Executives at most funds will need to think differently about their investment and operational strategies now the performance test is in play, Vasyl Nair, Mine Super’s current and interim chief executive has said.
After scraping through the government’s new benchmark hurdle without a strike – despite leading into the test deadline with a lifecycle MySuper product meaningfully off the pace based on APRA 2020 data – Nair has reflected on the changes he and other executives will need to make to their thinking in a pre and post-performance test environment.
Critically for smaller and medium sized funds, many of the organic growth initiatives that might have been pursued in a pre-Your Future, Your Super environment will find themselves on the cutting room floor, Nair explained.
Meanwhile investment strategies will be simplified with less time and money spent on overlays, asset class specific protection and non-vanilla alternatives, he said.
While the $13 billion, 57,000 member fund might have in the past had an organic roadmap to grow to $20 billion and $30 billion over a period of time, the focus for Mine Super and the many other funds of similar size will be more on outcomes to the existing member base, Nair noted.
“I would suggest that the outcome of an expenditure focus is less community engagement activities, less sponsorship, less marketing and probably less financial advice as well. I think you tend to return to core,” he said.
“So rather than trading off your current member outcomes in order to get more members to achieve scale, really, you become quite laser focused on the membership that you currently have which I would say is the case for a number of funds below the $30 billion mark. Very few I would suggest with respect to their boards and CEOs and their executive teams are growth focused now outside of the merger discussions they might be having,” Nair told Investment Magazine.
Death knell of some strategies
On the investment side, funds will need to simplify and refocus on the “big levers” of performance, Seamus Collins (pictured below), Mine chief investment officer, highlighted.
“What’s your equity appetite? What’s your currency strategy? How much illiquid assets or privates do you hold? And how much duration you have in the portfolio? Those four things essentially drive your outcomes at a very simple level and we just made sure we wanted to get those right,” Collins said.
As part of a rearrangement of the fund’s strategic investment process that began in 2019 when Collins arrived at the fund, he said the APRA heatmaps guidance and subsequently the performance test was pointing the direction firmly towards simplification.
“We essentially felt that we needed to get back to foundation qualities in our products, and that we potentially had a had a complexity bias, which is something I’d say you’d probably see in a lot of in investment teams. And we looked to simplify that and those simplifications really helped us with performance [relative to the SAA benchmark],” Collins explained.
Specifically, Collins highlighted downside overlays including downside protected equities strategies like ‘put’ strategies and other hedge fund-style alternatives to fixed income as important exclusions in a post performance test world.
“Once Your Future, Your Super came out, we just saw that as really the death knell for those strategies, because their bond like returns, which the way the benchmark was then structured to compare against a 50/50 equity/bond portfolio, you can’t attain equity-like returns in a raging bull market with products that are that are designed to be bond like in risk profile,” Collins highlighted.
“I think there are strategies that really are now going to be really, really tough to prosecute because they’re just treated almost punitively under the benchmark test,” he said.
New lease of life
The pathway for Mine is perhaps quite different today than it might have been if the fund had found it’s way onto the list of 13 that failed the performance benchmark on Tuesday, Nair admitted.
“We have a luxury position in that we have not got a strike and it’s nice to say we are not one of the 13 funds. I know there are very good funds with very good people who have worked hard for their members who are on that list… but I do believe the legislation is has generally resulted in high quality conversations being had by trustees that with a sharper focus on delivering better member outcomes,” he said.
In light of the challenges on funds to devote time and resources to organic growth in the performance test environment Nadir admits there is “enormous” pressure to merge.
“We are considered a medium sized fund now but we will be a small fund [as other funds grow through acquisition] in less than five years’ time so it’s obvious to me at least we will need to merge to grow and we are in constant discussions,” he said
Nair, who was previously head of strategy and risk at the fund took on the interim CEO position following the departure of the Mine’s group CEO Harry Mitchell last April and he will remain in the interim CEO position at least until June 2022 when a process restarts for a permanent CEO for which he’ll be considered.
“We do believe that scale can deliver benefits for members but it is about the right merger for us and making sure that things line up… not all mergers are equal and there are mergers which can actually be detrimental to members,” he said