AustralianSuper and UK fund NEST, the largest defined contribution funds in their respective countries, have seen rapid growth in their short histories. AustralianSuper has $341 billion and is projected to grow to $700 billion by 2030, while NEST has gone from zero to £47 billion and will reach £100 billion by 2030.
AustralianSuper deputy chief investment officer Damian Moloney and NEST Invest chief executive Mark Fawcett reflected on the challenges of their huge inflows, which include about $21 billion in net cashflows per year for AustralianSuper and £500 million in new contributions per month for Nest.
“The cashflow is the challenge,” Moloney told the Fiduciary Investors Symposium at the University of Oxford, hosted by Investment Magazine sister publication Top1000funds.com.
“It means exponential growth for the business, but also means an investment challenge for us. We’ve built the team quite significantly on the investment side, but also on the member side and deployment has been largely met as planned.”
AustralianSuper has about 57 per cent of assets internalised and has scaled up the size of the transactions in private markets in particular, and it deploys capital externally as well.
“All the support that we need to run those operations, we’ve built over the last five or six years as well,” Moloney said.
“So it’s been a sort of multi faceted program. We’ve made a few mistakes over the over the years, and had to slow down in certain areas.”
NEST was formed in 2008 and the pace of growth has not always been fast, it took about three years to amass the first few £100s of millions in assets. It added asset classes slowly as it grew and was upfront about its terms of engagement with asset managers.
“We don’t pay performance fees, we just get that out upfront. But what we do have is cash flow. [A manager] is going to get allocated £100 million or £200 million, possibly £1 billion every year, depending the asset class. So if you value that cash flow, and you can offer us a very competitive fee, then we can have a partnership,” he said, adding in the 13 years the fund has invested, it has only fired one manager, and that was due to ESG evolution.
“Generally, our manager picks have been good. They’ve pretty well all outperformed since inception, but we’re very careful [with] who we pick. We want them to be with us for a long time, and for them, that’s a benefit, right? They’re going to keep getting that money coming through the door. If you’ve got the imagination to change your business model to work with us, there’s some real benefits to that.”
At a high level, NEST is evolving its governance structure to try to delegate more down to the executive suite, it’s partly why Fawcett moved from CIO to CEO of Nest Invest to make sure that decision making in the executive was high quality and had sufficient rigour.
“For me, it’s about hiring good people,” he said. “We don’t pay a lot of money, so I say don’t come to work if you don’t love your job. It’s for smart people. You get smart people who are really interested in investment, and you empower them. You just push for decisions down as far as you can. And that way, they have a challenging job. They enjoy what they do, as long as there’s sufficient oversight over that. Then people hang around, because where do you get to invest £6 billion a year coming in, expanding into new markets and learning new stuff? Those opportunities don’t exist in many places. So having that highly motivated workforce.”
Sense of mission
Both NEST and AustralianSuper discussed their sense of mission as a motivation in hiring people.
“Our members are amongst the lowest paid in society. We’ve got a lot of minimum wage workers,” NEST’s Fawcett said.
“We’re providing, or we aim to provide the quality of investment product you only get by paying two and 20. In most DC schemes in the UK you can’t get in private markets, and we’ve got a big ambition there. So, it’s galvanizing that sense of mission that our team has for the benefit of members, the purpose.”
AustralianSuper has more than 2000 employees and in the past few years has staffed offices in London, now with 150 people, and New York, 60 people. And the plan is about 70 per cent of the assets will be invested offshore, up from the current position of 50 per cent. Maintaining a sense of culture is a particular challenge given that rapid acceleration according to Moloney.
“There’s internal programs we run around, culture, compliance, and risk so that’s all driven through as a sort of structured program of induction and enculturation,” Moloney said.
“But secondly, the types of people who join us, and I think Mark sort of made this point as well, have a slightly different motivation. They’re interested in the not-for-profit ethos that we have, they’re also interested in that ultimate goal of providing for people’s retirement.”
According to Fawcett, one of the consequences of attracting people because of the purpose is an eclectic group of people, and that results in diversity of thought.
“We don’t hire in our own image, because we can’t find people in our own image, if you like, and therefore we just have a group of people who just tend to think differently,” he says. And while that is mostly a good thing, they can “occasionally rub each other up the wrong way” as a result.
Emphasising the importance of hiring the right people, reflecting on what he could have done differently Fawcett focused on hiring and retention.
“Hiring at the start was quite tricky, as it was in the aftermath of the financial crisis. We got some good people on, but we had to hire fast, and we didn’t always hire well,” he said, adding leadership sometimes requires moving people on quickly if they are not a cultural fit. “We’ve got a great team now, and it’s very stable, very low turnover.”
The second thing Fawcett ruminated on was data and technology.
“You know, we were building up the assets and the investment strategy and thinking hard about that. But we didn’t do enough work on technology,” Fawcett said.
Part of the technology challenge for NEST was signing on members and employers at a rapid pace, at its peak it was signing on 2000 employers a day.
“No one’s ever done that before,” Fawcett told delegates. “On the investment side we were focused on investing the money, so we didn’t give technology or data, I think, enough focus. Now I’m working with a consultant, and we’ve got a new custodian and we’re trying to clean it all up. We are on our third risk system in 12 years, so getting that on boarded and integrated, and making sure the data sits in the right place, and the people using the technology are making good, buy, build decisions.”
Moloney said that AustralianSuper has spent around four years building its investment platform, and how to optimise that and create value out of the platform will be important.
“It’s been a big spend and a lot of work over a lot of years, and that optimisation piece is really important. And secondly, the sort of maintenance and extension of it in a way that doesn’t create complexity. That’s one thing that we’re intensely worried about at AustralianSuper is creating complexity as we build more areas of the business, as we create potentially more products, as we get into the retirement phase, as we build the international investment platform and international team. How do we keep it simple?”
AustralianSuper is working on its 10-year plan through to 2035 which is when it will reach $1 trillion.
“And key components of that are investing at scale, performing at scale, and building a business that can deliver on all of that,” Moloney said. “The second thing we’re doing in that program is to work out what’s the right servicing model for what will be we think, five million members at that point in time, a large percentage of which will be in retirement.”
Moloney’ said the fund was trying to restrict the initiatives and projects and growth plans to two, three or four key things.
