It’s been just over a month since Graeme Miller joined Mercer Super as its new CIO after nearly nine years in the top investment role at TelstraSuper. For Miller, it’s technically a homecoming. He started his career at Mercer more than 25 years ago, and “very much likes the symmetry” of his return. But he stepped into the role at a tough time for any CIO, let alone one that was trying to get across the operations of a whole new super fund.
“I like what I see,” Miller tells Investment Magazine. “It’s a great organisation, a great fund, doing great things for its members.
“The first month probably hasn’t been what I would’ve asked for if I was designing the perfect way to ease into a new role. On the other hand, what the recent volatility has done is forced me into the deep end, to some extent. I’ve had a lot of conversations and interactions that probably would’ve taken a little bit longer to happen, and it’s made me feel quite useful as well. There’s a job to be done here.”
Mercer Super is a very different beast to TelstraSuper. It’s more than double the size at roughly $74 billion, and comes with a significant offshore footprint and research capability through the wider Mercer business – though Miller says Mercer Super shares TelstraSuper’s way of thinking.
“Both of them have great track records of strong investment performance for their members, both of them are organisations that are deeply focussed on and committed to the financial wellbeing of their members,” he says.
“So in that sense there’s actually a lot they have in common.
“When I look at Mercer Super, though, the one very clear competitive advantage that we’re likely to have is our access to global scale. We’re part of one of the largest investment organisations in the world, and able to access, through our global colleagues, an incredible opportunity set and very competitive fees. I’m amazed by the depth and strength of the global research capability.”
All institutional investors have a “bunch of natural competitive advantages as well as a bunch of natural competitive constraints”, Miller says. It’s his job to be honest about what they are and why they exist and then orient the portfolio to exploit or negate them.
“Very clearly the standout competitive advantage of Mercer Super is the scale of the organisation, the strength of the organisation and the extraordinary intellectual capital that comes with that,” Miller says.
“But we all know that scale doesn’t only bring advantages; scale, if not properly managed, can also bring more complexity. It can slow down decision making, and there are some opportunities that are significantly capacity constrained. The more scale an organisation has, the more difficult it becomes to access those.”
“It’s all about making sure that we’re nimble and that our decision making doesn’t get weighed down by excessive layers of complexity and really focussing on making sure we’re harvesting all the benefits of that scale.”
But it can be very difficult to shed excessive layers of complexity once they’re in place. Bureaucracy – with its tangled web of committees and processes – is naturally resistant to simplification. Miller says the best way to prevent it creeping in is to have a “laser focus on purpose”.
“One of the great things about working for a super fund is that our purpose is absolutely unambiguous,” he says.
“We are here to do one thing and one thing alone: to look after and safeguard the financial interests of our members. If we look at everything we do through that lens it can be a fantastic way to break down complexity and things that stand in the way of sensible ideas being implemented. If we can point to something as being in the best financial interests of members, we should just do it.”
Miller’s interview with Investment Magazine follows comments from Mercer global chief investment officer Hooman Kaveh in sister publication Top1000Funds.com that he was recommending to clients that they reduce their exposure to US assets. Miller says that as a “general principle”, a more diverse portfolio will always be more resilient.
“And when you have a look at how extraordinarily concentrated equity markets have become, it’s axiomatic that over the long term, diversifying away from that concentration is likely to be incrementally positive,” he says.
“When you overlay that with the fact that starting valuations of US assets relative to those in most other places in the world are significantly higher right now, and the uncertainty from tariffs and the broader shifting of geopolitical relationships and the global trade system, I think all of that points in the same direction and argues for more diversification than less diversification, and argue towards a portfolio that is less concentrated in any single region – like the United States, in this case.”
And while Mercer Super mainly leaves the decision of where to allocate to its managers, a quick look through the underlying portfolios shows that they’re diversifying away from the US. That leaves Mercer Super – and other super funds – with a thorny problem: the US still comprises a hefty chunk of the benchmarks that they are measured against for the Your Future, Your Super (YFYS) performance test.
“Benchmark risk from YFYS is very real, and like all super funds we need to be very cognisant of the potential for any off benchmark positions to erode the headroom that we’ve got against it,” Miller says.
“Thankfully, Mercer Super has already built up a significant amount of headroom against the test and that does give us some capacity, where we’ve got high levels of conviction, to deviate from the benchmark. But all else being equal, YFYS will act as a very real constraint on not only our portfolio but the portfolios of all super funds.”
Those constraints don’t make market considerations any less pressing. Miller is sceptical of prices in equity markets, though cautions against extrapolating a big fall from the fact that they’re high.
“If you were to land on Earth from Mars without understanding any of the context or background and just look at the current level of pricing, you would probably think that we had found ourselves in a very benign economic environment and an economic environment with a below average level of uncertainty,” he says.
“I would argue that we’re probably in the opposite of that. We’ve got heightened levels of uncertainty; many of the institutions and the checks and balances that the world has operated under for certainly the last 50-60 years are changing and will continue to change. Perhaps the underappreciated risk is just how much the world is changing relative to where market pricing is right now.
“That’s not a prediction about how things will unfold – but it’s a bit strange that markets are priced for very benign conditions and lower than usual uncertainty when they should be priced the other way around.”
But while there’s a lot of doom and gloom in markets at the moment, there’s plenty of reasons for investors to be optimistic, Miller says – namely, the “extraordinary path of technological progress” that the human race has been on, which will continue to bring new innovations to the market.
“If you pause to think about how technology has completely transformed and generally improved the lives that we’ve lived – our health, our wealth, our lifestyles as a human race, history tells us that, with notable periods and pauses and retractions, but as a general rule we’ve been on this extraordinary march towards prosperity, towards healthier lives, towards more fulfilled lives – and that’s been substantially enabled by technology,” he says.
“And I think that we’ll continue on that trajectory; I think that will be good for human kind and will probably be very good for investors and owners of capital in the long run as well.”
