Aware Super, one of Australia’s largest superannuation funds, engaged McKinsey as part of the development of its next five-year strategy which the fund presented to the board in March. The fund is the product of fund mergers (First State Super, VicSuper and WA Super ) – a signature feature of the Australian pension marketplace. As it develops its next five-year plan a key initiative is how to deal with growth from an internal organisational perspective and in investments as it plans for an organisation that could double in size.

Chief investment officer, Damian Graham, is spending less time on investment strategy and financial market implications and more on organisational strategy and people management.

“It’s a lot about ensuring the investment function is well organised, is appropriately structured and that you have the right resources. It’s a lot about people management, organisational strategy and stakeholder management,” Graham says.

Indeed, it’s the shape and mechanics of Aware’s investment teams along with the fund’s approach to investment partnerships, the internalisation of certain investment functions as well as decisions around direct and co-investing partnerships where Graham has been spending a lot of time.

This plan will likely differ from other investment implementation plans designed by the group to date based on the fact it assumes the fund could be managing twice the amount of assets as the A$145 billion it has under administration today.

“As we move to A$200 billion and beyond we have to test our approach, structure and operating platform to support future growth,” Graham says . Aware is building an investment framework and strategy to comfortably accommodate A$300 billion by 2026.

Aware engaged consulting firm McKinsey to conduct a process which included discussions and comparisons with pension and sovereign funds around the world as part of constructing its five-year strategy which it delivered to its board in March. It is now working on the first phase of implementation.

“We wanted to test our operating platform and capabilities against global best practice to allow us to deliver strong returns on a long-term basis and to do it sustainably and at lower cost,” Graham explains.

Cost comes through scale, which will come organically as well as potentially inorganically via mergers and fund acquisitions, Graham acknowledges.

But cost can also be controlled through improvements to strategy and investment structures, he adds.

“We want to reduce cost to member materially… It is that duel objective of strong returns and also controlling the members costs,” Graham says, highlighting that Aware’s most popular MySuper growth option currently costs members in the low 70 basis points.

Pushing further down the path of internalisation will result in efficiencies for the fund, a feature of Aware’s five-year plan, Graham explains.

Internalising continues

Aware has a plan to increase the proportion of its internally managed assets from 20 per cent currently to 40 per cent across all of its portfolios in the next five-years at a time when it is also factoring in the potential doubling of total assets.

Identifying the fund’s strengths and competitive advantages has taken up a large part of Graham’s thinking and strategic planning, he says.

Local credit and direct lending, systematic equities investing as well as private equity co-investment are areas Aware will continue to focus on bringing expertise inhouse for as the execution of the five-year plan continues to play out.

Direct lending or ‘credit income’ as well as low-grade credit is an area the fund is focusing its internalisation capabilities on alongside the co-investment and co-lending relationships it is working on overseas.

It’s systematic equities project which it engaged HSBC on two-years ago will continue to help Aware build out its internal IP. Graham won’t be drawn on a “natural endpoint” for this project outside of highlighting that the mandate will eventually revert internally at some point in the future.

Infrastructure has been an area Aware has established internal expertise in, Graham acknowledges. He adds that private equity will be another area Aware will continue to push into co-investment relationships.

“I think we have a good capacity to manage complexity in our organisation. We want to continue to have flexible mandates which enable us to take on additional complexity to trade that for price paid,” he says.

“We have been happy to buy assets we need to develop or a business model for which we need to implement to create value. That additional complexity is a good trade off to get you a better return but not in every asset class,” he says.

Active management still lives here

The increasing focus on performance comparisons in the Australian market won’t be the death of active and fundamental management, according to Graham, however he added that funds will likely need to periodically adapt their approach to taking on risk.

“If you’re in the situation where you are at risk of failure of the performance test, clearly in the period before you’ll be considering what you do with active risk and there may be a way of changing the active risk in your portfolio to reduce the risk of failure and that will be a natural consideration the fund will need to go through,” he says.

“I don’t think this will kill active management, but at points in time you will need to consider active risk and need to change that.”

The balanced growth fund of Aware Super has returned 7.15 per cent over the 10 years to May 31, 2021.

When it comes to the evolving role of CIO as the country’s largest funds evolve into ‘mega’ funds, Graham puts it this way: “I try to keep somewhat of a good eye on markets, the investment decision making and frame work I keep involved in but not overly involved in,” he says, before adding that risk culture and governance rests with him in the Financial Accountability regime.

Graham is still at weekly investment meetings where all the main investment decisions are made but he concedes that a lot of the day to day decisions will go back to people responsible for the individual portfolios.

 

Aware Super Strategic Asset Allocation

Institutional investors face a rapid and evolving set of responsibilities that can severely impact their ability to focus and fulfill on their long-term strategy if not dealt with in a process-driven way. FCLTGlobal has released a guide for investors, Ripples of Responsibility, to specifically provide procedures around those responsibilities and gives investors tools to understand and fulfill on these responsibilities.

Failing to fulfill on responsibilities can cause staff to be distracted or leadership turnover and interrupt the focus of the investor on the long term.

“You can’t maintain your focus on the long term if you can’t maintain your focus at all,” says Matt Leatherman the report’s author and director at FCLTGlobal. “Fulfilling on your responsibilities is an enabler of your long-term focus when done well.”

In developing the toolkit, FCLTGlobal held workshops with asset owners and managers around six areas of emerging responsibility: economic impact at home and abroad, equity lending and stewardship, investor responsibilities when there is an impasse in corporate engagement, investor responsibility for climate and environmental impact, racial and gender diversity of portfolio companies, and reputation management.

“A lot of change is going on in real time in how the institutions dealt with those particular issues,” Leatherman says. “What stands out is it is normal for there to be an individual or small team who knows their responsibilities. The challenge is turning around and fulfilling that at an organisational level and getting consistency across those functions. That is the standard of responsibility but it is hard to do.”

FLCTGlobal’s paper – whose title is a reference to the ripple effects of not fulfilling responsibilities – provides tools for investors to identify their core responsibilities, determine how expectations become responsibilities, and consider the steps necessary for the fund to meet those responsibilities.

“We believe it’s an individual organisation’s responsibility to say what their responsibilities are because they have different purposes. But purpose is the referee and what determines what you are responsible for, the manner and degree of that responsibility and how you go about it,” Leatherman says. “There are some common responsibilities among asset owners across the world but they are not common because a peer has it but because of similar purpose.”

While collective action among asset owners with a common purpose is useful, the focus of FCLTGlobal’s work is on achieving internal consistency across an orgnisation to achieve their own responsibilities.

“We want to be able to provide a procedure that any institutional investor could pull from the back of the document and put to work. We won’t tell you what your responsibilities are but if you use it you will know what they are and be able to fulfill on them.”

The toolkit includes five steps to operationalise responsibilities and questions to fulfill investor responsibilities.

The five steps to operationalise responsibilities are:

  • Taking inventory of current responsibilities
  • Anticipating emerging expectations
  • Processing emerging expectations
  • Fulfilling new responsibilities
  • Communicating about responsibilities

“We hope the five steps can be entry point for boards and executes to know the direction to lead. Then the detailed toolkit related to those five steps are the things that staff can put to work to behave consistently to fulfill on the organisations’ responsibilities.”

 

 

 

This special report aims to address the challenge of mobilising investment and finance to support clean energy transitions in the emerging and developing world. This is based on detailed analysis of successful projects and initiatives, including almost 50 real-world case studies – across clean power, efficiency and electrification, as well as transitions for fuels and emissions-intensive sectors – in countries ranging from Brazil to Indonesia and from Senegal to Bangladesh.

The priorities focus on financing sectors that are market-ready, based on technologies at mature and early adoption stages, such as renewables and efficiency. They also examine options for financing transitions in fuels and emissions-intensive sectors where decisions taken over the next decade can lay the groundwork for the integration of new technologies – or could potentially lock in emissions for decades to come. We focus on actions that need to be taken between now and 2030 – a pivotal decade for economic recovery, for the realisation of the UN Sustainable Development Goals and for climate action.

Click here to read the full report

Click here for executive summary

In just 20 years the Canadian fund PSP Investments has grown to more than $200 billion. As it enters its next five year strategy, Amanda White spoke to CIO Eduard van Gelderen about the next phase of portfolio management and the development of its total portfolio approach including assessing and allocating investments on a sector basis.

In the past five years a big focus at PSP Investments has been developing the total fund portfolio approach including the team and decision making, and CIO Eduard van Gelderen says this meant the portfolio fared well during the market volatility of the past 18 months.

“When the uncertainty started the most important thing was that we didn’t panic,” he says. “We had a controlled way of looking at our portfolio on the public and private side of investments and didn’t really change positions that much. We didn’t feel any pressure to change or sell, far from it.”

The team’s approach is very focused on the long term and assessing positions on that basis. There was increased analysis of the portfolio during the market volatility, including every line item and the watch list grew from its usual 2-3 per cent, but there was not much movement in strategic positions.

“The process we have in place is very solid, every individual deal goes through an investment and risk committee and there is an independent role by the risk team to assess positions. The collective knowledge we have on individual positions is very high. That helped us not to panic and not to sell and that clearly paid off,” van Gelderen says.

The fund has around 47 per cent of assets in public equities which was the main driver of the 18.4 per cent return in the past financial year.

In the past financial year, which runs to March 31, there were 50 transactions that entailed cross-asset class collaboration, emphasising this collective knowledge, and evolving the total fund approach will continue into the next strategic plan.

PSP Investments, which invests funds for the pension plans of the federal public service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force, was formed in 2000 with less than 20 staff and about C$2.5 billion. It now employs more than 900 people and manages C$204 billion.

20 years ago it invested passively in public equities and bonds building up the private assets exposure over time including infrastructure, real estate and private equity which alone now accounts for 15 per cent of the portfolio. In the last few years the fund has expanded to open offices in London, New York and Hong Kong.

For two decades the effort has been on the bottom up, building different investment teams that were looking for best ideas.

“The emphasis has been on building up investment portfolios and now 20 years later while we have done a good job in generating returns going forward we need a more top-down total fund approach,” he says.

This includes examining the role of the different investment teams in the total fund.

“Not every team is about maximising returns, for example what are the roles of the different asset classes in mitigating funding risk?” van Gelderen says.

As an example he said a new infrastructure strategy was introduced last year which was not about return but driven by matching the pension liabilities, which are fully indexed to inflation.

“We do that with every single asset class,” he says.

The last 20 years has also been characterised by government cash injections and contributions being a major driver of growth.

“When we started to invest cash was the big driver now 20 years later the portfolio is the big driver, so the focus is on running the portfolio now not the individual deals. It’s about how we steer the C$204 billion going forward and match it with the mandate.”

A sector approach capitalises on collective knowledge

As PSP looks to the next five years a clear message is coming from the fund sponsor, the Canadian government, that risk is more important than the upside.

“It is about maximising returns but the funding risk is becoming the real driver going forward. Does that mean we change the portfolio construction process and emphasise that element more than we did before,” van Gelderen says, adding that there are a number of different projects underway that look at that.

One of the more interesting is a move to a more sector approach rather than asset class classifications.

“We already had an initiative with our healthcare team where different people from different asset classes come together, and by combining these people we have a very rich dialogue on how this sector is behaving and where the opportunities are,” he says. “It provides a lot of interesting investment opportunities going forward. We want to expand that model to other sectors too.

“A traditional divide between public and private doesn’t make sense, that is just packaging. It’s better to combine all the collective knowledge we have and see where the best opportunities are. It’s very exciting and is part of our total fund approach going forward.”

van Gelderen, who has been at PSP for three years coming from heading up APG via a brief stint at California University endowment, says technology is another sector the team is closely analysing, in particular to determine what technology represents incremental change and what is disruptive.

“Instead of saying let the asset classes themselves look into it we think it is a huge benefit to group everyone together and see what we really think is happening,” he says. “We have a part of the organisation looking at the more disruptive, longer term changes and how that will impact our portfolio. We are spending a lot of time on this.”

PSP’s new strategic plan has three pillars: this notion of a global fund first where total fund performance is emphasised, being insight driven, and a emphasising a high performing team.

Van Gelderen says from an investment perspective a lot of time and energy will be spent on technology and data.

“We have a lot of data on the asset classes but that doesn’t mean we have it on the total fund,” he says. “We feel that if we combine the different investment teams and have a dialogue and come to a conclusion we want it to be more fact based and data driven than before, we don’t want to make the decisions purely on a narrative but want the supporting data to come to that conclusion too.”

He believes that developments in digitalisation and the enormous increase in available data provide an opportunity.

“More data doesn’t mean better investment decisions, it’s the quality of that,” he says. “A lot of people immediately think of AI, but that is only part of it. It’s data-driven, insight-driven investment decisions. If you believe the investment world is a low yielding investment world then this is very important to help differentiate investments.”

Investors are calling for more quantitative metrics around corporate climate change disclosure, with Olivier Rousseau, executive director of the French sovereign wealth fund FRR, calling for mandatory disclosure.

“Data is still lacking and dis-harmonised, which is why we want compulsory disclosure in a number of fields around transition and physical related risks,” he said.

“Besides GHG on a relative and absolute basis, the path for emissions and plans to emit or transition is crucial. It would massively help the investment community.”

Rousseau, who called ESG the financial risk of the future, called for a carbon price as a nice neat solution.

Speaking at the Bank of International Settlements Green Swan conference alongside Rousseau, head of ESG at MSCI, Remy Briand, outlined the lack of basic disclosure around scope 3 emissions.

He said in the universe of 10,000 companies across mid, large and small cap in emerging and developed countries about 40 per cent are disclosing scope 1 and 2 emissions but only 20 per cent are disclosing scope 3.

“Scope 1 and 2 are basic ingredients. We think that is an element that should be mandatory because it is a basic ingredient,” Briand said. “Net zero targets and alignment with a 1.5 degree trajectory will be the centre of this dialogue going forward. Without the core ingredient it is without precision.”

Herman Bril the former executive director of the United Nations Staff Pension Fund who is incoming CEO at Arabesque, says the TCFD is a good candidate to become the global standard but lacks the explicit mention of targets in its framework.

“The TCFD would be a really good candidate to become the global standard, it was launched by a voluntary initiative led by Mike Bloomberg and Mark Carney and it has been been broadly embraced, but something is missing. We can’t win the race to net zero without long term and short term targets,” he said.

Bril points out the guidance for institutional investors by the Net Zero Asset Owner Alliance which shows how to incorporate climate risk across all asset classes in the short term and long term.

“That is helpful for investors, and it would be more effective if corporates could also embrace science-based targets.”

He said while the momentum is moving in the right direction he urged regulators and policymakers to step in to accelerate the process.

“The clock is ticking, that is not realised so much by everyone.  This is not a relative game. It is an absolute race,” he said. “The bottom line is we will not win the race to net zero without mandatory disclosure, or emissions data or explicit targets.”

Meanwhile this month IIRC and SASB formerly merged to create the Value Reporting Foundation which offers a comprehensive suite of resources designed to help businesses and investors develop a shared understanding of enterprise value and how it is created, preserved or eroded over time.

Chief executive of the Value Reporting Foundation, Janine Guillot, said the merger was a response to the call from business and investors for more clarity and simplicity in the corporate reporting landscape.

“This merger also better positions us to support key bodies such as the IFRS Foundation and continue to work with our colleagues around the world to drive progress towards a comprehensive corporate reporting system,” she said.

The resources available include the Integrated Thinking Principles which look at how value is created in the short, medium and long term, the Integrated Reporting Framework which supports effective reporting on strategy, governance, performance, prospects and business model through a multi-capital lens, and the SASB Standards which provide investors with consistent, comparable, reliable data on the ESG factors most relevant to financial performance and enterprise value.

Income inequality is limiting economic growth, creating more frequent and deeper recessions, and increasing social instability. While the social challenges and issues stemming from inequality have been understood for decades, the economic impact of extreme inequality has only recently been studied.

According to the IMF, when the income share of a country’s wealthiest 20 per cent of people increases by just 1 per cent, GDP growth is 0.08 per cent lower in the subsequent five years, whereas an increase in the income share of a country’s poorest 20 per cent of people is associated with 0.38 per cent higher growth.

Disparities between population segments can also limit growth. The wage gap between black and white Americans accounts for as much as 0.2 per cent in lost GDP each year. By addressing the wage gap between men and women globally, countries would add 0.6 per cent to their GDP annually.

Clearly, income inequality hurts long-term profits and weakens our financial system, and it is past time for investors to take on this challenge. This is a broad, systemic challenge we are facing as a society, and it requires equally ambitious action from investors to change their investment approaches to address income inequality, improve the long-term health of the markets, while also still operating profitably and enjoying competitive returns.

A new toolkit from The Investment Integration Project, with support from the Generation Foundation, applies principles of systems-level investing to show how investors can confront income inequality and take actions that enhance their current policies and practices. The toolkit, Confronting Income Inequality, reviews a range of conventional and advanced techniques and tools at the disposal of asset owners and asset managers to address income inequality.

Conventional techniques – such as portfolio construction, engagement, manager due diligence, and policies and beliefs about the functioning of markets – are a part of daily practice for all investors. These familiar activities can be extended beyond portfolio construction and risk management to encompass the systemic risk of income inequality as well.

Advanced, system-level investing techniques can be used to influence the rules of the game and the culture within which the investment community operates to minimise the systemic risk and maximise potential rewards. These techniques can be grouped according to three broad or overarching tactics: field building, investment enhancement, and opportunity generation. As broad categories they show the path forward for the practice of system-level investment: first, investors start working more collectively (field building), then change the way they make investments (investment enhancement), and then create investment opportunities that will improve systems (opportunity generation). These techniques, which are the foundation of system-level investing, vary in their usefulness from asset class to asset class, and in how they can be applied to specific systemic issues.

One clear opportunity for investors in these advanced investing techniques is around calls for fair compensation and a living wage. The Platform Living Wage Financials (PLWF) is a collaborative effort of 15 financial institutions with more than $3 trillion in assets that encourages companies using manual labor (e.g., garment and footwear, food, and beverage) to pay workers a living wage that enables them, at minimum, to cover basic living expenses in accordance with International Labour Organisation (ILO), OECD, and UN guidelines and principles. The PLWF investor members identify and highlight companies with best practices and encourage progress in consideration of this issue throughout entire industries. In 2019, the UN’s PRI singled out the PLWF for praise for this active ownership project, which has led to various firms incorporating living wage policies into their management practices.

Another area of opportunity is decreasing the pay gap between men and women and other underrepresented groups. In 2017, the United Kingdom required companies with more than 250 employees to report on and publish their employee pay gaps each year. Companies must disclose the disparities in hourly, bonus, and overall pay between men and women. The UK government enforces these mandates and failure to comply can result in legal action and fines. In 2019, 100 per cent of these companies with over 250 employees reported this data to the UK government, with the gender pay gap for all workers falling from 17.4 per cent in 2019 to 15.5 per cent in 2020. Investors can and should support these types of disclosures within their investment portfolios.

Investors can also support the strengthening and improvement of workforce policies and practices through the disclosure of labor-related data. The UAW Retiree Medical Benefits Trusts’ Human Capital Management Coalition, supported by 32 institutional investors with $6 trillion in assets under management, petitioned the Securities and Exchange Commission in 2017 to require companies to disclosure human capital management policies and practices, asserting that such disclosures are “fundamental to human capital analysis.” These policies and practices included workforce culture and empowerment, workforce health and safety, human rights, and workforce compensation and incentives.

Lastly, investors can support the right of workers to organise unions and engage in collective bargaining, adopt and enforce responsible contractor policies, and utilise collaborative techniques. In 2019, the Committee on Workers’ Capital (CWC), an international network of unions, initiated an Asset Manager Accountability Initiative to support asset owners wishing to increase asset managers’ attention to workers’ rights considerations. CWC plans to issue reports on the progress of the current status of the world’s largest asset managers on these issues. In October 2020, it published a report on BlackRock. Among its recommendations for BlackRock’s private equity investment program were that it improve its project-specific agreements and enforcement in its Responsible Contracting Policy programs for real estate and infrastructure, join the Cleaning Accountability Framework in Australia, and enter into dialogue with global service unions on working conditions and workers’ rights in the private nursing industry.

These and other opportunities are detailed in the Confronting Income Inequality toolkit, which can help you apply these and similar approaches throughout your portfolio. Because, as the COVID-19 pandemic laid bare, we are operating within weak and vulnerable social and economic systems, highlighting the need for investors to act on income inequality and other systemic issues. We hope this toolkit can help investors do so.

William Burckart leads TIIP (The Investment Integration Project) and is co-author of the book 21st Century Investing: Redirecting Financial Strategies to Drive Systems Change

Michael Musuraca is senior advisor at TIIP