Australian asset owners have come to the consensus that poor investment governance will cost their portfolio at least to some extent, with 68 per cent saying the return penalty would be as great as 1 per cent per annum or more.
For a 25-year-old worker, the 1 per cent reduction in return could snowball into a 40 per cent (or half a million dollars) loss in accumulated savings over their full working life, just because they had chosen a super fund with poor investment governance.
The findings were revealed in a new survey conducted by Frontier Advisors and KPMG. With inputs from 22 different asset owners collectively managing $800 billion of assets, only 3 per cent said poor investment governance has no impact on their portfolios.
On the other hand, 62 per cent of participants said the return benefits of good investment governance could amount to 0.5 per cent per annum or more, although 8 per cent of respondents said there would be no positive impact.
“The Frontier survey demonstrates a very clear recognition of the potential value derived from, or potential capital eroded by, the gap between well-governed and poorly governed funds,” said KPMG consulting partner Platon Chris.
“This comes from the coalface – the funds themselves. The importance of the implementation of robust investment governance frameworks by asset owners cannot be overstated.”
Complex environment
Regarding the broader environment, almost all (97 per cent) asset owners said investment governance in Australia now is either substantially or marginally better than it was a decade ago.
However, most (92 per cent) participants also said governance has become more complex over the period, with large super funds naming organisational culture, oversight of internal asset management, collective outcome, unlisted asset valuations and accountability as the biggest governance challenges.
More than 94 per cent also acknowledged that smaller asset owners face heightened intricacies.
Frontier Advisors head of investment governance Sarah Cornelius urged funds to take the time to assess and identify their own governance shortfalls.
“This then enables the efficient deployment of skills, resources and time to focus on those areas of highest importance,” she said.
“Internal asset management requires robust oversight, review and challenge. Proper oversight is a crucial component, and the focus of the oversight should not only be on the investment teams themselves, but also on the investment models they use to drive their investment decisions.”
There are also systemic challenges at play. Asset owners cited the need to manage their portfolios through too many lenses (return, risk, peers, regulatory benchmarks and ESG) and the complexity it entails as the biggest threat to their future governance.
A focus on investment short-termism (partially fostered by the Your Future Your Super performance test) and continuous regulatory changes are also worrying to many.
“Traditionally, investment governance structures have been rigid and hierarchical,” Chris said.
“With the current, and likely future, environment being more volatile, investment governance models will need to exhibit the ability to be nimble and adapt, and avoid group-think through recognising the need for diversity in decision-making.”
