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.”
Mercer’s sustainability supremo joins Catholic Super
Garrie Lette
Catholic Super’s incoming head of sustainability, who has recently been hired from a global role with Mercer in London, will design and implement a whole-of-fund sustainable investment program for the $4.1 billion fund.
Sunsuper begins after-tax benchmarking
In a move signalling greater tax awareness among superannuation funds, Sunsuper has benchmarked a $700 million Australian equities mandate to the new FTSE ASFA index, which incorporates the impact of capital gains tax (CGT) upon the performance of the largest 300 listed companies.
Citi plucks JP Morgan WSS’ super specialist
Citi’s custody business has lured JP Morgan’s lead relationship manager among superannuation funds to become its new head of product as it builds its presence in the Australian market.
FuturePlus loses CIO in ongoing staff churn
Michael Block
The changes in senior management continue at FuturePlus Financial Services with the sudden exit of its investment chief, Michael Block, last week.
Ex-MIR resource seeks Pinnacle 'lifestyle'
Pinnacle Investment Management has named an ex-MIR Investment Management senior portfolio specialist as its director of product and strategy, saying the expansion of the team will further support the growth of its investment management boutiques.
Mercer's sustainability supremo joins Catholic Super
Garrie Lette
Catholic Super’s incoming head of sustainability, who has recently been hired from a global role with Mercer in London, will design and implement a whole-of-fund sustainable investment program for the $4.1 billion fund.
