell says. “We do not accept that fund managers cannot negotiate lower fees for particular clients. We have redeemed investments – substantial amounts – from fund managers who have been unwilling
to reduce their fees. We will do so again if required.
“This approach, combined with regular fee reductions from our collectively owned manager, IFM Investors, has reduced our investment management costs by more than 15 per cent.”
Lights, camera, action
Media Super, like most institutional investors at the moment, is looking for innovative ways to source returns, given the outlook for low interest rates, potentially sideways equity markets and negative bond markets.
“We can’t really put any more money into infrastructure and property, because there is a limit to how much we can put in illiquid unlisted,” Russell says.
The fund has found it can generate returns in one of the sectors that employs many of its members by pumping money into local film and television productions.
Through specialist fund manager Fulcrum Media Finance, Media Super loans much-needed cash during the production phase of TV shows and films, which is then paid back from a tax rebate that the filming company can claim from the Australian Taxation Office once production is finished.Producers pay interest on the loan, which provides the return for Media Super.
Since its launch in 2010, the fund has invested in 70-plus projects that have been completed – with zero defaults – and has returned 6.8 per cent a year.
Feature films financed include Lion – which was nominated for six Academy Awards – The Dressmaker, The Hunter, The Daughter, Holding the Man, The Railway Man, Last Cab to Darwin, The Rover, Drift and The Turning.
Australian television programs to receive funding from Media Super include: The Gods of Wheat Street, Cleverman, Miss Fisher’s Murder Mysteries, The Secret River, Rake, and Upper Middle Bogan.
The Commonwealth Government also has a tax incentive scheme for research and development. Leveraging its film finance experience, Media Super has created a new $30 million revolving fund to provide short-term cashflow loans for companies involved in research and development.
“It’s a good thing to do to support R&D in the country, but we are in it to make money, as we have to be, and we expect to get a higher return than the film fund for this one,” Russell says.
Looking to the future
Such diversified sources of returns will be highly sought after in the years to come. Media Super has decided to stick with its return objective of Consumer Price Index +3.5 per cent, at a time when many other funds are revising their targets because of historically low interest rates, low inflation and difficulty to generate reasonably high returns.
“The fact is we still are long-term investors and we should take a 10-year view, not a ‘how are things at the moment’ view. In the next 12 months, interest rates could be up by a hundred basis points or more; things may well change,” Russell says.
At its upcoming meeting in June 2017, the Media Super board will review its current executive structure and investment management strategy.
The decision to cut the CIO role is regularly assessed. In May 2015, Russell recruited then ME Bank head of treasury sales Justin Nunan to come on board as head of investments. His role is focused on implementation. In February 2016,
the investment committee function was once again relegated to a sub-committee of the board.
Russell says there are “no current plans” to reintroduce a dedicated CIO. Chair Noonan says the “welcome turnaround” has reassured the board the fund’s current approach is working, while noting that, longer term, the directors remain “open to ideas”.
Media Super is recruiting for a general manager of communications and marketing, which Noonan hopes will strengthen the executive team and extend succession planning options, although Russell says he has no current plans to give up the top job.
“Having said that, CEOs do need to have a good sense of when it’s time to give someone else a shot at pursuing the fund’s strategy; I hope that I do,” Russell says.
For the moment, there is plenty of work left to do. With the fund in improved shape, Russell’s next task is to pursue growth by enticing some of the biggest employers in the media industry into rolling in their corporate funds, or nominating Media Super as the preferred default fund for their workers.