In 2015 I wrote “the CIO could well be the toughest role in superannuation…they need to excel in investment management, people leadership, stakeholder and communications skills and deal with increasing complexity”. Like my recent “future CEO” article, I am reviewing the CIO over the next decade. The path of the CIO looks steeper than the CEO’s.

In my CEO article we covered the 4Cs driving super funds – competition, complexity, culture and clarity along with community expectations. For my CIO future gaze, I sought feedback from many CIOs using the 4R’s – regulation, return, risk and reputation.

Common challenges included: developing a diverse team of experts being critical; dealing with change and driving innovation; balancing often flawed regulation while integrating ESG with long term, member benefits; and, investment skills will lessen in importance while communications skills will strengthen to deal with wider community engagement, as super funds become economically dominant. Our CIO will need orchestral conducting skills.

The 4Rs- regulation, returns, risk and reputation.

Regulation No surprise the biggest concern here is the YFYS rules should they remain unchanged. Many CIOs worry the only rational result will be benchmark hugging leading to more homogeneity. To do otherwise and risk underperformance has severe fund consequences.

Some larger funds might take a more optimistic view, looking to a more flexible, total portfolio approach that may enable them to satisfy APRA and still deliver optimally for members. Either way, the goals posts are changing for CIOs as they seek to outperform their fund’s and APRA’s benchmarks. Come up short, straight to the sin bin and don’t collect $200! Let’s hope improvements prevail over the next decade.

Returns APRA’s so called ‘bright line’ measure, doesn’t offer much that is bright from a CIO’s perspective. They already orchestrate their way across their funds’ and relative peer performances and now we have the YFYS hurdle.

For cost reasons funds are expecting to increase passive allocations, accelerating this massive post GFC trend. More expensive, real and illiquid assets will be reduced. This ‘cost first’ approach is a safer option for trustees as they balance cost certainty vs higher return, higher cost options.

Will we see funds differentiate via choosing another investment path or will many industry and retail funds look the same? Will they merge? Does competition suffer?

Risk Our CIO now has ‘portfolio regulatory’ risk added to their plate. We will see CIOs torn between traditional risk/return measures and conforming to this new regulatory norm.

With SAA now king we will see DAA likely deposed and TAA banished! CIOs are quick learners. Short-term tilting is existentially dangerous to their fund and themselves. Risk isn’t banished – it is likely increased inside each asset class via leverage, credit quality, and co-investments.

More funds will appoint former CIOs to investment committees and boards thereby upgrading investment governance and potential differentiation opportunities.

Reputation The greater complexity and community expectations required of super funds, will push the CIOs to up their communications game. CIOs will need to regularly connect their ESG/SDG investment principles with the Sole Purpose Test and with members’ high expectations. Greenwashing won’t be tolerated.

Considering the mutual culture of ‘profit for member’ funds will they demutualize or find other ways to raise capital along the same path of their 20th century mutual cousins? A warning sign will be the spinning off their asset management units or managing assets for 3rd parties. The impacts on reputation and mission will need to closely assessed.

Our future CIO’s mission

Will be to deliver the following: absolute returns that are peer and benchmark relative, and ‘bright line’ approved; continuously reduce fees; internalize investments while building a competitive team; a winning ESG program; and, strongly communicate to all stakeholders. Add in mergers requiring integrating investments, teams, and ICs. Don’t forget to make sure they are well rewarded for running an increasingly complex asset management business. While many CIOs are up for this mission some worry about the constraints of a super fund versus other investment opportunities locally and offshore. Yes, over regulation will drive a brain drain which will not serve members best interests.

The future investment team

With increased complexity, a more diverse, tech and data savvy, and ESG literate team will emerge. As with many large asset managers, the investment COO will arrive to allow the CIO to focus on their fiduciary role and delivering investment outcomes.

For superannuation CIOs, agility will be their strength. Will they have a steeper path than the CEOs? Likely. Just as we need our teenagers to get off their social media, our CIOs need to get off their data terminals! Time is best spent leading their team of expert players much like an orchestra conductor. Maestra over to you!

Michael Swinsburg is managing partner, Australia at Alexander Hughes Executive Search & Leadership Advisory

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