Australia’s globally innovative superannuation system has helped give the average Australian two more years of retirement income security than pension systems elsewhere, said New York-based asset manager, Mercer’s president, investments and retirement, Rich Nuzum.
Another recent innovation, APRA’s “globally unique” MySuper Product performance test, has steered benchmarking away from peer groups, which is something other countries should follow, he maintained.
“In absolute terms, this is an improvement for the Australian industry; in relative terms it is another thing that positions Australia at the forefront of global governance,’’ he said.
“I wish other countries had a uniform standard and measured implementation skill and I want to give credit to industry here for the performance test, even as I point to some of the subtler issues with it, where there might be room for further improvement.”
Shifting risk profile
As the risk profile shifts and super fund chief investment officers look beyond equities and bonds to alternative assets to drive performance, the test would be counterintuitive, Nuzum warned.
“[The test] is not risk-adjusted, I know the industry’s unhappy about that, and then it does discourage and implicitly assumes that the benchmark index providers are smarter than the asset owners, and the investment management community,’’ he said.
“So the danger is in applying the performance test as the only criteria. If somebody does that, you’re going to penalize products that are weighted towards future success and disruptive innovation, and reward products that were maybe overweight in past success.”
Softer equity returns
Nuzum said a shift towards softer returns in equities and low interest rates means funds need to “get more bang for the buck” for their risk by lifting their allocation in alternative investments: private equity, infrastructure and venture capital.
“The past 10 years has been really good in terms of account balance accumulation but the next 10 years, the next 20 years is going to be hard,” he said.
“(Funds) need to better diversify their risk… anybody who looks forward and thinks… we want to deliver a CPI plus three per cent to our members on this particular option, the weight in alternatives should go up,’’ Nuzum said.
Mercer, has worked in private markets for 30 years, employing more than 240 alternatives professionals across 25 offices globally and maintains more than $US26 billion in alternatives assets under management and $US164 billion in alternatives assets under advisement (as at the end of the 2021 financial year).
Nuzum said a global trend for pension and sovereign funds is to internalise alternative investment management and build in-house teams which risks being “the dumb money at the poker table” because of the difficulty in benchmarking.
“If you pick a bad active core stock manager, they’re probably going to underperform benchmarking your peers, but not by that much. If you pick a bad private equity manager or a bad infrastructure investment manager, you’re going to get a disastrous result against your peers,’’ Nuzum said.
“In the private markets, if you’re not represented by the most skilled people, you’re providing liquidity to people with inside information, you know, private markets, it’s all nonpublic information. So caveat emptor.
“You’re sitting across the table from other sophisticated counterparties whether it’s a strategic owner or other GPs [general partners] and if your representatives… are not as smart as… that other team, you’re going to lose money.’’
Risk of hubris
There was also the risk of hubris among in-house managers who can “pull the trigger” on tens of billions in assets and be treated like “Roman emperors”, he said.
“Your jokes are really funny, you’re very charismatic, it’s all eyes on you, everything you say is met with rapt attention, it can go to your head quickly. I’ve seen it happen over and over to people.’’
He said the general partners community knows the value of diversity and deliberately structures decision making to involve active debate as opposed to the possibility of hierarchical decision-making and muted debate on in-house asset trading decisions.
Nuzum, who contributed to a 2020 white paper for the World Economic Forum on systemic risks to the global economy which included climate change, water security, geopolitics, technological disruption, demographics and low, long-term real interest rates added digital power to the list.
He identified a “sub-risk” to the global economy as the rise of large technology firms which were currently clashing with governments over privacy and monopolies on markets.
Nuzum said US, European and Chinese government regulation of big dot coms, such as Meta, Google and China’s Alibaba, and their monopoly power as well as their use of individual data or privacy would provide some opportunities as they try to prevent them forming large monopolies.
“What do you do about that monopoly? Economic power is so pronounced in those organizations. That’s something we’re dealing with in the US and Europe, and Australia, and China’s dealing with it in a different way,’’ Nuzum said.
He expects investment opportunities to emerge once more clarity is known about government policies towards these tech giants.