Andrew Lill considers himself “very fortunate” to be the first chief investment officer employed by the $57 billion Rest Super fund. Fortunate or not, his hands are certainly full.

After coming in at the tail end of a $3.26 billion member withdrawal due to the government’s emergency release scheme nine months ago, the ex-Morningstar and AMP Capital executive was charged with knitting two investment teams into a cohesive unit while continuing to bring more asset management in-house, as well as gearing the fund’s strategy towards the imminent Your Future, Your Super reform.

Not that he’s complaining. “I’m enjoying the challenge,’ he says during a podcast as part of Investment Magazine’s Market Narratives series.

“This is the time in my particular career where I’m going to sort of bring to bear all the experience that I’ve gathered and gained, and – in conjunction with some of my colleagues and team – put that into place,” he says. “It’s a really critical and exciting kind of time for Rest as it goes into version 2.0 of its evolution.”

Lill was brought in after an investment governance review in 2019 recommended the fund move towards a single CIO responsible for investment strategy, implementation and operations. Fortunately, he says, a lot of the integration work had already been done by the time he came in. “I’ve just been continued to work on that path whereby I’ve been building a whole-of-fund investment management team internally.”

As one of the fastest growing funds in the country – and one that is tipped to be a primary beneficiary from new member stapling rules – it was key for Lill to fill out personnel gaps in the team as a matter of urgency.

“I think that most observers would say that rest is growing quickly,” he says, adding that the roles filled came from investment strategy, asset allocation and equities. “Those were kind the missing pieces in my internal management investment team.”

Throughout the whole-of-fund rebuild, the team was careful to maintain a member-focused lens.

“It’s not just having experts in different sectors, it’s about how the whole packaging of that manufacturing process works towards the product that the end investor or member receives,” he explains. “Service management are areas that I’m going to be to work on and potentially bring new people in.”

Another focus area for Lill has been operational infrastructure. Getting smart investors to work together is highly dependant on technology and data management, he says, but operational infrastructure is an large, fluid area that needs constant attention.

“It’s like a house that needs renovation in that you start by thinking that you’re just going to renovate the bathroom and then the kitchen, but by the time you’ve finished you could have done the whole house.”

The fund’s personnel footprint has more than doubled in the last three years from 150 to 350 staff as more and more functions have been brought in house. While Lill has been responsible for steering this growth since August 2020, he pays tribute to the work of chief executive Vicki Doyle in transforming the fund from one that outsourced most its operations to one with strong internal units in core areas.

More importantly, he believes the fund has a clear path to continue growth at this rate for the next few years.

“As far as the internal investment team, we’ve got great investors primarily in the areas of real assets, unlisted assets, property infrastructure, Australian fixed income and Australian equities, those teams are developed and developing,” he says. “We’ve got sort of critical mass, but we think we can get bigger as the amount of assets that they manage increases.”

SAA Risk in a YFYS world

One of the trickier aspects of Lill’s transformation project at Rest has been implementing a whole-of-fund approach and taking on unique investment risks, while also sticking close enough to its strategic asset allocation parameters to meet the performance metrics embedded in the new YFYS performance test.

Taking the fund away from the traditional SAA approach to bring the right “themes, exposures and risk focus” is manageable, he explains, as long as you stay within sight of the test’s benchmarks.

“You can still do that in the [YFYS) environment, but the degree or the tolerance that you have for taking a portfolio down that path is obviously, in my view, limited because as it stands today, that [YFYS] test is a test of the implementation of your SAA.”

Careful, deliberate development of active risk is crucial, he continues.

“The way that I think about that is to win in this game, you have to be prepared to take risk,” Lill says. “You need to be aware that any decision you take to move an asset allocation or level away from your SAA is effectively at both an opportunity and a risk, and introduces tracking error to the portfolio compared to the features of the benchmark.”

“But we do have a lower tolerance for total portfolio tracking error, so we have to decide which of the investment views [should] be added at an asset allocation level, as a portfolio tilt or at the active stock selection level,” he says. “You need to be very cognizant of your overall portfolio and where your biggest active risk opportunities are.”

The CIO doesn’t feel necessarily compelled to veer the fund’s SAA in new directions, but the freedom to do so – and the ability to manage it with the YFYS framework in mind – will be crucial in uncertain fiscal and regulatory environments.

“I don’t think we anticipate moving from SAA that much. I still think that as investors, we believe generally you set a portfolio for at least a year, maybe three years ahead. But if something changes in the environment, then actually the regulations probably implore you to think about changing your SAA as a way to restructure the portfolio into the opportunities and away from the areas of danger that you now have.”

The defining issue

As the investment leader of a fund with over two million members, Lill is acutely aware that that how he manages broader governance risks like climate change will be significant enough to have impact.

Lill says he wants the fund to be a “system thinker”, one that factors global complexity into the way it operates and invests. For ESG to be more than just a box-ticking exercise, Lill reckons, funds need to not only keep in mind that it’s a moving target, but also work together to set goals and achieve measurable outcomes.

“The whole world of climate change… is probably the biggest challenge that we as investors have experienced in our lifetimes, because the framework is still developing,” he says. “It’s critical to have collaboration across super funds to build that new framework because climate change is actually a collective action problem. We do need the scale of lots and lots of asset owners around the world doing similar things to actually see the impact.”

Ultimately Lill believes that how he manages the ESG challenge, and how successful he is getting the fund’s talent to become ‘system thinkers’, will be the best marker for how well he has performed in the role.

“The thing I’ve been working around is how to bring this sort of new lens to investment teams,” he says. “It’s a tough problem. And I have to say that as CIO it’s probably going define me or define the way that Rest is viewed over the next five or 10 years.”

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.
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