The $46-billion industry-superannuation fund, AustralianSuper, has started the search for a senior portfolio manager to head a new internal equity-management team. This is the first step of a process that will see as much as 30 per cent of the fund’s assets managed in-house within five years.
AustralianSuper’s head of investment operations, Peter Curtis, says the fund is something of a global oddity in being the size it is, but having so few of its assets managed internally.
The fund currently spends about $200 million a year in external investment-management costs, and as the fund grows, that figure continues to rise. Curtis says that if left unchanged, when AustralianSuper reaches $100 billion, its costs will balloon to more than $500 million a year. Switching to internal management will cut costs by about two-thirds, he says.
AustralianSuper says it plans to recruit 14 people in “a mix of roles, including those directly involved in stock selection as well as back-office staff in operations, finance [and] legal”.
Funded from cash flow
Curtis says AustralianSuper’s head of Australian equities, Innes McKeand, will continue to oversee all of the fund’s Australian equities operations.
“He was recruited in so that we had somebody senior in the team who had experience with managing money,” he says.
“He will be overseeing the team that selects the external managers, and he’ll also oversee the team of internal equity managers that we start to build up. He will view that internal team the same way he does the external teams.
“We’re looking for people at the moment, so we’ve kicked off that process to start looking for a senior portfolio manager to head up the Australian equity internal-management group. We think it will take us a bit of time to find that person, get them on board and then he or she will start to recruit the team.”
The internal equity-management team will initially be funded from cash flow, Curtis says, rather than moving money away from the fund’s incumbent asset managers (see table below).
AustralianSuper’s incumbent Australian equity managers include
||Eley Griffiths Group
||Industry Funds Management
|Antares Capital Partners
||Paradice Investment Management
Source: AustralianSuper website
“We’re going to start with Australian equities, because it’s local, it’s an area we understand, we can attract the talent and the systems and operations infrastructure is fairly straightforward,” he says.
“So with our ongoing growth trajectory, we expect we will be able to fund the internal mandate or fund the internal team, with our cash flow. If you look at us this year, with the AGEST merger and the IBM merger and our normal cash flow, we’ll have $11 billion over this financial year.
“We’re not going to put the whole $11 billion into equities, but it’s going to be a very controlled rollout of the internal management capability. We will build it up over time as we get comfortable and we have the processes, people and systems in place and we can just ramp it up over time with the cash flow.”
Curtis says the next step is likely to be “running equities in this sort of time zone, and then just move across to the other asset classes”.
“We’re also looking at doing more direct investing in the areas of infrastructure and property,” he says.
“So, we’ll be looking to work closer with our key investment managers in the infrastructure and property asset class, and start to look to do direct investments with those managers, going through their pooled products.”
The senior management of AustralianSuper spent much of 2011 “doing the analysis and building the case, as we mapped out our longer term growth trajectory” and “spent time researching what a lot of the offshore pension funds do”.
“You look at global funds generally and most of them will be doing something internally, a portion internally,” he says.
“We’ve done a lot of work with CEM Benchmarking – a group in Canada that do a lot of benchmarking of costs across different pension funds around the world. They’ve got a fairly large database and if you track or plot all of the people in their database based on funds under management and how much is running internally, a fund our size you would expect to see somewhere around 30-odd per cent managed internally.
“If you look at their database, somebody at $100 billion would have more than 30 per cent under management internally. But because of where we’re starting from, we think that over that term, our internal plans over the next four-to-five-year period would see us growing to somewhere around 30 per cent of funds under management.”
Curtis expects the benefits to AustralianSuper fund members to arise through a combination of lower costs and better investment results.
“If you look at us in a global context, at our current size of $46 billion of funds under management, we’re an oddity, when you look offshore, in having so little managed internally,” he says.
“As we look at our costs and what they are likely to grow to under the existing manager-of-manager models, we pay close to $200 million a year to manage the investment portfolio at the moment, in external fees, et cetera. If we continue that sort of model, at $100 billion we’ll be paying over $500 million a year in external fees.
“And funds management is essentially a fixed-cost business. You get a certain level of capability in-house and you’re then able to put a fair volume of funds onto it in the different asset classes.”
Curtis says managing assets directly will place AustralianSuper closer to the market.
“It’s also something that we thing will add significantly to our investment insights, in how we do asset allocation as well,” he says.
“We think that being closer to the market, we will be able to get better insights that we can feed up into our asset-allocation and general investment-thinking processes.
“We believe we’re going to get better insights. We believe we will be able to take account of what we call the low-hanging fruit in the portfolio – we think we can do more things on an after-tax basis – and it will also allow AustralianSuper to face off directly with the brokers and other agents out there in the market place. We think that’s area where we can use our scale to get better outcomes for our members.
“At the moment we have the Australian equity portfolio, we give that out to various investment managers, who then chop it up across all the different brokers. We think that if it’s AustralianSuper that’s actually running a portfolio and we’re dealing directly with those brokers, then we should be able to get fairly close to the opportunities that are available in the marketplace with rights issues and other opportunities that come up in the market – which at the moment would go to the fund managers and then get split across their various clients.”