As super funds continue to bring investment management in-house in a bid to lower costs and exert greater control over their assets, the standards they apply to investing member money outside the fund should also apply to what they do internally, according to Jo Leaper, head of operational consulting at JANA Investment Advisers.
“If anything, it should have a higher benchmark – if only because of the reputational risk involved,” Leaper tells Investment Magazine.
“But it’s not always clear that the industry recognises that the culture of that investment team is going to be more like an asset manager then it is a super fund.”
Leaper says that it’s going to be “an incredible super fund” that can make that work well.
“When we come back to the governance of all that, you need to have segregation of duties; you need the right people on your boards, your independents, you need people that can challenge – whether that’s a consultant or another external adviser,” she says.
“But you also need to make sure that the roles and responsibilities for every single layer are really, really solid; and not just solid today, but reassessing them in 12 months, 18 months, because what they’re doing and the role they’re doing will change slightly.”
But at the end of the day, funds are still bringing on personnel from the world of asset management that might have a different motivation to staff working in other parts of the business – and that means they need to get the remuneration right.
“Some get it, some don’t,” Leaper says.
“The classic is whether industry super funds, which are profit to member, pay bonuses. If you’re trying to attract staff from an asset manager, I guarantee you they’re getting a bonus (at the asset manager). The argument used to be better work/life balance, but I don’t know the split across the industry in terms of which funds pay bonuses and which don’t.”
But deciding whether to pay their star stockpickers a bonus is only one part of the equation for super funds. After all, those stockpickers wouldn’t be stars without the operational staff that support them.
“What do you do when your pay has a bonus and the person sitting next to you – who implements everything for you – might not have that?” Leaper says.
“ That investment decision is only as good as it is when it hits the market, and that’s supported by the people who run the cash or investment ops or reporting that enables you to make those investment decisions.”
“One of the thigs we see in ops due diligence is that variation in short-term incentives and long-term incentives across businesses, and that can cause rifts. If that’s the same in a super fund, they’re not immune; those rifts will continue. So we encourage them to look at it from a holistic perspective. It’s not just your PMs that are making you money – it’s the rest of the business too. They’re either saving on costs or finding a more efficient way to enable an investment outcome.”
But the industry is “doing a good job” of recognising what’s possible with internal investment management, Leaper says. What it could work on is lifting support for it.
“Does it have a GS 007 (assurance framework) are there are additional cyber-controls, what are the role-based access controls – all of those things that go with it,” she says.
“And it’s definitely a spectrum within the industry in regards to where people are with that. From the investment side, what are the additional resources you might need in risk or audit? All those peripheral things – the systems aren’t set and forget. They need constant investment to stay resilient from the perspective of cyber and business continuity and disaster response. How different should it be? It shouldn’t. It should be the same, but stronger.”
The build out of operational infrastructure is also important, and the complexity of that process depends heavily on whether funds want to in- or outsource their middle office functions.
“If you’re going to insource your middle office, you’ve got not just your order management system [OMS] but your risk controls, cash controls, your counterparties, your brokers; more detail, probably a lot more legal, particularly if you’ve got derivatives,” Leaper says.
“If you’re going to outsource your middle office you’re going to put that risk back on to whoever you use. That could be your primary custodian, it could be someone else. That changes the systems – you can stop at the OMS and reconciliation and pass the rest off to your third party, but you do have to keep your book of record going.”
There are also considerations for how super funds manage and apply the data that can be sourced from – and used to build – their portfolios and investment strategies.
“If you think about, in the past, everybody was running on (investment accounting and asset servicing solution) HiPortfolio,” Leaper says.
“That dictated how your portfolios had to be structured, how the data flowed; now we’ve got application programming interfaces, data agnostic systems, you can use any custodian’s data warehouse. There are so many ways of doing it, and there’s a really interesting discussion to be had in terms of why we’re still doing things the same way with the data we’ve got. We can re-engineer and rethink a whole lot of things.”
