Mine Super’s Seamus Collins said superannuation funds cannot just rely on investment strategy to beat the market, they also need to up their spend on investment operations.
The chief investment officer warned that poor implementation can eradicate the gains of smart investment decisions and make a bad calls much worse.
Collins said a well-run operations division is critical since, as the industry grows in size and scale, cash-leakage is also intensifying.
Implementation leakage comes from unintended exposures, fees and hidden charges which are a drag on returns.
“Large super funds cannot rely on always getting the investment decision right,” said Collins ahead of the Investment Magazine Investment Operations conference in February. “There are fewer opportunities for funds to consistently outperform their rivals through employing a particular investment strategy.”
The CIO said there are two ways to beat the market – having the right investment strategy or investing in operations. “The first is demonstrably extremely challenging to do,” he said. “There are a surprisingly low proportion of investment strategists who consistently get allocation, tilts and manager appointments right.”
He said ultimately, in an uncertain environment where returns are lower, a good implementation structure will allow funds to notch up superior returns. “At scale, over time, as you ride through the peaks and troughs of the strategy, investing and prioritising operations will allow you to remain in the upper echelons of performance outcomes.”
Collins said by focussing on strategy – rather than operations over the long-term – superannuation funds are forced to rely on achieving a high number of correct calls which leaves them vulnerable.
On the other hand, he said good implementation processes can cushion funds during those periods when the headline strategy is not doing as well.
“There is still a view that getting the headline calls right is more important and by and large that’s true,” he added. “It is true that if you call them right, execution becomes less important and the effects of operation efficiencies are overwhelmed by the impact of the overarching investment strategy.” However, he warned that funds should realise they can’t always time the market over the long-term, which is where effective implementation starts to underpin consistent performance.
The prudential regulator’s heatmaps have sharpened the superannuation industry’s focus on herding and peer underperformance which Collins believes will lead to less innovation. He said as peer risk becomes a bigger issue, implementation could become a differentiator.
“If strategies become more aligned in terms of asset allocation, type of manager and higher passive allocations, then innovation and outperformance in the implementation space become more significant,’ he said.
Peter Curtis, AustralianSuper’s group executive finance and operations is also due to speak at the conference in Sydney. He stressed the importance of working closely with custodians to get access to the underlying data quickly so it can be integrated into other applications.
“For us it is really all about seamlessness across the whole process now – and less about handing off or instructing custodians,” he said. “What’s important is how we work across both organisations to ensure we are doing everything efficiently and timely so we can consistently make better decisions.”
Global peers have brought much of the custodian function in-house. However, Curtis questions the value of such a shift given that cost savings are meager.
“Australian Super pays roughly 1 basis point for custodial services or say $10 million,” he said. “It’s very different to paying 30 basis points, on average to an investment manager.
The issue then becomes can I run my model, can I achieve the outcomes I’m after with better data integrated into the system, can I do it myself or can I work in a different way with my provider to get the same outcomes?”
Investment Magazine’s Investment Operations Conference will be held on February 11, 2020 at The Fullerton Hotel, Sydney.
To register, please click here.
