Chris West wants to improve stakeholder engagement by explaining the rationale behind investment decisions. As CIO of WA Super, he has been instrumental in setting up a new scorecard.
At WA Super, members are at the heart of every decision the investment team makes. In the realm of managing and making investments, it’s not enough anymore just to consider managing returns at a reasonable cost and risk.
WA Super general manager of investments Chris West says communicating to members the ‘why’ behind investment decisions is now essential.
This ‘moment of truth’ has spurred West and his team to develop a new portfolio analysis technique. It is designed to boost WA Super’s stakeholder engagement by explaining investment rationale to the trustee board, employers, financial advisers and, ultimately, members.
For the last year, WA Super and its asset consultant, Willis Towers Watson, have been developing a portfolio quality scorecard that includes a range of risk and return measures, the likelihood of success, and portfolio resilience measures.
West says this type of digestible information will also drive investment process efficiency and sharpen the focus on the next best idea, or area of most value, for the portfolio. WA Super’s version of total portfolio thinking is to have a clear and simple way of comparing potential investment decisions across different asset classes and opportunities with clear and prioritised metrics.
“We believe it’s a powerful way of articulating our investment process and decision-making,” he says. “It means when we come back to our trustee board we can say this is why we prioritised these things – this is why we made the decision.
“The difference in thinking about it [the total-portfolio approach] through a scorecard is that it is then used for stakeholder engagement and buy-in.”
West, who has been at WA Super for about five years and in the executive role for two, intends to use the scorecard to explain the fund’s investment approach to stakeholders this year.
The scorecard ensures that all stakeholders are on the same page in terms of knowing where the fund is headed, since it will provide the hard evidence to support the fund’s narrative.
One of its aims is to help reassure members during periods of volatility of performance.
“We feel it’s important to be able to explain why we prioritised risk over return, why we emphasised inflation-linked objectives and built diversity rather than focusing on peer relativity.”
To West, the development of the scorecard is also a critical element in engaging staff outside of the investment team and explaining the logic behind investment decisions. He believes investing shouldn’t be viewed as a black box or a closely guarded secret, as ultimately the capital being invested belongs to other people.
He also has a vision of a future in which members could provide feedback on the prioritising of different objectives and portfolio characteristics but that is probably a few years off.
Walking with investors
West believes the role of an investment leader is broader than running a portfolio. As he sees it, the role should be seen in the context of the people the super fund is serving.
He is adamant, too, that staying relevant means the investment team shouldn’t sit in an ivory tower but, rather, should spend time in conversations with member-facing staff, employer relationship managers, financial advisers and members.
As an investment specialist, he says trying to understand the members’ psyche as best as you can is crucial in times when they may start comparing their super returns to the top super growth fund returns reported by the media or when they become fearful that market volatility has wiped out their returns.
West believes members have short memories on what volatility looks like – especially when illiquidity has crept into certain markets. That can frighten people if their investment hits an air pocket.
“Clients do get spooked, which is why it’s important to be able to articulate a fund’s end strategy in a way that reassures them,” he says. “We have been communicating our expectations of lower forward-looking returns, higher downside risk and more uncertainty for a few years now.”
Ready for uncertainty
The focus of most super funds has increasingly stretched into real assets to leverage yield into their portfolios at a time when volatility increases and returns are lower than they used to be.
In the last three years, West and his team have been building up a more diverse portfolio, as they believed certain markets were overpriced and economic conditions were going to become tougher and more uncertain.
Accordingly, in 2016, WA Super reaffirmed to members a lowering of return objectives.
Like many of its peers, WA Super has increased its allocation to real and illiquid assets and diversified alternatives to the point of building a diverse and robust portfolio.
Consequently, West is not looking to make any more changes to the fund’s investment team, external managers or investment strategy in advance of choppy markets and greater uncertainty, having already positioned the fund for those realities.
In fact, he concedes he might have moved too early.
Asked if anything keeps him awake at night, West says his biggest worry is that the diversity that has been built into portfolio may fail to perform when it is needed most. There have been periods before in markets when everything becomes correlated or diversifying strategies don’t diversify.
Neither does he think investing in real assets and alternatives is a panacea.
Adding a return stream that is positive but less correlated to the economy – and to the fund’s traditional asset allocation – is no easy task.
“You need to be really careful that you understand what the underlying risk/return drivers are because, like all investment classes, real assets have a range of different characteristics,” West says.
The trouble is, some illiquid assets have high levels of underlying sensitivity to the economic cycle.
Illiquid assets with long-duration cash flows are tied to bonds; if assets have an underlying sensitivity to GDP, they are tied to equities.
The investment chief has a strong view on the importance of being realistic about the value of unlisted assets and does not pretend that if equivalent listed markets sell off, the value of the funds’ unlisted assets shouldn’t alter. The fund, therefore, has a clear and objective approach to impairing unlisted assets when listed markets fall sharply, which West believes is the right thing to do for members.
As markets have become increasingly complex – whether from the speed of execution of trade, the number of market participants, differences in the way capital flows, or the degrees of interconnectivity – West has had less conviction about the predictability of the path of returns.
“It’s hard to fully understand what will happen and how markets will react to what happens,” he said. “We don’t have a crystal ball, we don’t know what the future holds, we can accept we don’t know what the structure of markets will be in the future and we don’t know what type of companies will be successful, because the rate of change is so fast.
“We should be humble enough to know that we don’t have all the answers.”
Be clear about strengths
West is very focused on employing all the advantages of being a smaller fund and neutralising any weaknesses. He says WA Super won’t be successful if the Perth-based fund simply replicates a much larger investor, as it would do so with less efficiency at a higher cost.
So, his team must focus on things that align with WA Super’s competitive strengths, such as where the fund is capital constrained, and being able to move quickly with a less-restricted governance process.
An idea in recent years has been healthcare real estate, where opportunities are relatively small and can provide solid risk-adjusted returns.
He also highlights the fund’s approach to working with major service providers. WA Super positions itself as a pilot client with asset consultant Willis Towers Watson and custodian J.P. Morgan. When those firms roll out new capabilities, WA Super gains a slight edge by adopting them early in exchange for providing testing feedback.
Collaboration as custodians of the future
West is appreciative of the support and mentorship he has received in his role from a number of other CIOs, along with leaders in the funds management and asset consulting community.
It is through these relationships that he has become increasingly passionate about leveraging collaboration between asset owners for the greater good. He believes too much in resources is wasted on competition, when it could be used more productively for a better future for all society.
From where he sits, there is everything to gain and nothing to lose if funds collaborate more to tackle some of the societal issues.
West has been working with Curtin University on research into improving the inclusiveness of the investment industry through researching the concept of ‘Inclusive Alpha’ – the idea that an investor at a certain career stage will, on average, be more skilful the more hurdles they have had to overcome to reach that career stage.
He reaffirms his open invite to all peers with an interest in collaborating on a fairer and more inclusive industry, believing that by working together, asset owners, as the allocators of capital, can be leaders to a more fair and inclusive world.
“We have a fantastic opportunity as the stewards of capital to improve society as a whole and if we dream big enough we can do amazing things if we focus on solving problems,” West says.
He also argues that impact investing will be adopted as a mainstream approach by asset owners. “We are slowly heading there but in the future, for the organisations that thrive and prosper, their purpose will involve treating people fairly and decently and being good stewards of our planet.
It will be a given,” West says, “not an issue for debate.