With recent government data indicating that Australia’s ‘maturing’ superannuation system will continue to grow strongly over the next four decades, superannuation executives are thinking hard about the ways they will have to welcome innovation and transformation.
Speaking at the CFA Societies Australia Investment Conference in Sydney, Ian Patrick, chief investment officer at Australian Retirement Trust (ART), shared his experience at the helm of one of the country’s largest super funds.
Formed in February 2022, ART was a “bet on scale” in combining the capabilities of Sunsuper and QSuper, resulting in a curious case of Noah’s Ark, he said.
“We have two of everything, and just to be a bit more pointed about the two of everything, you may get a leopard in the Himalayas and a leopard in the Serengeti, but they are not the same thing,” Patrick explained.
He continued that, as a consequence, the $260 billion fund faces a degree of complexity in its mission to deliver for its 2.3 million members as the fiduciaries of their capital.
Consolidation has been a dominant theme in the super sector and the Australian Prudential Regulation Authority (APRA) has encouraged funds to merge to achieve benefits of scale. According to JP Morgan’s latest Future of Superannuation report, there were 137 funds in March 2023 compared to 174 in September 2021, a reduction of 37 funds either from merging or closing.
“Given my comment on Noah’s Ark, very much top of mind is having consistent strategies for our various products that our members consume, [ensuring] it is consistent and joined up,” Patrick said.
“What I mean by that is, the underlying principles that drive our investment thinking and the process that leads to those strategies serves all products in a consistent way.”
Reflecting on transformation, Patrick believed being “comfortably uncomfortable” was one of the elements that remained top of mind.
“Investments are not an endeavour driven by certainty, so you have to be comfortably uncomfortable, and then thrive in that, letting the team thrive in that,” he said.
“The reality is, portfolios go through transformation all the time. Just think about moving from $5 to $10 to $20 billion, invariably you are taking on more activity in the value chain, whether that’s co-investments, whether that’s manager selection or a third party. Growth is natural.”
Part of this growth included opening up to partnerships, as outlined by the Future Fund’s deputy CIO, Alicia Gregory.
Earlier this year, the $250 billion fund announced its decision to return to active management for its equity allocations after six years, pivoting from its previous belief it was “nigh on impossible” for active managers to add value over and above their fees.
This included handing its active small caps investment mandate to fund manager Maple-Brown Abbott even as it invests in domestic small-cap equities for the first time.
The fund’s other external managers include State Street Global Advisors and UBS Securities Australia for emerging market equities; First Sentier Investors and PIMCO Australia for cash and Lendlease Investment Management and Morgan Stanley Real Estate Investing for unlisted property, among other managers, as at 30 June 2023.
“We start with: if we can outsource it, if we don’t have a competitive advantage, why wouldn’t we outsource it?” Gregory explained.
“And so, partnerships with fund managers are really important to us. For those who say, ‘This is how we do it, we aren’t really interested with how you do it’, that’s okay, maybe not a partner for us.
“I think what people have learned over the years, is [that] with our team small, information is safe, and hopefully in the ability to share information, we can give something back to the fund manager as well. And this component of the size of the portfolio we get to see now is interesting, so we try and make that a two-way street, and I think that’s the genesis of all good relationships.”
Under the Future Fund’s legislation, she acknowledged the fund has to have investment managers in place, however, ART’s Patrick weighed in on the outlook of outsourced funds management in the next decade.
“It’s more nuanced than just insource or outsource, and the reason for that is, if you think of a whole investment value chain, there are many aspects that can be insourced or outsourced,” he said.
“I’ll use the classic example of how QSuper historically delivered global equities or equity beta into the portfolio. They designed a bespoke beta, internalisation of call it the factor manufacture, and then outsourced the implementation. I could envisage the opposite also happening. We happen to have a capital market trading desk today, it only trades in derivatives and some bonds and parts of the value chain – it could choose to trade equities. It could turn around to [fund managers] and say, ‘We like your approach to x industry, give us your top 12 ideas and we’ll worry about the portfolio construction and overall integration into our portfolios, plus the trading’.
“I think the whole context of insourcing and outsourcing is a) to morph more generally and b) in our context, probably evolve along the pathway of that interaction as partners versus, ‘I’m going to take all my Australian equities at the moment in-house’ or the opposite.”
