Talent acquisition will remain one of the great challenges for the superannuation industry as it continues to grow quickly in size and sophistication, but there are some natural advantages funds can tap into as a global talent pool begins to open up to the local industry, a partner at consulting firm McKinsey has pointed out.
As the footprint of the super industry broadens, with a handful of funds approaching assets of $200 billion and advancing plans to diversity geographies and deepen inhouse asset class expertise, funds’ ability to attract talent by leveraging their size and sophistication will be enhanced, said Eser Keskiner, the Sydney-based McKinsey & Company partner and private equity and institutional investor co-lead.
“You are already seeing international folk coming in [to the Australian superannuation industry]. There have been international professionals that have joined some of these larger funds… Also there are a lot of Aussie expats that are looking to come back [to Australia],” Keskiner said in a recent interview with Investment Magazine.
“I think this [flow of talent to Australia] is part of the Australian superannuation industry truly entering the global competition… that’s competition not just for assets and for investment opportunities, but it’s also competition for talent,” he said.
In addition to repatriation and attraction of new talent from overseas, local funds will also be able to increasingly leverage the unique value proposition associated with being an asset owner in the same way pension plans overseas have done.
“I would say in Australia we are still at a relatively early stage in that transition [to being of significant size and complexity]… pension funds globally have found there is a significant value proposition associated with being an asset owner,” he said.
“So what we hear when we talk to the HR teams in these organizations is you don’t necessarily have to match like-for-like the salaries that people will be getting at Wall Street investment firms, so we do see institutional investors having a having the opportunity to differentiate their value proposition beyond just the financial means,” said Keskiner, who has see-through into pension funds, sovereign wealth funds and also endowments across geographies including in Canada, Europe, Middle East and Asia including Australia.
Scale benefits top of mind
Executives and boards within Australia’s largest funds are focused on identifying and extracting benefits from the increased scale they are achieving – either organically or through consolidation – while also defining the frameworks that will inform their next five years”, Keskiner said
The discussion about whether to start internalising investment operations is a pressing one for the country’s largest funds, Keskiner added. He said the decision to bring more of the investment function in house would be unique to each fund and that size may not necessarily translate to an internalisation program.
“It is very, very hard to generalise when we talk about things like internalisation. Yes, we have shown mathematically that from a net returns perspective internalising in asset classes like private equity and infrastructure over time has tended to deliver higher net returns because of the much lower fee that you have. But having said that, there are some very, very good top-notch institutional investors globally that have invested through external managers successfully,” Keskiner said, highlighting the $US31.2 billion Yale Endowment as a “poster child” for maintaining an external manager investment strategy.
“The key thing when thinking about asset allocation and your implementation style is the congruence of the different components of your strategy and how well they fit because you can be a top notch investor with fantastic returns by going totally external,” he said.
Keskiner also acknowledged that many funds that reach a certain size will want to explore the internalisation path which he said would include considering the cost of building an in house team, attracting top investors in a given asset class and scoping out the annual ongoing costs associated with that. He also noted that funds will also maintain hybrid models where they have direct investment teams in house alongside investment partnerships that can give them access to certain geographies and types of transitions they might not be able to get with an internal team.
“The more liquid asset classes tend to be the ones that are relatively easier to internalise; whereas, for example, if you were to think about infrastructure or private equity, access to a good international deal flow is not as straightforward and funds may need to establish relationships to get access to that,” he described.
Many Australian funds are spending a lot of time at the moment thinking about cost, scale and negotiating power, Keskiner summarised.
And while there will be obvious benefits of scale and consolidation from funds bringing together things like back offices and administrations platforms in terms of average administrative fee per member or per dollar of funds under management, Keskiner added that it’s less straightforward to achieve savings on the investment front.
“Obviously there will be some benefits to scale in terms of your negotiating power with the managers you’re using, but the real benefit starts coming in if you’re able to start using your larger scale to change your implementation style,” he said, highlighting that implementation style in this context means whether a fund is investing with external managers or whether its starting up an internal direct investment team.
“Just because you have scale doesn’t mean that your investment costs will automatically come down. It requires conscious strategic decisions around the implementation style to get most of the benefit,” he said.