When a super fund can’t use the blunt-force instrument of scale to drive operational or investment efficiencies, it must be smart and strategic about where it gleans a competitive edge.
For the $16 billion NGS Super, that means working with big data and artificial intelligence, being clear on what it can and cannot internalise, developing deep research capabilities, identifying and exploiting secular trends, fostering cognitive diversity in its investment team and harnessing that team’s cross-sector expertise to generate investment insights.
NGS Super chief investment officer Ben Squires tells Investment Magazine that every hiring and investment decision by a small fund has an obvious impact on operations and performance for its 112,000 members. With an investment team of around 30, and a couple of positions yet to be filled, Squires says every hire must be “individually amazing, but then they also need to be amazing within a team structure”.
“The culture really matters because every person in the team needs to pull their weight,” Squires says.
“Over the last several years, since we’ve established our broader strategy and made changes to the portfolio, there’s been missteps along the way, for sure – we’ve definitely made hires that haven’t worked out, we’ve had people self-select because the cultural fit is not quite right.
“But where we sit today, we’ve got a really, really stable team, and I’ve been able to date to provide a runway for them to progress. That’s the other challenge for a small fund: how do you keep good people? I think culture is super important.”
Squires says NGS’ cashflow means there’s nowhere to hide poor investment decisions. Every dollar it invests is “very observable”. He says larger funds can mask the impact of a bad call with their huge cashflows
“If they make a bad property deal or a bad private equity deal it’s not a problem, because they can just dilute it over time,” he says.
“But again, that’s a double-edged sword, because when things go well that volume of cash flow also works against you.”
Squires says a strategic review after he joined the fund recognised where it could add value as an investor and strive to create a competitive edge, and other areas where trying to do that might be a waste of time and effort. While larger funds have been focused on internalising equity management capabilities, Squires says NGS recognised there was no competitive advantage to be gained by doing so.
“We will never be in a competitive position where we can appoint really skilled stock selectors that can beat the market, we don’t think; but we know we can get access to active managers that have [capacity] constraints, we know that we can get access to passive investments equally as cheap as any big fund in the market, so we can compete on fees on that side,” he says.
But NGS thinks it can add value and exploit opportunities in the areas of unlisted assets and asset allocation, Squires says.
“As we’ve started to do more direct investing on the private side of our portfolio it’s apparent that we needed to internalise [legal skills], because [there is a] significant amount of legal contracts that we need to review; we need to protect the trustee,” he says.
He says outsourcing legal work is often expensive, not necessarily commercially focused and sometimes not well connected to what the fund is seeking to achieve for members.
“We need legal skills that have a commercial lens as well, so they can work with the portfolio managers, and they can go, ‘OK, what commercial risks are we willing to take here?” he says.
“It’s not only the legal component, it’s the commercial side, so they can work hand-in-hand together. So, I think about the legal team as being investment professionals.
“They’re working on deals. We think about it collectively as a deal team.
“It requires a deal origination team to bring these into the portfolio. So legal is a big part of that as well. So that’s an area that we’re investing in.”
The TPA perspective
Squires says NGS has adopted a total portfolio approach to managing members’ money, which gives it a particular perspective on how to add value, and that “having the ability to do research has been really valuable”.
While it hasn’t internalised its equity management, Squires says the fund spends considerable time focusing on tax efficiency – including optimising use of foreign tax credits – and on rebalancing and decarbonising its portfolio.
He says its in-house research capability allows it to “go deep down on carbon and look at the companies to determine which…we think are disingenuous” in their claims.
“I think we do have a disconnect between our managers’ time horizon and our time horizon as it relates to carbon risk, and so we’ve actively instructed our managers to divest a whole raft of different companies,” Squires says.
He says the equity team also spends time with the fund’s quant team, focusing on secular trends.
“From a total portfolio approach, our head of private equity might be working on a venture capital deal, and we might think this is an emerging area,” he says.
“How does this fit into our secular trends; where are we on the S-curve in terms of its development; is this early, where it needs a 5, 10 years; or is this growing at such a pace we can see how this could play out into other areas within our portfolio, such as infrastructure?” he says.
“Or it could be in the public equity space. So, [we are] trying to get congruence between the various areas, so we can gain insights. Being a small team allows us to do that, because we’re intimate, so we’re always talking. There’s not so many people where it creates competitions between sectors.”
Squires says NGS is also seeking to incorporate a range of viewpoints, expertise and experience into its decision-making processes.
“We want cognitive diversity in the team,” he says.
“When you look for cognitive diversity, you get people from different backgrounds, all different aspects, that bring different experiences, different qualifications. We’ve got PhDs in in math and finance, in the quant team; and then we’ve got PhDs in particle physics; and we’ve got engineers, chemical engineers.
“That allows us, particularly when we’re doing research and we’re wanting to go deep on a vertical on a secular trend, to tap into their background and their skills, and that’s really helped us on the climate side to determine which companies we believe are disingenuous with their claims.
“I don’t know if other funds have done that. That’s why we’ve been quite active with our divestment strategy, which has actually added significant alpha to our portfolio since 2021.”
Squires says a deeply research-driven process has had a positive impact on the fund’s portfolio.
“We haven’t made decisions based on ideology, we’ve done the work,” he says.
“We’ve determined that there’s physical stranded-asset risk; we’ve determined the risk that we can bear in terms of tracking error if we do make any divestment decisions; and we’ve looked at that in the context of our total risk budget and determined that this is a risk that we believe is going to be positive for the for the fund.”
Headwinds abating
Squires says that a number of the headwinds that five years ago looked like they might buffet small or medium-sized funds are beginning to abate thanks to rapid developments in technology, especially AI.
In 2020 NGS kicked off a project to centralise all of the data sources it uses across its investment operations.
“I’m talking about your custodian data around your portfolios; I’m talking about your APRA data; I’m talking about Bloomberg data; I’m talking about economic data; I’m talking about manager research,” he says.
“We employ data scientists to help us build this out. We’ve built this phenomenal investment database, and we’ve got connectivity to all these different sources now.”
He says this allows the fund to meet its reporting requirements efficiently, and to respond to ad hoc requests, such as surveys from the regulator.
“We were able to address those surveys without too much difficulty, where a lot of the bigger funds couldn’t,” Squires says.
“We are very comfortable on that side, because we think a lot of the information that the regulator requires is often data-led. And the next phase is that we can see that they’re now starting to request unstructured data.
“But the beautiful thing is, there are now solutions that we’re seeing available to us to tap into where we can take unstructured data using AI and we can formulate it and populate it into the into the templates for the regulator.”
Squires says that a big super fund might have five times as many people in its investment team as NGS but 20 times the AUM, so its fixed costs as a percentage of assets will always be lower.
“So we need to make that up,” he says.
“That’s where we need to be able to think, what are our competitive advantages? Can we exploit them? We might be able to observe what we think our competitive advantages are, but can we actually execute on it? And how can we execute on it?
“So we think about that in the context of what are the lead indicators. We need great data; we need automation; we need a really strong risk culture; we need a collaborative culture of meritocracy – every person in the team really matters; we need to be able to recycle capital. We need to have direct access to investments as well. So we need that capability to neutralise the cost base [disadvantage], and we’ve been able to actively do that.”
