Australian superannuation funds exhibit a range of structures characterised by varying degrees of operational complexity, which may be one of the industry’s greatest strengths, the Fiduciary Investors Symposium has heard.
A white paper published by 1886 Consulting managing director Doug Talbot suggests four principal investment models exist in the industry: fully outsourced; investment allocator; manager-allocator; and global manager.
Talbot said that the operational complexity associated with each model does not increase in a linear fashion; and the symposium heard that reasons for adopting or maintaining a particular model are varied, and can include the pursuit of additional alpha, cost reduction or greater control.
But it is unlikely that any single model will emerge as the “Australian model” in quite the same way it is held to have done in Canada.
“There is absolutely a spectrum as far as investment operating models in this country,” Talbot said.
“And the broad thesis that has become clear to us is that there’s not a linear level of complexity as you go along that spectrum, or a linear level of operational risk.”
Talbot said 1886 had approached the issue of operational complexity “in regard to investment governance, investment capability”.
“[We’ve] thought about it as it relates to talent and culture, as it relates to data and technology. And so, across that spectrum, the role that the board plays or the role that the Investment Committee plays can fundamentally change, and their level of responsibility. And so this difference between governance and management.”
Talbot said the variation in structure and complexity exists even though all funds operate under the same regulations and are pursuing the same objectives, namely, maximising income in retirement for members.
AustralianSuper head of asset allocation Alistair Barker said the fund’s evolution has been gradual, and while it’s edging towards the “global manager” end of the spectrum it’s not yet fully there. Barker said the reasons for the evolution are more important than the stage of evolution it’s reached.
“I often say that the ‘why’ is more enduring than the ‘what’ or the ‘how’,” he said.
“So the why is, what’s our objective and what’s our kind of belief about how we might go about that? For us, that is: what’s our return objective?
“We believe in active management. We believe in value for money – I wouldn’t say low-cost or high-cost, but I’d say we believe in making sure we get value for money. If we’re spending members’ money, we’ve got to give them a multiple of that back.
“Those core principles haven’t changed, but what has had to change is how we execute.”
Right model for the size
Barker said AustralianSuper has been grappling with the question of “what’s the right model for the size, assuming that we keep our return objective and our philosophy about how we invest pretty consistent?”.
“To be frank, the biggest factor we’ve grappled with is probably the speed of change. When we spoke to the likes of [Canadian Pension Plan Investment Board] or various other people who were further down the journey than we were, we would ask them, ‘How long did it take you to get to where you were?’ And their answer was typically about half the time that we had.
“So moving with speed has probably been our biggest challenge. Identifying what we do, you could say it was probably a little bit of almost the Wesfarmers playbook: find something somewhere around the world, see how it works and apply it to your culture, your situation, your market.”
CFS chief investment officer Jonathan Armitage said the organisation currently sits in the “allocator” category, but “even within the couple of years that I’ve been with CFS, we’ve probably been shifting a little bit further [towards manager-allocator]”.
“One of the things that we’ve been quite focused on is where are the things where we actually believe that doing things ourselves is going to add value to member outcomes,” Armitage said.
“There is also one other sort of component that our business model is a little bit different from some of our peers, in terms of we got a variety of products. We are an organisation that stands for choice. And what that means is that we’ve got various sort of avenues of where our members and other investors come and join us.”
Armitage said CFS has more than 180 different investment options, “and that obviously acts as a strong component in terms of the type of operating model, from an investment perspective, that you’d introduce”.
CFS has, in the past year or two, internalised its cash management, Armitage said. In addition, “we’re doing our hedging ourselves, and we’ve built a derivatives capability, which is sitting alongside the ability to do dynamic asset allocation”.
“We don’t think that that means that we’d be starting to look at managing equities ourselves,” he said.
“We’ve been quite deliberate around some things where, either for control reasons, as it’s much easier if you’re managing cash yourselves you just get a holistic view of how you’re doing that; or because we think it fits into the way that we are looking at asset allocation and taking a more dynamic approach to that.”
Armitage said this required having “the right governance processes, and the risk the risk management that sits alongside that”.
“That has led to an evolution in terms of the capabilities that we’ve needed, skill sets and some of the technology as well,” he said.
“And if we find areas where we think that doing things ourselves is going to produce a better outcome, we’ll continue to do that. Some of that might be around the different types of structures that we use as well for housing various assets, and particularly as we do more in the unlisted arena.”
Diversity of purpose and constraints
Member of the Investment Risk & Advisory Panel, Monetary Authority of Singapore, and former Future Fund chief investment officer Sue Brake said the diversity of operating models often springs from the diversity of purpose and the diversity of constraints under which they exist. Some constraints may be deliberate, some may develop over time.
“Two big ones, which are what I would call more personality-driven, rather than people-driven, [are] the risk appetite and the investment beliefs,” Brake said.
“[They are] very impactful on what you end up building. And what I’ve seen, because I’m old, is some strong personalities earlier in the life of your organization have a very long lasting effect in terms of those values and those investment beliefs. But they’re way more impactful than I think people realise.”
Moving along the “Talbot spectrum” isn’t necessarily automatic for funds, and the direction of movement need not be uniform, either, Brake said.
She had recently completed some work with a large, retail for-profit pension provider outside Australia, “the largest in their country, and they’ve gone the opposite direction”.
“Part of that was the desire to reduce complexity and operational risk, but it was also this generative AI threat,” she said.
“They’ve gone to a truly strategic partnering model. It’s very different from your outsourced or your asset allocator [model], and they’ve partnered with a very large organization that has a multi-billion dollar AI budget that increases their chance of being a disruptor, rather than the disrupted as the generative AI thing comes through.
“So you’ve got to keep looking and thinking about the model and where you want to take it.”
