The investment industry is facing an ongoing battle for talent as it considers new investment ideas and implementation approaches to tackle a low-return environment over the next decade, according to a Frontier conference panel.
The wide-ranging discussion, chaired by industry doyen Greg Bright, touched on several topical issues including the trend towards internalising asset management by larger super funds, which is also raising issues about the talent pool, internal culture and governance.
Jo Townsend, CEO of Funds SA said, “We are competing for all intents and purposes against the organisations that are not only on the east coast but in asset management and institutional investment in general – it’s extremely difficult and getting harder and harder.”
Former asset consultants have been lured to super funds such as Cbus (Kristian Fok) and HostPlus (Sam Sicilia) while a number of large funds including AustralianSuper have internalised substantial asset management activities.
However, Townsend said hiving off asset management teams into separate entities within super funds is not always an effective way to manage issues about remuneration and culture.
“Even though you might have a separate legal entity everyone who works in the other part of the organisation that’s under the same umbrella would still know they’re there, so it’s not necessarily the answer from a cultural perspective,” she said.
It also raises governance issues – an issue the Australian Institute of Superannuation Trustees (AIST) is tackling on several fronts.
Its new governance code, based on the ASX Corporate Governance Council principles and recommendations, will outline principles for risk management and outsourcing. It will also require funds to design and manage investment strategies with regard to member demographics during both accumulation and decumulation phases.
Super funds must also now perform operational due diligence on their fund managers. AIST suggests that fund managers pay for this expense on a one-off basis with the results shared by super funds, rather than each super fund conducting their own due diligence.
“There are those that are supportive of the AIST initiative on operational due diligence and those that are not,” AIST CEO Eva Scheerlinck said.
She said about 30 investment managers are currently signed on and 12 more are considering it. Some AIST member funds have been early adopters of the approach, but others are waiting to see the quality of reports produced.
Frontier Advisors Director of Consulting, Kim Bowater, said ongoing fee pressure on fund managers is likely to continue.
“There’s still a model whereby the benefits of scale and the increase in fees has gone to fund managers… and the institutional investors aren’t getting enough of the net alpha of returns that we think they deserve.”
With a greater focus on fees in the MySuper era, passive investing and factor approaches (or similar smart beta strategies) are growing in popularity.
Colin Kelton, Managing Director of Vanguard Investments Australia, said the firm has a US$1 trillion active business in the US and uses smart beta as a way to assess external manager’s performance.
“We will use our smart beta tools to essentially assess their performance and make sure that they weren’t just tilting towards a certain readily and cheaply accessible factor, and that that was in fact the outperformance driver… and then they’re asking to be paid for their brilliance.”
Funds SA’s Townsend warned against the push towards passive investing, calling out the massive growth in ETFs when markets have not been stress tested.
“The absolute focus on costs that is current at the moment is potentially to the detriment of member returns at the end of the day, and again I just wonder if we do get another little rout in the market if everyone will continue to see passive investing as the great thing.”
Frontier Advisors’ Bowater observed that, while some factor and smart beta strategies would not last, some well proven strategies would likely remain a challenge, on a net of fees return basis, to both active and passive strategies.
Kelton said it was hard to predict the next innovation in the industry but embedded advice in products, such as lifecycle funds, is one probable direction, with robo advice also likely to grow in popularity.
“The press around robo advice has exceeded the success of robo advice, but it’s absolutely starting to change the game and if the end result is more people getting advice that’s a good thing.”