Since Mine Super’s Seamus Collins stepped into the chief investment role last April, the former head of portfolio implementation has focused on boosting returns by generating ‘operational alpha’.
Coming as he did from the investment operations side of the business, Collins views his promotion to investment chief as an opportunity to bring his back office experience to the way he runs the superannuation fund’s front office.
Speaking of the changes since his appointment, the CIO said the growth in sale and complexity of the $11 billion Mine Super fund had not been matched by the supporting infrastructure. As a result he overhauled the fund’s portfolio by simplifying the investment process to gain real clarity on the decisions made by the asset allocation team. He also beefed up the data analytics and quant areas by hiring more staff.
“That resource has been critical because they have rewritten nearly all our implementation tools,” Collins told delegates at Investment Magazine’s Investment Operations Conference last week. “We are still too reliant on worksheets but at least they have been rewritten to minimise human interaction as the data flows through to final reporting and the oversight function.”
Collins said that Mine Super had received a “substantial implementation dividend.” He added that the result of the changes were also achieved by giving the head of portfolio optimisation and risk oversight a real mandate to chase operational alpha, drive improvements and forge a real partnership with the front office.
By improving implementation outcomes in areas like operational cash management, agent lending and transaction costs, Collins expects to pick up between $5 to $10 million annually.
The chief investment officer warned that poor implementation can eradicate the gains of smart investment decisions and make a bad call much worse.
He 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,” he said. conference in February. “There are fewer opportunities for funds to consistently outperform their rivals through employing a particular investment strategy.”
The CIO earlier claimed there were 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.