Institutional investors are seeing their investment period with some private equity managers shorten. The time the GP invests in a company until the time they exit is reducing, meaning that investors are getting more cash coming back than forecast in their pacing models.

“For several quarters we’ve been net cash back for our private equity portfolio,” says Vince Smith, chief investment officer and deputy state investment officer at $31 billion New Mexico State Investment Council for the last eleven years. More cash coming back than forecast makes it difficult to hold up the sovereign wealth fund’s recently extended 13 per cent allocation to private equity and keep its weight to the asset class steady. “We are trying to increase our allocation, and in this environment it’s difficult,” he says.

Smith links the trend to the availability of liquidity meaning companies can go public and investors exit quicker than normal. Private equity teams are also turning companies around at a faster pace. “In some cases, they are just fixing the capital structure rather than overhauling company operations.”

Ideally the fund would have raised its private equity allocation to 15 per cent in its latest asset allocation study, but Smith and the team reasoned this would not be achievable in the study’s three-year timeline. The largest component in the private equity allocation is to growth and buy outs.

Venture Capital

Within private equity, venture capital has been the best performer but the allocation is not without its challenges, and Smith expects a tougher climate on the horizon as Central Banks pare back on their liquidity. “VC could run into some trouble,” he predicts. Getting into small VC funds, the best of which are usually closed to new investors  is an enduring challenge. New Mexico’s sovereign fund status has helped open doors that might be closed to underfunded US public pension funds. “Managers seem to favour our perpetual structure; our hand is a bit stronger. We’ve gotten into a couple of good funds,” he says.

Still, he notes that SWFs “the world over” face increasing pressure on their distribution rates. A factor he believes is contributing to SWFs increasingly aggressive growth allocations. “In the past, SWFs tended to have bond portfolios and maybe some real estate. The pressure on distribution rates had led to them wanting more expected returns.”

The State Investment Council also uses consultants to help access private equity funds and Smith observes enduringly tough fee negotiations as demand for the asset class continues. Elsewhere he says the fund still needs to pare back on the number of private equity managers and strategies in the portfolio which escaped a fund-wide manager pruning and restructuring in 2015.

New Mexico is also building out its private credit allocation, especially focused on the allocation for two new funds – the Tax Stabilisation Fund and Early Child Education and Care Fund. It has led to a hunt for private credit managers and strategies in an asset class he expects to grow in line with his broader anticipation of an inflection point ahead as central banks withdraw liquidity and reduce bond purchases. “If Central Banks withdraw, liquidity will have to come from the banks. They will have less capital to lend which will require more private capital to step in.”

The private credit allocation will be diversified across geographies and sectors, and he notes that the asset class is not as illiquid as often perceived. “We’ve found more liquidity than we expected when we moved into these markets. You can invest for shorter lock ups and there are quicker turnover periods.” Still, for an investor able to tie up money long- term this can be a double-edged sword. “We can’t always get the illiquidity premium.”

Macro perspective

The entire portfolio is externally managed, leaving New Mexico’s internal investment team of 12 primarily concerned with developing the outlook, strategy, and asset allocation in line with macro views. “Our manager selection is a tool to express those views,” says Smith. He has created a portfolio of standard investments allocated to well-known managers that shies away from complexity. He did away with a 10 per cent allocation to hedge funds and hasn’t integrated a global tactical asset allocation or related products. “Managers are always approaching us with new things, but our acceptance rate is pretty low,” he says.

Crypto: Not even close

He expects low returns going forward but sees light at the end of the tunnel, buoyed particularly by shifting demographics and the growing buying power of Millennials as they move to peak earnings. A tick up in productivity will help fuel growth but could also trigger deflation. It’s why he favours investments that throw off cash like infrastructure and real estate. He has no interest in crypto. “We are not even close yet,” he says, noting with surprise some US public pension fund investment. Houston Firefighters’ Relief and Retirement Fund recently announced that it had made its first investment in Bitcoin and Ethereum.

The portfolio is divided between stocks and bonds (50 per cent) and alternatives (50 per cent) where Smith is still filling out allocations to non-core fixed income and real return, both well below target. Building out the renewable allocation in the real return portfolio has been challenging because of competition, he says.

The allocation to core fixed income amounts to just 10 per cent in a reflection of traditional fixed income’s declining use in the portfolio. “Fixed income should provide income, liquidity and downside protection to stock investments, but it only does one of these things.” Unless there is a big sell off in the stock market, he doesn’t envisage any shift back into public markets.

 

 

A recent webinar hosted by FCLTGlobal, the not-for profit that aims to focus capital on the long-term to support a sustainable economy, urged investors to allocate more to emerging markets to solve the climate emergency and consider climate risk in every transaction.  Investors should include climate impact and a just transition into their traditional risk and return framework, said panellist David Blood, founding partner and senior partner at Generation Investment Management.

Dow, the global materials science company, has introduced a range of measures to achieve climate neutrality by 2050, said Jim Fitterling, chairman and CEO of the company. Dow has reduced its emissions by 15 per cent over the last decade and is targeting another 15 per cent reduction by 2030 driven by a sweeping investment program, he said. The company is increasing renewables in its power mix, as well as focusing on carbon capture, advanced nuclear and hydrogen strategies.

Most importantly, Dow’s decarbonisation strategy also allows the company to grow. “Investors understand you can grow and get your footprint down,” he said. “Investors want us to succeed and see us as part of the solution.” He noted how investors increasingly dig down into the company’s climate strategy details and like to see commitments and results.

Fellow panellist Kim Thomassin, executive vice president and head of investments in Quebec and stewardship investing at Caisse de dépôt et placement du Québec, said CDPQ uses engagement as a key lever of influence. The asset owner considers the ambition and potential of each investee company to reduce its carbon footprint, negotiates governance rights when it invests and measures progress.

For example, since CDPQ invested in India’s Apraava Energy in 2018 with the ambition to support the company’s transition, Apraava’s renewable energy mix has increased by 25 per cent. She said that CDPQ plans to exit oil investments by 2022. “Our capital remains available to energy companies that have a transition project.”

Giant asset manager Fidelity Investments’ fiduciary duty to maximise returns sits within the company’s sustainable strategy, said Pam Holding, co-head of equity and asset management lead on sustainable investing at Fidelity. Assessing corporate climate strategies is critical to understanding the long-term return profile of Fidelity’s investment. The asset manager determines where the risks are most material, and rank orders companies using a proprietary evaluation process drawing on quantitative and fundamental insights. Fidelity also actively engages with companies. “Every company is on a journey,” she said, adding that tomorrow’s climate winners maybe only just starting out. “Assessing climate strategies and risk is good business, and the right thing to do.”

ISSB

Panellists also noted progress on disclosure, namely the COP26 announcement from the IFRS Foundation that it would form the International Sustainability Standards Board (ISSB), tasked with creating a single set of standards to meet investors’ information needs. However, disclosure in private markets is a growing concern. “How we manage disclosure in private markets is critical,” said Blood.

Thomassin noted that although public companies are in the spotlight, investors also scrutinise private companies; the same ESG rules apply to public and private companies, she said outlining how CDPQ works closely with private companies and that private companies increasingly “ask for help” to adapt and transition. She added that CDPQ  now ties a portion of its own variable compensation to climate change targets.

Challenges accessing corporate data risks investors making the wrong judgements. It also introduces the risk of greenwashing in the asset owner and manager community. Companies and investors need to demonstrate they are not just talking about net zero commitments, but put in place actions to prove it, said panellists.

Fidelity is constantly trying to find new ways to access data, working with industry peers. “There are instances where data is sparse and not comparable from company to company,” said Holding. She spoke about the consequences of getting climate analysis wrong; incorrectly assessing the impact of climate change could mean investing in a company that fails to change or understand climate risk, she warned.  Investors need to be wary of double counting and additionality.

Fitterling said that a carbon price is preferable to government taxes. Taxes raise revenue for the government, but it’s not clear if they are redistributed to reduce emissions. Holding added that because data and comparability is still low, investors need confidence that credits are offsetting environmental damage.

 

 

 

 

New Zealand Super just returned its best-ever result of nearly 30 per cent reflecting the souped-up risk profile of the fund. In addition to the gains from its overweight position to equities, the fund under CIO Stephen Gilmore also fully hedged the currency. Amanda White explores the fund’s strategy and the risk budgeting review currently under way.

New Zealand Super’s long time-horizon – it doesn’t need to make payments until 2050 – allows it to take a lot of risk that other investors might not have the luxury of taking. But without the strong governance of the fund, this time horizon alone would not be enough to execute a risk-taking strategy, the fund’s CIO, Stephen Gilmore, told Top1000funds.com in an interview.

“We have a reference portfolio of 80:20 so that does pretty well in environments of rapid gains in equities,” he says of the financial year return. “In addition to that we had fully hedged the currency so we got the benefit of that currency risk premium. And a number of our active risk activities did pretty well too.”

In big picture terms, Gilmore says the whole approach is guided by a number of factors that allow for risk taking. The really long horizon is one, and the strong governance arrangements to facilitate that long view is another important part.

“We have to have strong governance in place to buy when it’s a bit nerve racking.

At time of the COVID shock, when credit spreads widened, we leaned-in to the sell off buying equities and taking greater credit exposure and we’ve got the benefit of that.”

One of the more important discussions at the fund in the past little while has been currency hedging. Gilmore describes this discussion as “rigorous debate on how much to hedge”. In the end the fund decided to fully hedge the currency.

“The considerations were multiple. We have a high level view there’s a currency risk premium associated with NZD, we get paid for taking exposure. We have to trade that with the liquidity implications of hedging, and what that means for diversification in the portfolio.”

Another driver of return recently, and one that has added value over many time periods, is the fund’s dynamic asset allocation, tilting, program (it’s added 1.1 per cent for the 10 year-period to 2019).

Gilmore says the tilting program has a lot of latitude to take risk and “we took a meaningful amount of risk”.

“The tilting program has been extremely successful. Conceptually it’s reasonably simple, we think about where fair value may be and the tendency for markets to move towards fair value, we don’t necessarily have concept of how quickly that will happen,” he says. “We have good risk appetite and decent time horizon.”

But to make that strategy work it is essential to have strong governance to support the sometimes uncomfortable buying opportunities.

“You have to stick with it, it’s a form of volatility harvesting and you need to focus on where you think the value is. We are continually updating those views on where the equilibrium is,” he says.

Risk budgeting

New Zealand Super introduced a formal risk budgeting process in 2014 and conducts that every five years. It’s now going through that process.

Currently some of the biggest sources are internal, the DAA tilting is one of those as well as

credit and funding mandates that lean in when there is a market sell-off.

“Those could change as we go through the current risk budgeting exercise,” Gilmore says.

“There are a few things that are different this time. When we introduced the formal process we didn’t have the history of experience and we didn’t know if we were any good at being active, we now have that information as well as more information on things like correlations. We keep refining the work and improving the information.”

More specifically the fund is doing more work to integrate liquidity aspects.

“We are incorporating information from our experience, some areas turned out to be more successful and some less which may impact the overall level of risk, as well as liquidity and correlation between different investment opportunities,” he says. “The secondary consideration is we do vary risk through time. We will have a target for many of those areas that will vary through time depending on how attractive we think it is.”

The risk budgeting exercise will be completed by June next year.

Scenario planning for the future

Gilmore said that the pace of the COVID-induced market downturn surprised many investors and for New Zealand Super was a conduit to question assumptions.

Scenario testing and the investigation of some possible structural shifts as well the work on risk budgeting ensued.

“We are looking at higher inflation, how transitory is it, how sustained is it, and what’s happening to growth and productivity. We want to think about the portfolio performance in different regimes,” he says.

The fund has a particularly high growth orientation and so when thinking about the future an interrogation into strong growth or weak growth or high inflation or if rates change.

“For a growth-orientated portfolio like ours the worst case is a downturn in growth like depression, but also stagflation where get high inflation and no growth is also bad for the portfolio,” he says. “Given our long horizon we don’t do too much but at the margin we are increasing our exposure to real assets. The real thing is to understand what happens when we come to those environments.”

So what if something has changed? For some time the team has been looking at a “structural shifts assessment” where it has investigated a lot of possible contenders for shifts which has been narrowed down to five core possible shifts.

The first of those is income and wealth distribution inequality, and whether there are shifts from capital to labour, what that means for margins and equities and redistribution and the confluence of monetary and fiscal policy.

“We’re thinking about a world of fiscal dominance, the attitudes to budget deficits and public debt levels, and if rates are at zero what does that do to the allocation of capital and efficiency of market, and to growth.”

Gilmore says the team has questions around how this plays out the long term and a world in  which more is determined by policy action rather than prices.

Geopolitics, the relationship between China and the US and the implications for globalisation, capital of markets and technology, is also a key consideration.

Other key topics include work flexibility and digitalisation, including crypto and smart contracts, and how that changes the investment universe. Climate change of course is also on the agenda.

“We are looking at all those things and asking so what? Does it have any impact on the way we do things? We’re unsure at this moment.”

 

Asset owners increasingly encourage their asset managers to improve diversity, but both owners and managers report the need to grow diverse talent coming into the investment industry, according to recent research from asset managers and owners including Unilever and the New York Presbyterian Hospital for Russell Investments conducted by Cerulli Associates, the global research and consulting firm.

Asset owners and managers says their efforts to recruit and hire diverse employees is limited by small pools of talent. Solutions include broadening the group of universities from which they draw talent or specifically targeting certain Historically Black Colleges and Universities.

For entry-level roles, asset managers have traditionally targeted certain universities, falling in line with “you hire who you know” thinking. Some have addressed this by expanding the group of universities from which they draw talent. Others have implemented “blind” hiring processes, where they don’t target any specific universities.

Some participants (both asset owners and managers) said that their companies have begun to broaden their focus on academic majors as well. For experienced candidates (non-entry-level roles), organizations are broadening their focus to roles outside the asset management space. Notably, for some positions that require asset management experience, this is more challenging and highlights the reason why industry participants are putting efforts into growing the pool.

Survey respondents also cited challenges in retaining diverse talent at the mid- level career point. Measures meant to address this problem include the provision of career development and mentorship programs, while employee engagement surveys help investors identify areas of “flight risk” as well as the ability to assess their level of inclusivity. Self-evaluation surveys are used to measure an organization’s level of inclusivity. Other tools used are alternative meeting formats, where employees are given the opportunity to speak their mind both before and after meetings.

The survey found firms are competing for the same limited pool of candidates for roles requiring experience in the asset management industry. This especially applies to roles requiring investment management experience.

By including diversity inquiries in their RFPs, asset owners encourage managers to consider diversity at their own organizations and adopt measures to improve. Many asset owners questioned spoke of efforts to select woman- and minority-owned firms as asset management partners. However, others say that looking at diversity at the ownership level within an asset manager is an incomplete approach, as it does not consider the diversity of the employee base.

Asset managers tend to be larger than asset owner investment offices which has several implications for their D&I approach. Namely, they are able to evaluate diversity more granularly and can gain exposure to more demographics and absorb the corresponding costs more easily.

Factors driving owner and manager’s diversity efforts include both internal and external demand. Internal demand refers to demand from within the organization – either top-down or grassroots bottom up. For institutional investors, external demand comes from end-beneficiaries and, in the case of corporates, clients that their sponsoring organizations serve.

We just need more

Some asset owners and managers told Cerulli that they do not have specific diversity benchmarks or targets. These organizations are more directional, taking the approach, “We just need more.” While they are not necessarily behind in considering diversity measures, these organizations tend to be further behind in achieving results.

“Changing the makeup of your employee base is not something that you can do quickly. You want it to happen naturally over time. That departure of early career hires is something we’ve tried to fix through development and mentorship programs. The jury is still out on trying different things. Large firms have the resources to do those things. Do smaller firms have the ability to do that? I don’t know,” said one asset owner respondent.

In addition to forming their own peer-to-peer partnerships, asset owners and managers look to partner with third-party organizations specifically formed to address diversity. Examples of these third parties include non-profits such as Girls Who Invest, The Robert Toigo Foundation, and Invest in Girls.

COP26 has had many critiques and my review, in this article, gives it just over half marks. The phrase ‘good COP, bad COP’ summarises it well and how to view it depends on framing and context.

One good note was that the marching orders for the investment industry have emerged at least at a high level. The industry is now more broadly committed to a significant role in the implementation of this great transition to a net-zero economy, starting with a halving of carbon in the decade ahead. So, the road from Glasgow now needs its roadmap and some key milestones.

In the 3D investment framework is a gamechanger article I argued that the investment firm of the future must have the 3D investing model, comprising return, risk and impact on its roadmap. Here I argue that something even more significant is lined up for the asset owner of the future in which shifts in convention, collaboration and culture are needed for the transformational changes ahead.

Convention

The investment models – ie the structures, processes and content – used in our industry have evolved over time into a range of best practices. That paradigm is being shifted by large-scale changes to asset owners’ circumstances, particularly relating to sustainability, the prevailing investment macro and governance.

While sustainability and ESG forces have now largely been integrated, there is further to travel into 3D investing and impact. And central to this new model is universal ownership theory[1] and the rise of systemic risk.

We also have a new investment macro. The succinct version of this is the rise of private market investing and the fall of 60-40 as the main responses to lower-for-longer interest rates and returns. This is calling for as much unlearning as new thinking as one shouldn’t use an old map to explore a new world.

The last shift is organisational in nature. Most asset owners have kept to a basic benchmark-oriented model in which their boards have ownership of investment policy via a policy portfolio and implement using outside investment managers. But with more complex goals coming from these paradigm changes (like net zero), the shift to an outcome-oriented model is increasingly attractive alongside making increases to internal capability to manage in a more streamlined, sophisticated and – most of all – holistic way. The test of this approach is at the total portfolio level – where every investment contributes to the joint goals of maximising risk-adjusted returns and alignment to net-zero commitments[2].

These shifts are leading asset owners to contemplate future actions that are substantially dissimilar from today’s actions. Managing real-world impact is the biggest example. That calls for new versions of collaboration and culture.

Collaboration

For this transition, we need a big shift in priorities in the fields of active ownership, engagement with asset managers and in engagement with sustainability NGOs like PRI. This will require asset owners to build new capabilities in leadership and teamwork.

Systems leadership is quite a good marker for the new type of leadership we need to enable the collective action so critical for success. This is collaborative leadership that finds joint solutions to common problems framed by a joined-up understanding of the interconnected, but messy, systems of which we are a part. It is built on respect for the multiple strands to the challenges and the multiple people that have a stake in the problems, and on a realism that the there are multiple facets to any problem requiring thought though and holistic solutions. A systems leader works with the belief that their, and their organisation’s, success depend on co-creating wellbeing within a very large system.

Part of this requires more attention to be given to effective teamwork which is, in effect, the principal way value is created in investment organisations. But the focus on making teams work well is largely absent even though the ways to do so are quite self-evident. That is not to say it is easy. Working with the enablers of cognitive diversity, collective intelligence and organisational culture to enhance team dynamics and engagement requires confident leaders with a high emotional intelligence and systems leaders that walk the talk by empowering deeper collaboration and sustainable cultures.


Culture

In the aforementioned 3D gamechanger article I suggest that culture is symbiotic with sustainability, whereby positive culture supports sustainable investing and vice versa. And that organisational culture has been deepened and enriched in many places by the wider purpose and goals mantra that has emanated from the sustainable-investing model.

The pandemic has reinforced these links with many financial institutions responding to the difficulties experienced by the workforce by taking more humanistic pathways. This has been a differentiator for some, but it obviously does not register for all, with many organisations still seeing sustainability through a business-first lens and not the people-first lens, which I think it requires.

A rapidly changing society is a new factor entering an equation where climate change casts such a long shadow. There is a resultant societal zeitgeist which increasingly reflects the resentments of harms caused and a less-than-just transition. The systemic risk of these social changes is significant. And a conceivable scenario is a world in which investment organisations’ social license to operate is downgraded or even taken away. The key is for asset owners to recognise the rise of systemic risk and build critical strategies to address it.

The different roads from Glasgow stretch out in front of us, with many finishing in dark places. But we can all make brighter choices about the role of our influential industry in a high-stakes transition, if we take seriously the great responsibility that comes with this power.

 

What did we get from COP26? Doing what we can with what we’ve got
This personal view is through an investment industry lens using a systems-wide perspective.		 Marks
Overall COP26 assessment:

 

1½/3

 

 §  Glasgow was never the place to solve the climate crisis but it has been a place to get better alignments in place – science, politics, civil life, rules and principles. And signal some marching orders. We have made progress

§  There has been improved holistic understanding and to some extent inclusion of nature-based solutions (carbon sinks, forestry, oceans intact) and of financial commitments and solutions

§  A version of the Stupidity Paradox* among nation-state administrations is holding back progress. In Glasgow communications were over-simplified, over-optimistic and under-authentic. The saying-doing gap (greenwashing) was everywhere (as Greta Thunberg pointed out) as was political correctness (except remember Tuvalu)

 

 ½

 

1

 


0
World leaders coming together with appropriate seriousness & collaboration:


1½/3

 §  The absence of systems leadership in Glasgow was omnipresent, we got myopic leadership. At no time have we needed systems leaders more because we face a host of systemic challenges beyond the reach of existing institutions and their hierarchical authority structures

§  This is the first COP where we did not debate the direction of travel, just the speed. But we are doing that with a lack of urgency

§  We have been given a road from Glasgow just as we had a road from Paris

 0

½

 

1
Passing the baton – support for a wave of initiatives; battling new conventions

2/3

 §  Glasgow signalled the considerable progress in the finance community with capital an increasing force in tackling the climate emergency

§  The rainbow aspect of the climate coalition was evident – activists, academics, NGOs, lobbyists, business and government all part of a wide stakeholder ecosystem addressing the planetary ecosystem

§  Climate challenges are producing peak complexity and a messiness with considerable challenges to convention which those with the baton are not yet in great shape to address

 

 1

 

1

 

 

0
Collaboration – with influence through soft power and systems leadership:


1½/3

 §  Relationships across the value chain and with peers are starting to be deepened and sharpened with industry collaboration groups (PRI, GFANZ, etc) much more significant

§  The market infrastructure in climate investing (regulation and standards, data and practices, etc) is really immature and is leading to a logjam of ten years of work needing to be squeezed into one or two. Glasgow confirmed a few areas of progress, notably financial market sustainability disclosures

§  Countless collaborative initiatives have started in the past decade but failed to foster systems leadership within and across organisations

 

 1

 

 

½

 

 

 

0
Culture and change in investment private sector:

 

 2/3

 

 §  This is a great commercial private finance opportunity that can galvanise much more energy and creativity but to exploit this investment organisations must step up a lot in their sustainability credentials and edge

§  Glasgow has helped signal to actors in the financial sector to come on board and has directed the focus on where capital should be moving and what standards are needed

§  The main factors supporting the winning business models are true commitments to net zero, change capabilities and strong culture which makes this tough for most organisations – only some will make it. As prevailing industry cultures remain overly self-interested, they may find it easier to avoid the challenges and occupy the boltholes** like free riding and greenwashing that are more about looking good than being authentic

 

 ½

 


1

 

 

½
Overall marks COP26 has been moderately successful, particularly in terms of how it has mobilised thinking and action, but it will be seen as a missed opportunity 8½ / 15
*Stupidity paradox – source Alvesson and Spicer. Organisations encourage a degree of stupidity through a misplaced faith in classic leadership (not more progressive systems leadership versions), addiction to branding, thoughtless attachment to conventional rules, and overly upbeat cultures because it seems to work in the short-term. The application to nation state administrations is that they use the same over-simplifications, over-optimism and myopic orientation that are politically expedient and work short-term but are not good with long-term issues

 

**Boltholes – source TAI. Systems exhibit patterns like freeriding, tragedy of the commons, arms races, winner takes all and greenwashing. Understanding these is particularly important given a tendency of organisations and nation states to use them as ‘boltholes’ – ie places that are comfortable because they avoid long-term challenges with neat-looking short-term fixes that also reduce career risk

 

[1] Universal ownership combines the large-fund mindset of seeing themselves as long-term owners of a slice of everything – the world economy and market and its implied dependency on the market beta; with the large-fund strategy of leveraging collective action to build better beta to address systemic risk through active ownership, systemic engagement and allocations to more sustainable betas. ‘For universal owners, overall economic performance will influence the future value of their portfolios more than the performance of individual companies reor sectors’. (Urwin | Universal Owners | Rotman Journal of Pensions Management 2011)

[2] The total portfolio approach methodology (TPA) has been developed by a number of leading asset owners. See Total Portfolio Approach | TAI.

 

Roger Urwin is co-founder of the Thinking Ahead Institute

 

Pension funds positioning for growth should prioritise building technological capacity, according to chair of Alberta Investment Management Company Mark Wiseman who led CPPIB through a significant growth period.

“Really, if you have much less than $1 trillion in assets it’s almost impossible to compete globally, as big as the pension plans are, they’re not big enough to compete with the private sector,’’ Wiseman told delegates at Conexus Financial’s Fiduciary Investors Symposium in Australia.

“People, processes and systems –  all of those things are incredibly important. If you’re playing catch up, you’re building your tech from behind and you’re never going to get it right,’’ he says.

“It’s a bit like a war; when you’re at war it’s great to move troops ahead but if you don’t have the supply lines then they can’t be effective at the front lines.”

Wiseman, who after leaving CPPIB as CEO also held senior executive positions at Blackrock including Chairing its investment committee, says the manager’s arrival at $10 trillion in funds under management was realised through technology and a “maniacal” focus on automating as many functions as possible for operational leverage, elimination of errors in the system, and use of data and IT systems to make investment decisions.

“Blackrock spends $100 million a year just on data. Not processing or analytics. Alternative data sources, satellite imagery and specificity around shipping costs,’’ he says.

AustralianSuper chief investment officer Mark Delaney says the Australian “mega fund” is now in Model 3.0 of its growth phase which means a more internally managed portfolio with a large investment team operating on a global platform.

“As we get larger the proportion of assets we have invested overseas will increase,’’ Delaney says.

“Australia is a very tough time zone to run global assets from and global investment is what we’re looking to build. We need to be in those markets closer to the assets.”

He predicts AustralianSuper will have 1000 staff in front and back office roles beyond two years, but says recruitment takes time and “bandwidth” from people doing the hiring from within the fund.

“In building 3.0, we looked at others who were $400 and 500 billion and saw what they were doing, the same way we developed 2.0.  We’re following the same tried and true strategies with a bias towards private markets,’’ Delaney says.

“We looked at capability and you need a large office, you need a global footprint, you need access to good deals, good partners and highly skilled portfolio managers and you need a very efficient implementation so you don’t give up much in leakages within the portfolio,’’ Delaney says.

Technological change is “coming slowly” to Australia’s super industry with fund managers still using spreadsheets and data which has not changed much since the 1980s, he says.

“There won’t be many fund managers who don’t know how to use AI in the future,’’ Delaney says.

“Data matters, but comes at enormous expense to the business. Already it’s very large for us and alternative data costs even more money. We need to watch data expense to make sure we’re getting value for money.”

McKinsey partner Eser Keskiner (the consultancy recently advised Aware Super on its five-year plan) says culture is central to sustainable growth for super funds.

“… as you expand how do you make sure the culture you build over time is not changed and is unique,’’ he says.

“One thing that’s worked well is mixing homegrown talent with overseas talent that blends; usually the secondees come back to their home country and culture is well established in overseas offices.”

Keskiner says artificial intelligence and data usage is also in a “nascent” phase for pension funds.

“The part that is still nascent is the usual AI, big data and tech in investment decisions,’’ he says.

“There’s this fear of: ‘where will tech fit in with investment decision making? Will it displace human decision making? Is it complementary? Where do we draw the line?

The big area is to what extent can we automate and take away analytical data analysis that will free up investment professionals to add quality on top.”