A parliamentary inquiry into stock market ownership concentration by superannuation funds risks blurring the concepts of “concentration” and “collusion” and could ultimately limit funds’ ability to act in their members’ best interests, according to Luke Barrett, general counsel at $100bn industry fund UniSuper.
Liberal MP and house economics committee chairman Tim Wilson used a public hearing on Wednesday to question whether super funds act in lockstep to wield influence over listed companies. The hearing featured a rebuttal by Australian Council of Superannuation Investors (ACSI) chief executive Louise Davidson who rejected the suggestion that the organisation’s members collaborate on how to vote at company meetings.
As Australia’s $3.3 trillion superannuation sector grows, funds are expected to increase their ownership of Australian listed equities–along with private assets and overseas holdings–as they search widely for investment opportunities, and the House of Representatives economics committee inquiry is looking at the impact this could have on competition and consumer outcomes.
Barrett said collusion–or covertly acting in association with other actors in the market–could potentially put a fund “on the bench” and unable to trade or vote on transactions that matter to its holdings and this is surely something funds would see as going against their best interests.
His comments were part of a broader conversation on the topic as part of on Investment Magazine’s ‘Future of Super’ podcast series produced in partnership with AIA Australia.
Listen to the episode via the player below or search the series wherever you listen to podcasts.
UniSuper, where Barrett is general counsel, was the 15 per cent owner of Sydney Airport at the time a consortium of investors including IFM Investors, QSuper and Global Infrastructure Partners made a record $30 billion enterprise value take-private bid for Sydney Airport in July this year.
Growing equity market ownership concentration
On the issue of whether growing equity market ownership concentration is appropriate or not, it is important to look at the alternatives, Barrett said. Funds needed to invest more as Australians’ retirement savings grew, and limiting how much a fund could own in a particular company would potentially force funds to invest in their second or third preference due to being blocked from their first, he said.
“I think it’s quite ironic that in the same era when we’re talking about acting in the best financial interest of members, there’s even this conversation which seems to be leading down a path where someone’s going to tell super funds that they can’t invest in their first preference when it comes to investment decisions,” Barrett said.
If funds are limited in their holdings, other institutional investors including foreign sovereign wealth funds will likely take up the slack, he said, and these entities could have far greater ownership concentration than Australian funds. The member-first nature of Australian superannuation funds arguably prevents concentration even when one fund owns a large stake in a company, he said.
“No one has a significant holding in a superannuation fund,” Barrett said. “You don’t have anyone having… a 5 per cent or 10 per cent ownership stake in a super fund.”
On the related issue of how super funds execute their proxy voting at company AGMs, Barrett pointed to Vanguard founder John Bogle’s 2006 book ‘The Battle for the Soul of Capitalism’ which argued a significant problem at the time in the United States was institutional investors owning greater proportions of share registers, but not exercising their rights of ownership.
The scope of Wilson’s parliamentary inquiry will also include concentration implications of giant passive funds; Vanguard Australia also participated in Wednesday’s hearing.
“When we have strong managers, weak directors, and passive owners, don’t be surprised when the looting begins,” Bogle famously wrote. [Bogle made it clear he had “come across” this quote, and it wasn’t his words].
Australian superannuation funds are “the exact opposite of that,” Barrett said. “They are not passive owners. They haven’t taken their eyes off the road. They haven’t taken their hands off the steering wheel. They exercise their rights of ownership and they’re not conflicted because of the Sole Purpose Test.”
Australian funds’ current proxy voting practices are themselves a response to concerns two decades ago that funds weren’t doing enough on boards to exercise their rights of ownership, he said.
David Gallagher, Visiting Fellow at the RoZetta Institute and Managing Director at Sandstone Capital, said funds’ growing internal teams made them increasingly capable of understanding the issues facing companies, leading them to gradually rely less on advice from proxy firms that provide recommendations to asset owners around how to vote at AGMs.
But proxy firms’ recommendations will still be important in the process, and it is important that trustees feel the freedom not to follow their advice, he said.
Regarding the parliamentary inquiry into concentration of ownership by superannuation funds, and potential collusion, Gallagher said he hoped the review was “not going to be partisan” and ensure the best interests of super fund members are looked after.
Empirical research shows governance oversight is an important input in holding boards of directors and their management to account, Gallagher said, and fiduciaries should indeed be voting their shares.
“Super funds these days are highly sophisticated investors,” Gallagher said. “They have mountains of money that they’re responsible for, a lot of them run internal teams, they are across all the issues, they hire good people.
“I think there’s a lot of ideology in this debate and certainly I think it’s unnecessary. It’s one thing to question an issue and say: ‘Here’s a problem because the facts say this.’ But I don’t see that there is a problem at this present time.”