When UniSuper CIO John Pearce arrived at the fund in 2009, it managed $33 billion of member money entirely through external partners. Sixteen years later, three quarters of its $150 billion FUM is handled internally – but the fund never would have got there if it took big swings, Pearce tells Investment Magazine.
“When we embarked on this journey, I was not – and still am not – a big believer in this whole ‘light on the hill’ kind of vision of ‘in five years’ time we’ll have 70 per cent of our funds managed in-house’,” he says.
“We were going to stay away from that; you set yourself up for disappointment and failure because you have to get there regardless.”
Pearce instead embraced “logical incrementalism” – taking small steps and starting with the in-housing of fairly basic investments, like a listed property portfolio of around 26 stocks. In the same vein, a decision was made early in the process to use Bloomberg as UniSuper’s core trading system. It was better suited to some asset classes than others, but Pearce didn’t want the fund to become a “pseudo software house with all these tech people running around” (it did later supplement Bloomberg with FactSet and Axiom to enhance data management).
“If you look at the strategies we wanted to manage in-house, Bloomberg could handle it all,” Pearce says.
“Where it wasn’t as strong was on the more exotic kinds of portfolios, but it was never our intention to go there. If Bloomberg couldn’t handle the portfolio we had in mind, we weren’t going to go with that portfolio.
“It’s not just in investments – in business, you quite often make the mistake where the business determines the technology. It’s got to be a two-way process, or you start to get operational risk. You have to say ‘No, here’s the tech stack we’ve got. Does the business fit the tech? And if it doesn’t, is this the business we want to get into?’. It’s an iterative process, and Bloomberg was fit for the purpose.”
But Pearce also had to consider the people who were going to use it. Remuneration is a touchy subject in the Australian superannuation landscape now; 16 years ago it was close to toxic. But Pearce had a mandate from the board to go forth and hire, and “pay what you have to pay to get the right people”.
“(But) we had people who were taking pay cuts to join because they were really interested in just managing money or just being an analyst rather than having to pound the pavements and sell,” Pearce said. “I knew where to look, and what I was looking for.”
UniSuper has around 75 investment staff today, including middle office and support roles. That’s pretty small compared to some other institutions, and research houses tend to argue that the fund is “too lean”.
“We don’t think we are. The point I make to the research houses is that if the investment committee felt there was a correlation between the size of the team and alpha, they’d tell me to hire another 50 people tomorrow. There is absolutely no constraint in terms of people.
“The reason I run a lean team is because it means we’re very focussed on what we’re going to stick with: these big, heavy-lifting strategies. A classic example – when we merged with Australian Catholic Super, that was $12-odd billion. We didn’t have to hire a single person. Whether you’re managing $10 billion in Aussie equities or $15 billion, it doesn’t require any more people. We’ve got a very scalable model – that’s why we can afford to run lean.”
Having a large chunk of investments managed within the fund also helps when markets are going haywire, Pearce said.
“Having experts in the room looking across markets and asset classes certainly helps when it comes to making decisions at a moment’s notice, and particularly with the kind of volatility we’re seeing at the moment.”
There were few models of internalised pension asset management in the local landscape for Pearce to adopt; UniSuper was always going to be its own beast, and remains unique among superannuation funds for the proportion of FUM it has managed to bring in house. For that reason, the project had – and still has – plenty of sceptics.
“If you’re a manager we’re taking money from you’re probably not disposed to go around saying nice things about us,” he says.
“And to this day we know of other funds that are still sceptical and still aren’t going in-house because they’re not convinced of the benefits. There was cynicism from the managers we were taking money from and scepticism from industry fund peers that didn’t believe it was going to work.”
And not every strategy has. UniSuper has “sacked itself” about 10 times, Pearce said (though that doesn’t always mean firing people).
“A portfolio might be set up based on a set of circumstances from a particular time, the macro environment at the time; it could be that the model we felt was going to work didn’t,” Pearce says.
“We’re pretty brutal with ourselves. Every September we sit down for two days with the investment committee [IC] and go through all the strategies and look at what’s working and what’s not working – and if it’s not working, we decide whether we should hold or terminate.”
“It’s not a hard and fast rule; full credit to our IC, we like to see strategies run for about three years. And even three years is probably not long enough to go through a full cycle. We have terminated internal strategies before three years, but that seems to be about the right time.”
UniSuper has sat at around 75 per cent internal management for several years now, and there’s no appetite to take it further. With most of the plain vanilla strategies already in-house, bringing anything else into the fund would only make it more complex.
“We’ve been very disciplined in terms of what we don’t think we’ve got any edge in,” Pearce says.
“We’ve got no appetite to set up a private credit team, or a small caps team or an emerging markets teams. To get that 75 per cent up to 90 per cent, you have to ask yourself whether you want to cross the Rubicon and go up the risk spectrum and into more niche strategies. We’re not going to do that.
“Even with the mainstream asset classes, like Aussie equities – we’ve got a bunch of external Aussie equities managers, and they add value. It reduces our business risk. Managing everything yourself entails huge business risk.”
Internalisation was a project that could have floundered, and the “key to its success” was support from the highest levels of the organisation – the likes of Elizabeth Bryan and Chris Cuffe, who sat on both the board and IC. They needed little convincing of internalisation’s merits, and backed Pearce to get the job done.
But Pearce says that what worked for UniSuper – an eye to keeping the structure simple, the team lean and the pace of internalisation slow and steady – might not work the same for other funds, which are expanding overseas and bringing more complex investments in-house.
“Other CIOs have done the same sort of thinking on this and come up with different conclusions, and I respect that,” he says.
“We’re pretty clear that we’re not going to establish offshore offices; my peers in the industry have decided it’s been a great move for them, and these are smart guys. It’s just not for us.”
