In 2010, T. Rowe Price ranked 41st in the Pensions & Investments/ Towers Watson list of the world’s largest money managers. In the US market, it has prominent retail and institutional followings, which account for the bulk of its $482 billion in funds under management. This success, however, has not made the traditional long-only equities and fixed-income manager too comfortable in its home market. T. Rowe Price’s international business accounts for 12 per cent of its assets. European clients and prospects do not have to look hard to find a T. Rowe office – try London, Luxembourg, Zurich, Copenhagen and Amsterdam – and partnerships with distributors in Japan, India and Taiwan ensure a presence in these markets. In Japan, T.Rowe struck subadvisory deals with Sumitomo Mitsui and Daiwa Securities to manage non-Japanese equities and bonds, and over the years has garnered mandates from Japanese institutions. It arrived in Australia in late 2005 after winning a reported $1.3 billion global equities mandate from Queensland Investment Corporation. It now manages $3.8 billion from local institutions and retail investors, and in 2010 made the bold move to start a domestic equities team in an already competitive local market. The team, led by Randal Jenneke and country head Murray Brewer, is the first T. Rowe Price manufacturing office to be launched since its Singapore base in 1997.
Global small-caps are big deals
In an institutional investment market as sophisticated as Australia’s, it is surprising that Mercer is the only asset consultant to be actively recommending specialist global small-cap mandates. Here, investment thinker and former Auscoal Super analyst, DANIEL GRIOLI, condenses the academic literature to consider whether broad-market global managers can make the most of their touted ‘discretion’ to tilt into small caps. He also looks at the potential opportunities and challenges of investing in global small-cap equities. Small-caps beat large-caps over the long-term.
ESG inaction: Who voted in Australia’s first climate-change resolution, and why
Australia’s first -ever shareholder vote on climat e change, put to Woodsi de Petroleum in April, provided superannuation funds with a prime opportunity to support the sustainability principles that many of them have espoused for years. But at this first hurdle, many crashed and burned, prompting the question: how seriously are funds pursuing sustainability through their investments? PHILIPPA YELLAND reports.
Active managers belong in MySuper
Compared to the perceived MySuper model, default industry superannuation funds are too complex and, therefore, expensive. But they have satisfied the most important challenge presented by the recommendation, writes SIMON MUMME. The core aim of MySuper is clear: superannuation fund trustees should focus on maximising long-term investment returns and justify the costs required to deliver them. But the way MySuper has been categorised – as a simple, low-cost default fund – is a “very misleading description,” according to Warren Chant, director of ratings house Chant West. It has caused more expensive return-drivers, such as active investment strategies and alternative asset classes, to be sidelined with financial planner commissions as ‘bells and whistles’ that should be foregone in default superannuation design. In the influential Super System Review, Jeremy Cooper stated that default fund members could accrue $40,000 in fee savings over the course of their working lives if their providers used less expensive investment strategies, eradicated commissions and reduced the number of investment options available to members.
So long, set-and-forget SAA
Soon after investment returns began to correlate in the panic of the financial crisis, the practice of dynamic asset allocation (DAA) staged a revival. With no clear, longrunning trends to be seen, it was believed that making medium-term tilts to exploit undervalued sectors of the market or to seek a safer place to invest money was the smartest thing to do. No clear and long-running market trend was visible. Asset consultants such as Mercer and MLC, who were driving forces behind the DAA comeback, advocated that funds rethink their long-term strategic weightings and devote some capital to executing mediumterm tilts, of three-to-five years, that could take advantage of undervalued sectors of the market. For some, the acronym DAA wasn’t precise enough, and soon the terms strategic and tactical were combined to create ‘stractical’. Some investment chiefs said dynamic tilting was nothing new. As CIO at Telstra Super, Steve Merlicek, says he first executed a tilt in 2002.
Is it a wrap for platforms? The rise and rise of managed accounts
The increased transparency and lower costs provided by managed accounts have not gone unnoticed by funds management sales forces, Ian Knox, managing director at Paragem, said. Some investment product providers and financial planning dealer groups have embraced this new way of selling funds. And while many people believe there will always be a place for platforms, managed account structures are beginning to steal the spotlight away from their dominant rivals. “More and more dealer groups and advisers that we talk to are coming to grips with the advantages of a managed account,” Knox said. “They’re looking at it so they can control their business better, lower their costs [and] provide greater transparency. Those factors are quite compelling.” Trending now Toby Potter, a managed account consultant and chairman of the Institute of Managed Account Providers (IMAP), said the medium-term trends influencing the development of managed accounts – and their popularity – have been more structural. He said: “The key drivers for managed accounts over the last 24 months have been the loss of confidence in managed funds as a result of the financial crisis, and the technology developments spurred by the emergence of new platforms like Hub24 and OneVue, which has had a flow-on effect to the mainstream platforms. “It’s also been supplemented by a growing interest in direct securities generally, as opposed to managed funds. That’s also seen in the increased investment in direct fixed interest through platforms as well as other vehicles.” These changes are occurring as the Future of Financial Advice (FoFA) reform package is forcing many financial advisers to rethink commissions- and volume rebatesdriven business models.
Keep watch on the watchmen
The job of corporate governance specialists in superannuation should not be to solely monitor and, where necessary, intervene in the management of listed companies to improve shareholder returns. They should also seek to make the people in charge of funds accountable for their work. Dean Paatsch, founding CEO of the Australian Institute of Superannuation Trustees (AIST) and former CEO at RiskMetrics in Australia, warned that a collective solipsism is blinding the superannuation industry. This was a belief that the “superannuation world” is the only world that exists, he said. Speaking at the 2011 AIST Fund Governance Conference last month, he pondered whether this was the outcome of a lack of focus on governance standards within the funds themselves. “We’ve fudged the biggest questions of all,” he said. These were: who owns the funds, and what ownership rights accrue to the people who own them? Super funds are fond of referring to themselves as the new mutuals, he said, and if this is the case, these ‘new mutuals’ must take the time to define how they discharge their responsibilities to the underlying owners of the funds. Neglecting this responsibility ran the risk of going the way of the old mutuals, which were now “captured by the managerialism and bureaucracy that once defined what they were not”. “The moral cover of the trustee system and its fiduciary mask hide the fact that members of most funds have no right to choose or remove the trustees who represent them, let alone discover what management is paid,” he said. In addition, the industry’s obsession with the fees paid to investment managers hid the management costs routinely being pushed onto investors, as soft dollars or payments into operating businesses of unlisted assets. Despite these shortcomings, Paatsch continued to advocate the equal-representation trustee system championed by industry funds.
Wake up, smell hydrocarbons, adapt: GMO
Jeremy Grantham has built a career on shouting down, and outlasting, asset bubbles. As far back as 1972, before he co-founded GMO, he was two years too soon in his bet that US small-caps were undervalued against the so-called ‘nifty-50’ companies leading the index. In 1986, three years before the Japanese market caved in from its all-time high of 65-times earnings, he sold all of his exposure to the original tiger market. He was deeply underweight technology companies two-and-a-half years before the dotcom crash, and railed against the US housing and leverage bubble that precipitated the financial crisis. As asset bubbles have come and gone, GMO’s undying adherence to mean-reversion has delivered a solid long-term performance record with less absolute volatility than most. However, temporary periods of painful underperformance mean that not all of the manager’s clients have enjoyed such gains. “We hero-worship regression to the mean,” Grantham said in a briefing with the financial media in Sydney last month.
Tread carefully amid systemic risks
Funds managers, pension trustee boards and fund members should adjust to a low-returns environment and think carefully about investment risk in such uncertain times, warned Tim Gardener, global head of consultant relations at AXA Investment Managers (AXA IM) and a veteran of the UK asset consulting industry. Tim Gardener, who was global CIO of Mercer before joining AXA IM, was in Australia during May and told delegates at investment roundtables that communicating this reality to all fund stakeholders was vital to secure long-term investment returns. “God didn’t come down from the mountain and say you can always have 10 per cent returns on your investments, and I do think that this is a period where we will get lower returns and people just have to get used to it,” he said. “The danger is [that] if they don’t get used to it, investment managers will go in pursuit of riskier and riskier investments to try and maintain returns.”
Agents in the mirror, all around you
Not only were agency risks alive and well in Australia’s $1.4 trillion superannuation industry, they were inevitable in a system whose principals – the end-investors – were largely disengaged, the Fiduciary Investors Symposium was told in Manly last month. Defining agents as every commercial participant in the super industry – including trustees, funds managers, asset consultants and the media – speakers explained how their actions put investors’ capital at risk and suggested how this risk could be mitigated. Agents found work in superannuation because the majority of principals did not have the time or expertise to run investment programs to meet their future income needs, explained Professor Ron Bird, a director at the Paul Woolley Centre for Capital Markets Dysfunctionality (PWC).
Advance embraces risk-on, risk-off regime
BT-owned multi-manager Advance Asset Management has instructed funds managers to exploit the wide-ranging opportunities available in a global market dominated by shorttermism. Head of investment solutions, Patrick Farrell, said this strategy would enable Advance to exploit the “risk-on, risk-off trade” playing out in markets worldwide. These large, short-term market swings were driven as much by sentiment and “noise” as fundamental valuations, Farrell said. “Capital markets forecasts are tormented by this. Fundamentals aren’t driving it. There’s lots of money washing around the system that is trying to make a quick buck and then get out.”
