One of our defining characteristics, and main objectives, at top1000funds.com, is to provide behind-the-scenes insight into the strategy and implementation of the world’s largest investors. Analysing the most read stories of 2017 shows that’s where our readers’ interest lies, as six of our top 10 stories for the year were Investor Profiles – interviews with CIOs of large asset owners.

In 2017, readers were interested in learning from one another with regard to asset allocation, innovation on fees, new investment opportunities and organisational design.

This year, we have delivered more than 300 Investor Profiles and other analytical and research-driven pieces on the global institutional investment universe, and we now have readers at asset owners from 95 countries, with combined assets of $48 trillion.

Thank you to all our interview subjects, readers and supporters over the last year. Below is a look at the 10 most popular stories of 2017.

 

Number 1:  OTPP’s private equity revolution

This deep dive into the world-class private capital division of OTPP, led by Jane Rowe, reveals a strategy of buying large direct stakes in companies, and a commitment to innovation.

Since its inception in 1990, the C$175.6 billion ($136.5 billion) fund has achieved an average, annualised return of 10.1 per cent; fully funded four years on the trot, it now boasts a $9 billion surplus. This track record has been achieved with a revolutionary investment approach that prioritises active, internal management and buying chunky direct stakes in companies, infrastructure and property. It has made OTPP the benchmark for endowments and pension funds the world over.

This story looks at the strategy of the 75-strong private capital team, which oversees a $20 billion global portfolio and complex relationships with about 40 core private equity funds. It reveals the shift towards direct investing and the search for opportunities in emerging markets. Read more

Number 2: Largest pension funds get bigger

The world’s biggest funds are gaining even more market share, and arguably more influence, over the world’s pension capital, with the largest 300 funds now accounting for 43.2 per cent of all global pension assets.

This story examines the Willis Towers Watson report on the top 300 pension funds for 2016, which shows the world’s 20 largest funds have increased their share of global pension assets under management by 7.1 per cent. Further, the capital is becoming even more concentrated at the very top, with the largest 20 funds in the world accounting for 40.3 per cent of the assets of the Willis Towers Watson 300 ranking. Read more

Number 3: OTPP: an innovator’s tale

The third most read story of 2017 was also a profile, on Ontario Teachers Pension Plan and its intention to unleash “a whole brand new level of innovation in the organisation that we have not seen in the past 15 years”. The fund’s chief executive, Ron Mock, revealed that the platform of innovation and commitment to excellence that has been at the foundation of the fund’s success will continue to drive it. This includes an evaluation of the way it manages its portfolio at a total fund level, and how it addresses risk and communicates as a team. Read more

Number 4: Cambridge hedge fund insight sells

The US-based Cambridge Associates is best known for its advisory work with endowments and foundations, where private and alternative assets have been its specialty. But its outsourced-CIO business is its fastest-growing, increasing by nearly 30 per cent each year for the last five years.

Cambridge manages $22 billion for clients of its O-CIO business, and these clients tend to have a fairly aggressive asset allocation. While it varies by client, a typical allocation for an open plan would include: 10-15 per cent in alternatives such as private equity and private credit; 10-20 per cent in hedge funds; a healthy portion in long-only equities; and 20-40 per cent in fixed income, depending on funding status. This profile looks at these allocations, and the tilt towards alternatives and hedge funds, and asks whether high fees eat into the potential alpha. Read more

Number 5: CalPERS says consultants could do better

The first-ever publicly released review of the California Public Employees’ Retirement System’s (CalPERS) investment consultants revealed a high satisfaction with the consultants’ honesty, integrity and competence, but much lower satisfaction when it comes to them recommending ways to control fees and costs and proactively bringing new investment opportunities to the board’s attention.

Eleven of the CalPERS board of administration’s 13 members provided responses to a 16-question survey assessing the consulting firms in three main areas: strategic analysis and recommendations, communication and responsiveness, and overall performance. Read more

Number 6: Texas Teachers bears down on fees

The $140 billion Teacher Retirement System of Texas is successfully renegotiating its fees with its hedge fund managers, including moving to a 1-or-30 model as it looks to realign fees across the board. Under the model, TRS pays hedge fund performance fees only after managers meet an agreed upon hurdle rate. Managers can earn whichever is greater – either a 1 per cent management fee or a 30 per cent cut of the alpha or performance after benchmark.

This innovative model was also outlined in a story we published on the chief executive of Albourne, John Claisse, who worked with Texas Teachers on the fee structure. Read more

Number 7: South Dakota pensions’ long view

Over the last 10, 20 and 43 years, the South Dakota Investment Council (SDIC), which manages the benefits of more than 84,000 of the US state’s public-sector employees, has ranked in the top 1 per cent of US public pension funds in terms of investment performance. This article looks at the strategy at the $10.5 billion fund, which is based on strict adherence to long-term strategies. The fund’s quest for value has led to contrarian moves in real estate and debt, plus a focus on hiring and retaining young, local talent. Read more

Number 8: Private equity persistence slips

Persistence of returns in private equity is diminishing. Moreover, the returns themselves are not what they used to be. And in even further bad news, new research from a leading Massachusetts Institute of Technology academic shows that co-investment vehicles may not be a panacea for these problems.

In the first of this two-part series, chair of the finance department at MIT Sloan School of Management, Antoinette Schoar, reveals new research that looks at the structural change private equity is undergoing – with persistence and performance waning – and warns investors that co-investment may not be a panacea.

The second part of the story looks at how investors are reacting to this news, including the Oregon State Treasury, which has the oldest private equity program in the United States. Read more

Number 9: Asset owners zero in on fees

The results of the third-annual conexust1f.flywheelstaging.com/Casey Quirk Global CIO Sentiment Survey, published back in February, revealed that asset owners planned to put more pressure on fund managers’ fees in 2017, as they looked to control costs in a low-return environment.

Chief investment officers cannot rely on markets to generate high returns, and also can’t control contribution levels, so they are looking to what they can manipulate – costs.

As a consequence, managers need more innovative thinking around fee structures, according to the survey, including models that put more of their own skin in the game.

This was definitely a theme that played out as predicted in 2017. Read more

Number 10: The value of the Canadian model

A lot has been written about the superiority of the ‘Canadian model’ for managing pensions, but assigning an actual value to this organisational design structure has been elusive. Now, Keith Ambachtsheer has done it. He looked at eight Canadian funds that have provided CEM Benchmarking with data for 2006-15 and also exhibited for that 10-year period three features he considers part of the Canadian model: a clear mission, a strong independent governance function, and the ability to attract and retain talent. The funds also have had sufficient scale to insource the investment function if they choose. He compares these eight funds to 132 other funds with data in the CEM database and, using an elaborate framework, places the “value” of the Canadian model at $4.2 billion a year. Read more

Just a hundred companies are responsible for about 85 per cent of total greenhouse gas emissions. Global investors have seized upon these findings from extensive carbon mapping data to forge ahead with a new, five-year initiative to target the worst climate offenders directly, to curb their emissions, improve climate governance and strengthen disclosure.

“Money talks. If we can deploy capital and the power of financial markets, we can ensure [these] companies make the transition needed to cap global warming,” says Anne Simpson, investment director, sustainability at $323 billion California Public Employees’ Retirement System (CalPERS), speaking at the launch of the Climate Action 100+ initiative, timed to coincide with the two-year anniversary of the Paris Agreement to limit global warming to below two degrees.

The money involves about 225 global investors, with a combined $26 trillion under management, who have come together in the short time since the invitation was issued in September. Entities backing the project include the Swedish AP buffer funds, many of the UK’s local authority schemes, and some of the most influential Australian, Canadian and US public pension funds. Co-ordinators include the Investor Group on Climate Change (IGCC), Institutional Investors Group on Climate Change (IIGCC), and Principles for Responsible Investment (PRI).

To participate, investors must be a member of a least one of the co-ordinating partner organisations, sign the Climate Action 100+ Sign-on Statement, and commit to pursuing at least one engagement each year with at least one company on the focus list.

The 100-strong list of top emissions generators, drawn up with CDP data and developed through a collaborative process from investor and partner organisations, compiles both companies’ direct and indirect emissions. It names obvious polluters such as ExxonMobil, Coal India, China Petroleum & Chemical Corporation and Gazprom, plus groups linked to greenhouse gas emissions in the making or use of their products, like Toyota, United Technologies, Korea Electric Power Corporation, Berkshire Hathaway and Nestlé. Pressure will be brought to bear through robust engagement. The goal: to cut global emissions by 80 per cent by 2050.

“In a few short months, a substantial community of institutional investors have coalesced around this initiative because they want to send an unequivocal signal – directly to companies – that they will be holding them accountable in order to secure nothing less than bold corporate action to improve governance, curb emissions, and increase disclosure to swiftly address the greatest challenge of our time,” says Andrew Gray, senior manager of investments governance at A$120 billion ($95 billion) AustralianSuper.

Engagement is the plan

The plan is for investors to contact investee companies at the board and senior management level to discuss the engagement agenda in further detail. Each year, in partnership with researchers, Climate Action 100+ will produce a public annual report that will assess how the companies have responded to the collaborative engagement, and set the investors’ engagement priorities for the year ahead.

Investors will ask companies to implement strong governance frameworks that clearly articulate their board’s accountability and oversight of climate change risk; they will also request that companies take action to reduce greenhouse gas emissions across their value chain. Investors will also push companies to provide enhanced corporate disclosure in line with the recommendations of the Financial Stability Board’s Taskforce on Climate-Related Disclosure. This will enable investors to assess the robustness of companies’ business plans against a range of climate scenarios, and improve investment decision-making. Gray says this kind of disclosure will help investors price carbon risk.

“We want to support investors in pricing climate risk when buying and selling companies that are exposed,” he says. “If we can price that risk, it can reduce the risk for us, as investors.”

Strategies will include investors using their shareholder influence to elect climate-competent boards, which is particularly important for index-following funds that are unable to sell shares in companies that are exposed to climate risk, and filing proposals. For example, Exxon Mobil, the world’s biggest oil company, was forced by a shareholder vote to be more transparent about the impact of climate change on its business earlier this year. Strategies will also play to investors’ strength in numbers. In what CalPERS’ Simpson calls “the tragedy of the commons”, individual investors don’t own big enough stakes in companies to force change. It is only by a collective approach that investors can overcome this, she says.

Rather than blaming and shaming, the approach for Climate Action 100+ is upbeat. It will centre on “positive dialogue”, says Laetitia Tankwe, responsible investment adviser to Ircantec president Jean-Pierre Costes, Groupe Caisse des dépôts. It will also involve “working individually with each company to help them” and rewarding companies that reform.

“Some of the companies in the list have already demonstrated climate leadership on one or more of the initiatives,” Tankwe says. “Some companies may be removed, depending on their progress.”

Simpson adds that engagement is about persuading companies to swap short-termism for long-term “support and partnership” to manage the transition to a low-carbon world.

“Engagement is not a soft option,” she says, in contrast to divestment, which she calls “walking away” and letting “companies off the hook”.

Climate Action 100+ has attracted unprecedented interest from Asian investors, Gray believes. He says investors in the region now have a “framework to scale up climate action” for the first time. It has bought a “common language” that investors can now speak when they engage with companies in a “consistent message”, and has increased understanding of the climate risk in their portfolios. In this way, the initiative has helped reduce one of the biggest obstacles to progress – that not all investors are operating in the same policy or regulatory environment.

Financial markets are geared to the short term, Simpson says, but pension funds’ long-term interests stretch for a century.

“How the market is trading in the morning doesn’t help us,” she says. “This is the solution. This is the practical action.”

A new World Bank report showcases the features of the Canadian pension model that have made it the poster child for good design. Through case studies, it gives practical lessons for building world-class pension organisations and acts as a guide for emerging economies seeking to deliver their own retirement security.

Not so long ago, Canadian public pension funds invested predominantly in domestic government bonds, lacked independent governance and were administered in an outdated, error-prone fashion, the World Bank report states.

Today, the country’s top 10 public pension funds manage more than $1.2 trillion in assets, employ thousands of highly qualified professionals, and compete for investment opportunities around the globe.

The report commissioned by The World Bank and written by Common Wealth, The Evolution of the Canadian Pension Model , charts the transformation of the sector by profiling Alberta Investment Management Corporation (AIMCo), the Caisse de dépôt et placement du Québec (CDPQ), the Healthcare of Ontario Pension Plan (HOOPP) and OPTrust.

Its aim is to act as a guide for emerging economies seeking retirement security. The report also urges Canadian funds to collaborate with emerging economies via exchange programs, secondments and capacity building ventures, to help develop these pension sectors.

 

The importance of governance

The Canadian model, which has long been held up as an exemplar of good pension design, is a balance of strong collaboration between diverse stakeholders and robust independent governance, the report states.

Funds are structured as high-performing entities that are both transparent and accountable.

“Establishing a track record of independent decision-making early in the life of the organisation is important,” the report advises. “The board, and especially the chair, should be willing to push back against potential infringements on the organisation’s independence.”

At the core of the Ontario Teachers’ Pension Plan is “a strong, independent board that ensures Ontario Teachers’ is run like a business”. It’s a phrase from the fund’s founding chief executive, Claude Lamoureux, and remains embedded in OTPP’s self-description, the report notes.

Another way of expressing the concept is the idea that the funds exist at arm’s length from both government and the sponsoring organisations, including labour unions and employers.

This independence lets the funds prioritise “doing the right thing in the long term, over doing the comfortable thing in the short term,” the report states.

 

Internal asset management

Canadian funds tend to manage the majority of their assets in-house. Roughly three-quarters of the assets of the top 10 Canadian pension funds are internally managed, across a range of asset classes.

But there hasn’t been uniformity in the way this has been achieved. In some cases, in-house teams have been built from the ground up, as with Ontario Municipal Employees Retirement System’s infrastructure subsidiary, OMERS Infrastructure. Sometimes, they have been acquired, as with OTPP’s entry into direct real estate through the acquisition of Cadillac Fairview.

While funds have had different approaches to building teams, many of them began the move to internal management with liquid assets such as public equities, then moved to in-house, direct investment in alternative classes later. But the C$19 billion ($15 billion) OPTrust took the opposite approach, building in-house capability in private markets first and moving to in-house management of public-market investments more recently.

Canadian funds have also used co-investment to enter, and develop expertise in, new asset classes like infrastructure, real estate, and private equity. Much of the co-investment is with other pension funds, in a collaborative approach OPTrust chief executive Hugh O’Reilly calls an “ecosystem”, the report states.

Co-investment allows funds to share risk and lower due diligence costs by working together to scrutinise potential opportunities. In 2012, Canadian pension funds including CPPIB, AIMCo, OTPP, and CDPQ led a consortium of investors that acquired TMX Group Inc., which owns the Toronto Stock Exchange.

 

Focus on the talent

Today, Canada’s pension funds recruit globally and provide competitive, performance-based compensation to attract top-notch personnel; however, these funds began with small internal teams. They have grown over the years, by attracting qualified professionals and developing internal talent.

Jean Michel, executive vice-president, depositors and total portfolio, at CDPQ, credits talent and independent governance with the organisation’s success over the years.

“When hiring for a new position,” Michel says, “we adopt the mentality of ‘Who’s the best person in the world?’ We want to compete with the best globally.”

In an alternative approach, Edmonton, Alberta-based AIMCo has focused on building a farm team of local talent.

The organisation is not in a financial centre like Toronto; this way it can still ensure the next generation of leadership is in place.

“We have a strong internship program,” C$100 billion ($78 billion) AIMCo chief investment officer Dale MacMaster says. “We build talent from the bottom up. It can be difficult to recruit people, but once they join, they don’t leave, unlike the ‘revolving door’ phenomenon [in bigger financial centres]. Older workers are willing to come back from overseas. In terms of recruitment, you need to be creative, but you can be successful.”

Canada’s pension funds aren’t subject to public-sector compensation limits; exemption from such rules is often part of the founding legislation for these organisations. Compensation typically involves a significant performance-based component, tied to factors such as investment value added, member satisfaction or funded status, the report states.

 

 

Diversification and comparative advantage

In the mid 1980s, Canada’s largest pension funds invested most of their assets in local government debt. Today, these funds have large overseas allocations, in equity and real estate especially. Roughly one-third of the portfolios of the top 10 Canadian public pension funds are in alternative asset classes, the report states.

 

Canada’s pension funds also understand their comparative advantage when it comes to investing. Their strategies include playing to their ability to invest long-term and working with expert partners.

“You can’t be world-class at everything,” AIMCo chief executive Kevin Uebelein says. “You need to be thoughtful about determining the functional areas in which you are truly outstanding.”

The chief executive of the C$70 billion ($54 billion) HOOPP, Jim Keohane, says the fund takes its comparative advantage seriously.

“We don’t believe that we can outsmart people,” Keohane says. “We look to our comparative advantage – what can we do well that other people can’t or are unwilling to do?”

These advantages can appear in very particular areas; for example, OPTrust has developed an edge in midmarket infrastructure by often competing effectively for smaller deals that may not be of interest to larger funds.

Despite the funds’ similarities, there are also marked differences that emerging pension sectors should be mindful of, the report states. While each of the funds employs a highly diversified portfolio, for example, their approaches to asset allocation and portfolio construction vary.

HOOPP’s portfolio is more heavily weighted to fixed income. CDPQ and OPTrust are putting increasing emphasis on emerging markets. AIMCo and HOOPP have kept their efforts largely in developed markets. CDPQ, AIMCo, and OPTrust have invested significantly in infrastructure but HOOPP has stayed away from it, although it does make some direct investments in real estate and private equity.

CDPQ and AIMCo are focused on asset management, whereas HOOPP and OPTrust serve as integrated pension delivery organisations, managing both the assets and the liability side of the balance sheet.

The organisations also differ in their mandates. HOOPP’s and OPTrust’s investment goals focus on paying pensions or liability management but CDPQ has a dual investment mandate: it seeks both to maximise return on capital and to contribute to the province of Québec’s economic development.

Since the financial crisis, HOOPP, OPTrust, CDPQ and AIMCo have put greater emphasis on risk and liabilities. For example, HOOPP has identified three main risks: equity risk, inflation risk, and interest-rate risk. Managing these threats to the plan’s funded status has become the basis of a revamped strategy that focuses on increasing the interest-rate and inflation sensitivity and reducing the plan’s sensitivity to equity markets. OPTrust has recently begun to shift to a similar approach, which it calls member-driven investment.

“Risk has become much more integrated into our investment process,” CDPQ’s Michel says. “The chief risk officer is at the same level as the chief investment officer in the investment decision-making process.”

Like all funds around the world, Canada’s face challenges ahead. Lower expected returns and interest rates will make it more difficult to meet pension promises sustainably.

This ‘low for longer’ environment is leading funds to seek new investment strategies for achieving the required risk-adjusted returns, bringing additional complexity as they expand into new geographies and asset classes, and compete globally for attractive investment opportunities.

Staying focused on comparative advantage and seeking partnerships will be paramount, the report states.

 

 

Canadian public pension fund profiles

 

AIMCo

Assets under management at AIMCo are roughly $100 billion and the fund has had an annualised return since inception, in 2008, of 8.6 per cent; since 2009, $49 billion of AIMCo’s growth can be attributed to its net investment returns, $4.2 billion of which was value added over and above relevant benchmarks. Nearly a quarter of the portfolio is allocated to illiquid markets, including infrastructure, private equity, and real estate. Chief executive Uebelein links successful asset management to five key prerequisites: people and tools; low cost; appropriate risk taking; stable/ patient capital; and proper incentives.

 

CDPQ

 

CDPQ has $271 billion ($211 billion) in assets under management and a five-year return of 10.2 per cent. It is unique among Canadian pension funds for its dual mandate: to maximise returns and contribute to Québec’s economic development.

The initial investing approach at CDPQ was focused entirely on bonds. The fund started to invest in public equities in 1967 and created a private equity portfolio in 1971. Through the 1970s and 1980s, it continued to diversify, entering global equity and real-estate markets. In the 1990s, it went into real estate and began boosting the equity allocation from 40 per cent to 70 per cent of assets. In the late 1990s, CDPQ became one of the first Canadian pension funds to invest in infrastructure.

Macky Tall, CDPQ’s executive vice-president of infrastructure and chief executive of CDPQ Infra, offers the following advice to emerging-economy pension funds looking to invest in infrastructure: develop strong in-house teams; find partners with strong local and sector knowledge; take a long-term macroeconomic perspective on the countries where you invest; and ensure there is a stable and transparent framework for private investment.

 

HOOPP

The fund has assets of $70.4 billion ($54.7 billion) and a 10-year return of 9.08 per cent. It is 122 per cent funded. The HOOPP fund has been divided into two separate branches: a “return-seeking” portfolio and a “liability hedge” portfolio. The return-seeking arm is largely derivatives based; it comprises public equities, private equity, corporate credit, a long-term option strategy, and a variety of other strategies.

The liability-hedge portfolio includes short-term assets, nominal bonds, real-return bonds, and real estate. HOOPP’s journey towards a liability-driven approach began at the time of the dot-com crash of the early 2000s.

“We went from a big surplus to being materially underfunded in less than two years,” said chief executive Keohane, who led HOOPP’s transition to LDI. “Both sides of our balance sheet moved against us – equities crashed and interest rates dropped. We realised the disconnect between our assets and liabilities was one of the biggest risks to the plan.”

 

OPTrust

OPTrust is the 14th-largest pension fund in Canada, with assets under management of $15 billion. It has a 10-year return of 6.2 per cent and a funded status of 110 per cent. Its alternatives allocation is large, at 38 per cent of assets. In 2015, OPTrust adopted a new investment strategy framework called member-driven investing (MDI). As chief executive O’Reilly explains, the aim is “to change the conversation” away from a narrow focus on returns to an emphasis on pension certainty, contribution stability, and sustainability for plan members.

O’Reilly says this is a fundamental shift, from asset manager to effective “pension management organisation”. Portfolio construction under MDI means a desirable mix of beta exposures. To this, OPTrust seeks to add alpha by using its differentiated skills and relationships to take advantage of market inefficiencies.

The services of investment consultants need a rethink to include ESG as a standard part of the advice they provide, the United Nations Principles for Responsible Investment has stated.

In a new report, Working Towards a Sustainable Financial System: Investment consultant services review, the PRI is calling on consultants to consider and act upon environmental, social and governance factors in their service delivery.

The report states that the full suite of investment consultants’ services should be reviewed from an ESG perspective and there must be a deeper discussion in the industry about including such issues as a standard part of consultants’ advice.

The report is based on interviews with 22 investment consulting firms and industry experts (primarily in the UK, the US and Australia), data from the PRI’s member reporting and assessment framework, and data on investment consultants, their clients, philosophies and staff provided by IC Research.

“It is time to reconsider what investment advice should look like as a part of a sustainable financial system that serves beneficiaries and individual investors,” PRI director of policy and research, Nathan Fabian, said. “ESG must be a core part of investment advice, because ESG is a core part of investors’ fiduciary duties. We see market structure, market practice and regulatory reasons why ESG is not currently a core part of investment advice. Addressing these reasons is a necessary step for a more sustainable financial system.”

The report specifically identifies the barriers to ESG integration in the consulting market. They include issues on the demand – asset owner – side, on the supply side and within the wider regulatory and policy framework in which asset owners and investment consultants operate. The report suggests actions that could be taken to overcome these barriers.

Some consultants are more advanced than others when considering, and advising on, ESG. Mercer was the first consultant to include ESG rankings as part of its regular asset manager search and performance data.

 

To read the PRI paper click here

 

The £1.3 billion ($1.73 billion) Accenture Retirement Savings Plan recently made 24-year-old Anna Darnley a trustee, in a deliberate move to increase gender and age diversity. Darnley is the youngest trustee on the eight-member board, which is split equally between men and women.

Accenture’s defined-contribution scheme for employees of the management consultancy was set up in 1998 and is predominantly invested passively with Legal & General Investment Management. It has 9000 active members and 15,000 deferred members. The scheme’s success with diversity is heartening, since the issue remains such a challenge for many pension boards. Figures from the UK’s Pensions and Lifetime Savings Association found 4-in-5 trustees are still men, and in the Netherlands, a 2014 survey found 35 per cent of boards had no female trustees, and 60 per cent of the schemes lacked trustees under 40.

Darnley works in Accenture’s digital business and had no financial experience when she took up the board position. She joined Accenture in 2015, having graduated from the School of Oriental and African Studies at the University of London; she speaks six languages and is learning another two. She also has her own YouTube channel with nearly 10,000 subscribers.

She and Peter George, chair at the fund for the past five years, spoke to conexust1f.flywheelstaging.com about why board diversity is important and the difference it is already making. George is managing director of operations at Accenture and is tasked with growing the UKI business.

Top1000funds.com: Peter, could you detail the process building up to Anna joining Accenture as a trustee?

We were coming up on elections, and the process for election of member-nominated trustees has changed in the last couple of years. In many businesses, people used to nominate themselves as a trustee, and then were elected by peers. New regulation allows either election or selection of trustees.

We had an opportunity to look at the balance of our board and Accenture is very attuned to, and supportive of, a diverse workforce. I thought this would be a good opportunity to go down the selection road, and use it as a chance to deliberately increase the diversity of our board, both from a gender and age point of view. If you look at the membership of our scheme, there are a huge number of people in the 20-38 age bracket who are not represented on the board.

We had 40 people apply for the role, which is unprecedented, and we whittled it down to 10. The first [task for candidates was] to convince us they would be a good trustee. We then looked at the gender and age balance.

I attended a trustee dinner the other evening where I explained the make-up of our board and how we got there, and Accenture was heavily complimented by a lot of other trustee chairs. It goes back to this principle of selection or election. If there is an election, there is no way of changing the board make-up. Some people prefer an election because they believe selection is too engineered, as opposed to election, which is more raw. But trustees exist to ensure robust decision-making, and control over very large sums of money. I believe the effectiveness of the board has increased significantly as a result of our selection process.

How do you see the role of trustees at Accenture?

I tell our trustees they are not on the board in the capacity of their job at Accenture. They are here in their capacity as an individual, representing the interests of the members of this scheme.

Anna, what do you want to bring to the role?

There is such an absence of financial education, yet my generation are big savers. We are the age bracket that saves most, yet many people don’t know what to do with this money; they are making poor investment decisions and consequently not providing for themselves in an efficient way. I want to change Accenture’s communication strategy to improve engagement with our younger members. I want to shift away from top-down lecturing that says you need to save, towards more engagement that says let’s teach you how to save, and let this be a dialogue. So for me, it’s about giving back control and empowering, kick-starting a wider conversation about how pensions and lifetime savings are discussed. I want to find more ways to engage on this topic with people for whom retirement is a long way off.

Anna, what were your preconceptions about becoming a trustee, and how do they compare with the reality?

I was expecting that it would be a closed door. I thought the fact that I didn’t come from a financial services background, and that I lacked financial knowledge prior to joining the board, would be detrimental to my application. But the experience I’ve had has been the polar opposite. The board has been incredibly welcoming and supportive; I’ve felt free to ask any questions – and there have been many! I have also been given lots of training to get up to the standard needed.

Peter, pension funds often rely on their boards for long-term stability, continuity and financial knowledge. Did Accenture fully support your quest?

I found a total open door. As a firm, we want to promote diversity. From the CEO downwards, it was an open door to do what we did and we felt no pressure to do otherwise. They are delighted by what we have achieved.

Peter, what are you hoping Anna will bring to the role?

We have graduates join us every year and the furthest thing from their mind is retirement and retirement income. Having someone they could relate to was a priority. I also wanted someone who would add value in terms of our communications and address the issues our younger members want to talk about.

Have you started working in this area already, Anna? What are the time commitments of the role?

I am trying to push a new communications strategy and it is a fair bit of work. But it is also a personal endeavour that I am very passionate about. I have been given an opportunity to put something together and put it to the board. I’ve probably put more time into it than it would have required because I am getting so into it. We have quarterly meetings and more regular sub-committee meetings.

Are you already seeing changes from the increased diversity on your board?

Peter: I am already seeing changes in sheer engagement. I believe the selection process we did ensures people really want to do it. Fifteen years ago, many trustees just turned up and the lawyers did all the work. But under the regulator today, being a trustee is an incredibly responsible job, and for me it’s important to have people capable of making the right decisions and asking the right questions. For this, trustees need to feel they are in the right environment and if we had seven male trustees all over 55, and just one female, it could be intimidating for a younger woman. This way we’ve freed up the environment; all our trustees feel valued and part of the team.

Before, two or three people spoke at meetings. Now everyone speaks. Trustee boards are moving to a different level in terms of the seriousness and responsibility of the role, and a diverse board is a component of that responsibility.

Anna: Diversity is a strong foundation for good governance. I am thrilled to have an opportunity to be part of the board and we are leading by example – showing that diversity can improve member outcomes.

When the IOOF board named Daniel ‘Dan’ Farmer the firm’s incoming chief investment officer earlier this year, ahead of the retirement of long-time CIO Steve Merlicek, it allowed plenty of time to plan for a smooth transition.

So, when Farmer officially stepped up to the role on July 1, 2017, to manage a portfolio of A$20.6 billion ($16 billion), he knew what his immediate priorities were: solidify the investment team, appoint a new asset consultant, and progress a technology project to support a whole-of-portfolio approach to risk. Not to mention the all-important day job of overseeing the portfolio.

“Team is everything, so having the right people around me was the critical starting point,” he says.

One of the first things he did was argue for the promotion of strategist and international equities manager Stanley Yeo to the newly created role of deputy CIO. This also took effect on July 1. Yeo’s new title represents a “subtle but important” restructure within the team, the CIO says.

“That strategy role is really important because it touches all the different asset classes,” Farmer says. “To my mind, it was important to reflect Stan’s seniority in the team, and I guess make sure he gets buy-in from all the portfolio managers.”

Meanwhile, Farmer’s promotion had created a vacancy in the role of portfolio manager, Australian equities. In August, that was filled by Paul Crisci, who joined the team from Funds SA, where he managed an $11 billion portfolio of domestic and international equities for the South Australian public-sector superannuation fund.

“Paul had the right heritage…We really wanted a hands-on person with experience in the day-to-day realities of running a multi-manager fund,” Farmer says.

 

New consultant

A recommendation from Yeo helped Crisci nab the job. A few years back, when Yeo was a consultant with Russell Investments, he advised Crisci at Funds SA. In that consultant role, Yeo also advised IOOF, before coming in-house in 2010.

With Russell exiting the asset consulting market in Australia this year, IOOF needed to run a tender to appoint a new consultant. Farmer and Yeo worked closely together on this project in the months leading up to officially commencing their new roles. Mercer took over as IOOF’s new asset consultant from the start of the 2017-18 financial year.

The firm won the tender thanks to its “strong cultural fit with the team” and “the strength and broad sweep of their research”, Farmer says. Melbourne-based David Stuart is now the lead Mercer consultant working with IOOF.

“Advice on dynamic asset allocation and tilting is really the key component of the service we look for from Mercer,” Farmer says.

Stuart and his team at Mercer report directly to Farmer, rather than to the IOOF investment committee. Unlike at many Australian superannuation funds, the board designates significant responsibility to the CIO.

Farmer’s predecessor, Merlicek, who remains on the IOOF investment committee, is well-known in the industry for his successful track record built on excellence in asset allocation. Farmer has worked closely with Merlicek for the last 20 years, first at Telstra Super before both moved to IOOF, and is well-positioned to carry the torch.

“Steve and I worked together for 20 years. Back in the ’90s at Telstra Super we were one of the first Aussie super funds to go active [with dynamic asset allocation and tilting],” Farmer recalls. “Then we implemented a similar strategy here at IOOF…So I really have been on the journey with him and feel very comfortable in the transition.”

 

A dynamic approach

Central to the portfolio management philosophy is that it is the internal investment team’s job to “get those big sweeping moves right” and let the external managers trade and make money off the small moves.

“The view I take, and it’s followed on from the view established with Steve, is it’s really when you see markets at pretty big extremes that you take significant moves,” Farmer says. “For a multimanager like us at least…it’s really about trying to capture those big market risks or opportunities, not day-to-day trading off small moves.”

Figuring out what the next big moves in markets will be is tricky.

“It’s somewhat challenging at the moment, as we don’t see any of the major markets as extremely attractive. It’s really a case of trying to find those niche ideas and being active to generate an attractive return,” Farmer says. “We’re not overly negative but the outlook is not as strong as it has been.”

IOOF’s current asset allocation is fairly close to its benchmarks on most major asset classes.

“We’re a little bit underweight at Aussie equities in favour of international equities, which has performed very well for us over the last few years,” Farmer says. “We continue to hold that tilt, although I’m reviewing whether we begin closing that up.”

Within the equity portfolio, more money is due to flow into emerging-market strategies.

In the fixed income portfolio, IOOF has been short on duration for the last few years, another play that has performed well.

“We see inflation sort of picking up but only very moderately; it is very hard to see a sharp spike in inflation from here,” Farmer says. “So we’re beginning to add a little bit of duration back into our portfolios, opportunistically via a futures overlay.”

Upping alternatives

The most significant change he expects to make to the portfolio through the back half of 2017 is increasing the allocation to alternatives. As at June 30, the alternatives portfolio – which includes hedge funds, liquid alternatives, private equity and private credit – represented about 8 per cent of IOOF’s total $147.2 billion in funds under management, advice and supervision (FUMAS).

“We’ve actually been reducing our traditional macro strategy hedge funds in favour of more systematic multi-strategy funds,” Farmer says. “We see that more systematic multi-strategy approach as giving us a more predictable return outcome.”

In building out the alternatives portfolio, Farmer is hunting for new sources of return that are not overtly driven by the direction of equity or bond markets.

“It’s going to be really opportunity based…The private debt space is interesting at the moment, with the banks pulling back, so opportunities will probably exist there,” he says. “One of the other areas we are looking to see if we can build is co-investments.”

Opportunities to buy into good global private-equity funds at a discount on the secondary market are also being looked at with keen interest.

“We’ve also looked at some other niche areas such as agriculture, but are a little bit worried about valuations at the moment,” Farmer says. “Likewise, we’ve looked at, but backed away from, increasing our allocation to infrastructure due to stretched valuations.”

Much of this is being led by IOOF’s Melbourne-based head of alternatives Ray King, while the fund’s Sydney-based property portfolio manager Simon Gross is also working on closing more direct commercial Australian property deals in the $20 million to $50 million range.

“The direct property fund we run out of Sydney is a niche strategy, but they’re generating strong yields off those properties and for quite low risk with minimal gearing,” Farmer says. “We don’t need capped rates to fall further, we don’t need valuations to lift, for that to stack up. The running yield of those properties is attractive to us at the moment and we think that’s a relatively conservative and safe place to generate a reasonable return.”

 

A view to risk

As IOOF diversifies and expands it alternatives holdings, it will become more important than ever for the CIO to have a clear view of risk across the total portfolio.

That is why Farmer is focused on completing the rollout of a universal portfolio management software system across the whole fund.

“We’ve been running it across Aussie equities and international equities on a standalone basis for quite a long time, and I’ve found it very useful for managing my own portfolio and also for feeding into discussions about asset allocation,” Farmer says.

In recent months, the fixed income portfolios have been loaded into the system. Next up will be the more challenging task of incorporating alternatives.

Farmer says it is “obviously a challenge” to get all the data required to record some of the fund’s more idiosyncratic alternative assets in the centralised portfolio management system.

“But it is a priority for me as CIO,” he says. “It really helps provide a clear view on risk. For instance, having now entered the fixed interest portfolio, we have a much fuller picture of what our currency risks are.”

The technology and systems project will also make compliance with the Australian Securities and Investments Commission’s Regulatory Guide 97 (RG 97) easier.

Of course, given that most of IOOF’s business comes via advisers and platforms, the asset allocation of individual clients’ portfolios can vary greatly. The $3.3 billion ASX-listed wealth-management firm runs four main investment products: IOOF MultiSeries, IOOF MultiMix, IOOF WealthBuilder and Shadforth products.

But the business is set to swell dramatically.

In October, IOOF announced it had entered into an agreement with ANZ Banking Group to acquire its OnePath pensions and investments business, and aligned dealer groups, for a cash consideration of $975 million.

The plan is to complete the deal within 12 months.