New Cbus CEO Justin Arter says pursuing new mergers to massively increase scale will be a priority for the fund under his leadership, and he is “unashamedly” aiming to bulk up the fund well beyond $100 billion in size to cement its future as a “serious player” in Australia’s consolidating superannuation system.
When asked what he wants to change at Cbus, the lawyer originally hailing from Melbourne praised the fund’s investment strategy to date and said there wasn’t much to change or tinker with. But having been involved with several mergers, notably the 2003 merger of Goldman Sachs and JBWere which saw him become head of institutional equities in the new entity, he cited this skillset as crucial to his new role.
“I’ve been involved in mergers a couple of times in the past. They’re time consuming but can be very beneficial for members or shareholders,” Arter tells Investment Magazine.
While one of the larger funds in Australia, Cbus–with around $54 billion of funds under management as of June 2020–is starting to look decidedly small beside the likes of Australian Super and Aware, he admits. And while predicting how the superannuation landscape will look in five or ten years is hard, he says he suspects only around half a dozen funds over $100 billion in size will remain. He wants Cbus to be one of those funds.
“I don’t know exactly what the right size is, but something well north of $100 billion is where you need to be to be a serious player that’s continuing to generate value for members on an ongoing basis and accruing the advantages of scale,” Arter says. “Unashamedly that’s the space where we would like to be.”
But it will be important that the merging funds have complementary cultures, he says, saying mergers that look good on paper are best not pursued if the cultures are too disparate.
“When we merged JBWere and Goldman, we recognised the need to merge to prosper and survive,” Arter says. “There were a number of suitors other than Goldman who presented, but we realised culturally they weren’t right. The same learnings apply here. There could be entities that appear as merger propositions but culturally just will not fit. And certainly in my experience I’ve found if that’s the case, the merger activity can be difficult and best avoided.”
Cbus is currently working on a merger plan with $6.1 billion Media Super – the superannuation fund for the media, arts, entertainment and printing industries – scheduled to be completed late this year.
The plan is to integrate investment, administration and operations while retaining both brands. Arter said the two funds had similar cultures despite having different cohorts as their core membership base. Both want strong investment outcomes in the built economy, and both invest in asset classes that resonate with their members.
“We are very keen, should the merger go ahead, to preserve their brand which is important because their folks have different needs…and accrue further advantages of scale,” Arter said.
Relishing the fight
A lawyer originally from Melbourne, Arter climbed the ranks at JBWere in the 1990s as an outspoken analyst, eventually returning to Australia at the end of the noughties to settle things down as head of the state government-owned Victorian Funds Management Corporation after a storm of controversies around underperformance, high-level departures and controversial executive bonuses.
Back in Australia again since 2018 after two-and-a-half years in London as BlackRock’s Head of Institutional Business for the UK, Middle East and Africa, hee arrives in the industry at a time of rising competition from retail entities, with IOOF buying NAB’s MLC assets and, of course, Vanguard set to directly enter the sector. Competition will be stiff, he says.
“When I was at Blackrock, Vanguard was your head-to-head competitor most days,” Arter says. “They are a very good company that do a really good job. We took them very seriously.
“[At Cbus] we have to have our value proposition to our people really sharp, and all of our member communications and our brand have to be very sharp. There’s no scope to be resting on your laurels when serious entrants like Vanguard are scoping the Australian market.”
Arter says he has been surprised at the level of media coverage superannuation gets. He relishes arguments over how the system should be run as long as they are evidence based and free from left- or right-wing ideology.
He has called on the Australian government to “stick with the program” and continue with legislated increases to the superannuation guarantee, arguing it is more important than ever to replenish retirement savings after the early release scheme drew tens of billions of dollars from the system.
He says the federal government’s proposed new performance tests in their current form threaten to have a chilling effect on investments in long-term infrastructure and property, but remains hopeful that consultation will find a solution that the industry can agree on.
“We are in the top quartile if not the top quintile in terms of performance, and we look at these things with concern, but we speak from a position of strength to say these benchmarks look a bit weird,” Arter says. “You don’t want to dissuade investors from investing in the built economy for fear of falling afoul of the index.”
And when asked if there should be a reduced role for active management, he replies: “Oh my goodness, no.”
“If we look at the alpha that this fund and other leading funds generated last year, it is fair to say that hundreds and hundreds of millions of dollars of value was captured through the active teams, particularly with the internal teams we’ve got here.
“Take our global equities strategy. It has outperformed in the past year or two and returned about 19.5 per cent compared to its benchmark. That’s an incredible amount of alpha to have captured and passed through to members, and you just don’t get that with passive.”
Protecting group insurance
He also defends group insurance, calling it a crucial benefit superannuation funds can provide to their members alongside financial advice. TPD and death cover is particularly important to Cbus’s core cohort of construction workers who are in a hazardous occupation, he says, and simply isn’t available outside superannuation funds.
“It’s not obtainable on an individual basis at any price,” Arter says. “It’s only there if you can pool risk with others, and we can do that pooling being a large entity with three quarters of a million members. So to pull that out, hold on, that’s not a good plan.”
“Stapling” specific funds to members could leave vulnerable young workers in construction without cover, he says. If their first fund doesn’t have adequate insurance cover, they could find themselves in a dire situation if an accident occurs after they have changed jobs.
“Unfortunately what happens is when people join the workforce, they are young and oblivious to what superannuation is,” Arter says. “Eighty per cent of our workers are what we would call second timers–second time in employment, and it’s the second super fund they might join.”
It’s still early days in the new role, and Arter says he is looking forward to getting on with it on the “buy side” after a long sting on the “sell side” at Blackrock and Goldman. Australia’s superannuation system is widely admired overseas, he says.
“Having lived in Australia it’s only looking back from the other side of the world you say, wow, to have set up this system 35 years ago with compulsion, preservation and universality as key touchstones, that was a cool and very brave thing for Keating to do together with organised labour groups and employers. Now all these countries are saying, ‘We wish we had done that, too.’ It’s only through 35 years of compulsory inflows and compounding investment returns that it has become a massive system now.”
The position at Cbus was “enormously attractive” as it gave him a chance to bring his experience in commercial enterprise to the industry superannuation sector. Working for Cbus, with its powerful brand and connection with its members, was an opportunity to lead teams that are motivated by a higher purpose beyond money alone.
And it was good to be working for a fund a little smaller than Blackrock, which has around US$7.8 trillion of assets under management.
“With due respect to my jobs in the past, it’s hard as country head in Australia to make a material difference to Blackrock, it’s just so gigantic,” Arter says. “Here at Cbus with this executive team, we can make difference, we can move the needle.”
