Sovereign wealth funds need to become more democratic if they want to reduce citizen action against them.

Even the most responsible and ethically minded sovereign investors have come up against citizen campaigns, causing them to change investment practices. But the implementation of citizens’ desires can be problematic, particularly after investments have been made.

Installing democratic processes into the funds increases transparency, engagement and accountability, keeping problems from blowing up later, says Dr Angela Cummine, the director of The Wealth Project at Oxford University.

Investment practices aren’t the only contentious issue for sovereign wealth funds at the moment. Citizens are expressing strong feelings about the purpose of the funds as well.

While economist and philosopher Adam Smith first proposed state-controlled investment funds in the 18th century, it was not until the turn of the 21st century that the number of sovereign wealth funds boomed. Today, more money exists in sovereign wealth funds than ever, upping the stakes, and governments and citizens both consider the money to be theirs.

Cummine argued that classical political theory holds the key to deciding whose money it is. According to that theory, citizens are the principal and government is merely the agent.

“If you accept that basic insight of classical political theory, then sovereign funds are only ever in the custody of the government,” Cummine said at a Lowy Institute event on sovereign wealth funds. “This does not mean governments can’t or shouldn’t manage the money on our behalf, but we should have a clear understanding of who is the ultimate owner.”

But the typical sovereign wealth fund does not involve much direct citizen participation; in fact, many citizens are not aware of their existence.

This means citizens have decisions made on their behalf with no exit options, which can generate a backlash if the investments do not match social and ethical expectations, Cummine explained.

Trouble for New Zealand

The issue has already cropped up.

New Zealand is one of the most responsible and ethically minded sovereign investors, yet this hasn’t shielded it from facing some real citizen opposition to its investment practices, Cummine said.

New Zealand, like Norway, held some equity investments in mines in Papua New Guinea that ran into trouble in terms of labour rights and demonstrations that the police put down. Huge environmental destruction was going on around these mines, as well as questions around destruction of indigenous land rights practices.

These concerns led the Norwegian fund to divest from that particular investment.

New Zealand Super, which also has in its mandate strong obligations to respect human rights and preserve the country’s reputation as a responsible investor globally, took a different approach.

The management and trustees of New Zealand Super decided a better outcome could be achieved by actively engaging with the management of the mine company – a recognised form of ethical investing.

Unfortunately, when New Zealand citizens became aware of the investment, they were extremely uncomfortable with the fact that their universal retirement pension was being funded by this particular investment.

“They did not want, in effect, blood money in their retirement funds,” Cummine said.

After pressure and debate, the sovereign fund divested from the mines.

More pressure on the Future Fund

“That sort of problem can be avoided if you open up these funds to more consultation about what values we hold as a community, and what sort of values we like to see become accepted investment practices through our sovereign funds,” Cummine said.

In Australia, the $127 billion Future Fund is likely to feel the heat of  increased citizen engagement as it grows.

The former chair of the Future Fund, David Murray – who was on the event panel with Cummine – said the implementation of ethical investments was difficult for the nation’s sovereign wealth fund.

“The government wanted to ban the Future Fund from investing in tobacco, but does that mean that [we exclude] trucks on the road carrying the product? It gets very hard to implement,” Murray said.

To help guide the implementation decisions, a catch-all rule was created: the Future Fund cannot diminish the reputation of the Commonwealth Government in financial markets because of its operations.

“On the other hand, we decided that [when the] government had expressed its view by legislating or forming a treaty, for example on landmines, that was much easier for us to follow,” Murray explained.

 

Ericsson Pensionsstiftelse (EPS), the Stockholm-based SEK21 billion ($2.3 billion) pension fund for employees of the Swedish technology company, has recently added active long-only managers in its equity allocation. In a break from the last five years, stock picking is back because of what chief investment officer Christer Franzén calls a “probable” low-return environment from index strategies coming up.

“We haven’t used long-only managers in equity recently because we saw the stock market as a beta market,” he says. “Now, however, because the market is so expensive and future returns are probably low from here, we assume there will be a greater dispersion within indices.”

EPS will work with external managers using a concentrated portfolio of 30-50 shares, not the usual 100, he adds.

EPS is seeking to differentiate itself from the herd. Franzén explains: “Everyone flocks into passive today. It is great for the low fees, but we favour, in general, an active approach. This could be [achieved through] our own in-house activities via derivatives or specialist ETFs, or by using active managers. Regardless of the reasons – from low costs to regulation – you always need to question the wisest route to take and if there is alpha to be found elsewhere.”

A model focused on capital preservation

Strategy at EPS is focused on capital preservation and absolute returns. It is a model afforded by the fund’s structure, whereby EPS’s collateral comes under a mutually owned insurance company, PRI, which secures the defined benefit schemes for larger corporations in Sweden.

“EPS is a pool of assets; liabilities stay with the sponsor, in this case Ericsson the company,” Franzén explains.

Most recently, the fund has been focusing on cash-generating investments, rather than capital gains, in a strategy focused on lowering portfolio volatility and achieving a higher Sharpe ratio. Asset allocations start with a projection of future defined benefit liabilities and the return rate needed to meet them.

“From this, we do a classic asset liability management-study, where we assume the next five-year returns for all the asset classes, which then gives us a total possible return rate.”

The fund mirrors this analysis in a risk-factor model so it can discover if there are any risks that need to be mitigated.

“When this is done, we apply a macro overlay, which helps us decide if we should take more or less risk for the coming year. The board then decides on return targets and the proposed allocation for the year.”

There is a mandate for Franzén to deviate from that decided average within certain limits.

EPS’s current allocation is 35 per cent in fixed income, 15 per cent in credit, 20 per cent in real estate/infrastructure, 10 per cent in alternatives and 20 per cent in equities.

The equity allocation is divided between a 10 per cent allocation to public equity, 5 per cent to private equity and 5 per cent to equity long/short strategies. The fund has lowered its return targets over the last couple of years. It also divested from emerging markets four years ago, although it has started “to look at this again on a very selective basis”.

Strategy up until now has been focused on investing in companies from developed markets that could have exposure to emerging markets, due to stronger corporate governance and compliance.

Franzén doesn’t have a specific allocation bucket for hedge funds. He argues instead that traditional hedge fund strategies are “just another way of expressing an active and flexible approach, rather than being a separate asset class”.

He explains: “Returns from equities are normally, over time, the risk-free rate including inflation plus 4 per cent. This is more a common return target for many hedge funds these days; if higher returns are needed, leverage will be involved.

“Hedge fund fees are generally lower in Sweden compared with, say, London, where [a 2 per cent management fee plus 20 per cent of profits] has been the standard, even though it’s starting to change now.”

Bonds replaced with real estate

The real-estate allocation, three-quarters of which is in Swedish assets, includes social infrastructure such as court buildings and housing.

“We started 2009 searching for stable, cash-generating investments and Swedish social infrastructure and multifamily homes drew our attention. At the time, these assets were overlooked due to low returns and because they were seen as having less of a capital gain possibility. We thought it was perfect since they offered a decent cash flow with long durations, and a low probability for capital loss. After all, we were looking for assets to replace our low-generating bonds.”

EPS also manages the real-estate allocation.

“When we were searching for managers, we realised they were pretty expensive and most of the time the investments were more risky than what we wanted. It meant we started to talk to peers, and that led to starting several real-estate companies with them, which took our costs down significantly.”

EPS counts 20 managers on its roster, down from 35 a few years ago. Franzén considers the fund’s small size an advantage.

“We are…able to pick up stuff that the bigger funds can’t because it doesn’t move their needle. Some players are so huge they are, in practice, indexed themselves. We are small but we are also big enough to move around and take opportunities.

“We are a small organisation and pride ourselves on establishing strong relationships. We tend to stay with managers for a longer period of time if they perform within the top quartile. It’s important to understand how a manager makes money and whether it suits our philosophy. I don’t care too much if a manager has a bad year as long as I understand what is driving the returns. Not shopping around between managers too much saves us a lot of time.”

He also doesn’t use consultants, referring to them as “a layer of unnecessary cost”. The fund manages 40 per cent of its assets in-house, predominantly in fixed income and equity derivatives.

“I believe we need to be able to take care of our own fixed-income risk. My background is as a fixed-income trader, so anything on the macro front we are good at. In the equity allocation, we use derivatives as an overlay and are active if the market gives us the opportunity.”

Complexity is everywhere. And nowhere is its forward march more evident than in the field of investing. Seemingly unabated, the complexity of new products, processes, financial engineering and innovation grows.

And if you think investing is complex, take a moment to reflect on the dynamics of family relationships. Families evolve organically and acquisitively. And with every generation or addition, new personalities and opinions can emerge, complicating matters through conflicting agendas and differing priorities.

The coalescence of these domains – family and investing – can be the catalyst for the establishment of a family office. Few vehicles can assist in managing the complexity that families of scale face as effectively as a family office. Families aren’t homogenous and, depending on where they are in their lifecycle, may have myriad needs: formulating a family constitution; reviewing investment governance; undertaking estate planning or philanthropic activities, to name but a few. The family office agenda can be wide, dynamic and, well, complex.

Psychologist Daniel Kahneman, Nobel laureate in economics (2002) and author of Thinking, Fast and Slow, has evidenced how the framing of complex problems affects our decision-making. So why is complexity so pervasive?

Jason Hsu and John West argue that, “Complexity is almost hardwired into investors…and their asset managers.”

We know complexity costs more, perpetuates the belief that complex problems require complex solutions and, as Edsger W. Dijkstra, winner of the 1972 Turing Prize, opines, “…to make matters worse: complexity sells better”.

Complex doesn’t equal better

Traversing from Kahneman’s insights to the wisdom of Occam’s razor, it is important that we challenge the idea that complex problems require complex solutions. One lesson from the global financial crisis (GFC) is that complexity and fragility are almost constant bedfellows. As a trusted adviser, how can we best frame the right questions to ask families, at the right time? How can we help families set their sights on a metaphorical North Star (a set of objectives) that can help them navigate safe passage across the generations? We offer the following questions to start the conversation:

  • What is my role?
  • How can I see the whole picture?
  • How do I enable future generations? What is my legacy?
  • How can I step away from the details but still stay in control?
  • Who will make the decisions when I am no longer able to?
  • How could I manage my wealth more effectively to achieve the outcomes that matter?
  • Do I really understand my investment approach?
  • What level of risk should I be taking? How do I know if it’s correct?
  • How much is enough? For myself? For my children? For my giving?
  • How can I make the most impact with my giving?
  • The framing of these questions places the family’s objectives at the heart of all we do. It is an approach that, without apology, embraces simplicity and discounts complexity. These questions provide a basis for the challenging, but necessary, conversations needed to provide the family office with clarity of mission. The result is a laser-like focus on what is important and what is not.

In too many instances, complexity is used as a foil to avoid an uncomfortable reality. In the low-return world in which we live, the truth may be that the investment objective the family office sets is simply not attainable without taking on an unacceptable level of risk. Without doubt, it’s a tough conversation. Simplicity or complexity – let’s sit with this choice for a moment:

  • Frame A: We are unlikely to achieve the investment objective.
  • Frame B: We have found an opaque process that works well in expectation. It seeks high returns uncorrelated with the S&P 500, with a base-and-performance fee. Oh, and it comes with a side of unicorn, Q.E.D.

Maybe we shouldn’t sit with this too long.

Establish a clear mission

My research agenda with Adam Walk, head of investments at The Myer Family Company and a senior research fellow at Griffith University, has examined the tension between simplicity and complexity in the context of investment governance. We have argued that mission clarity is necessary to achieve family outcomes:

What is a sustainable, real withdrawal rate, for me, my family and my foundation?

What proportion of the corpus should be performance seeking?

How can I stay focused on the asset allocation decision?

What is my planning horizon?

What is the impact of fees and taxes?

The GFC hurt; are we scenario testing our investment approach?

Who is watching when I’m sleeping? Do I have institutional-grade risk-management processes?

Is my family office striving for best practice in investment governance?

Seeking simplicity can help us align the investment process to the priorities of the family. Such an approach challenges unnecessary complexity and calls out misadventure – it is robust and repeatable over time.

Complexity has important implications for family offices and their investment processes. We know that complexity can conceal the true level of risk. Consider the words of the late Steve Jobs:

“Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”

When seeking intergenerational wealth transfer, simplicity can illuminate the path for the family office to deliver on its mission.

Michael E. Drew is chief investment officer for The Myer Family Company and professor of finance at Griffith University.

 

Imke Hollander, head of investment strategy and policy at Dutch fiduciary manager Blue Sky Group, has spent most of her career specialising in alternative beta strategies.

“My background in physics does help because I am not afraid of numbers. I can see through numbers to work with the formula, which usually finds the answers,” says Hollander, who holds both a master’s degree and a PhD in physics from the University of Amsterdam. “The difference is that in physics there is only one answer. In investment, there are hundreds of possible answers.”

It is a confidence and familiarity analysing and explaining numbers and complex investment strategies that the Dutch central bank (De Nederlandsche Bank, DNB) is increasingly demanding of the country’s pension fund trustees.

Hollander and her colleagues are spending more time than ever convincing investment committee members from the seven different funds for which Blue Sky invests of the merits of certain strategies.

“Pressure on trustees from the DNB to make them responsible for investment has slowed down our decision-making process.

As long as they are responsible, they cannot put anything in the portfolio they don’t understand. It is difficult and frustrating for us if we are convinced of a strategy,” Hollander says, voicing a widespread irritation in the Dutch pension sector with the tightening regulatory mood, which critics say is slowing down investment decisions and forcing pension funds to be risk averse and bureaucratic.

Get defensive

The task of talking through technical strategies with trustees is top of mind for Hollander. She is working to expand a defensive equity portfolio.

Twenty per cent of the manager’s equity allocation is invested in these low-volatility, maximum-diversification strategies, which she has championed since the allocation was first introduced at the group seven years ago.

“We are currently thinking of extending the universe to emerging market equities, which may take defensive equity to 25 per cent of the entire equity allocation. There is less data available in emerging markets for these kinds of quantitative strategies, but it is there if you know where to find it,” she says.

She characterises defensive equity as “reducing risk but maintaining performance” and a strategy that “is designed for risk management and not return enhancing”.

She points to long-term research that shows the strategy brings “at least” the same return as traditional equity but 25-30 per cent less volatility. It is an allocation that was deemed pioneering when it was introduced at the group but is commonplace now.

“It was more difficult finding managers back then,” she recalls. “Back then, there were not many low-volatility managers, and even fewer you could take seriously.”

It was an experience she likens to the challenge of finding managers for Blue Sky Group’s Dutch residential mortgage portfolio when the fund diversified its fixed income allocation into this asset a few years later, in 2014.

“There is always a limited manager universe if you are using newer strategies,” she says.

Blue Sky Group manages €20 billion ($21.6 billion) on behalf of seven pension funds with more than 100,000 members. The bulk of assets belong to Dutch national airline KLM’s three pension funds – for pilots, cabin crew and ground staff. All assets are pooled and externally managed. Blue Sky has 11 internal manager selectors and about 80 asset managers on its books.

The group employs active strategies in inefficient markets, but Hollander sees active management also “paying” in efficient markets like the US.

In fact, Blue Sky tends to blend active and passive management and Hollander questions hard and fast distinctions between the two strategies.

She characterises defensive equity as an active strategy, and says that although the group’s buy-and-hold approach with inflation-linked bonds is regarded as passive, it is just as easily characterised as active since it is “not doing what the market is doing”. Allocations in emerging markets are active, with a small passive component for liquidity.

Private debt and other possibilities

The pension funds Blue Sky manages typically hold 45-55 per cent of their assets in fixed income. In addition to inflation-linked bonds, allocations include more performance generating assets, such as local currency emerging market debt, high yield and the Dutch mortgage allocation. The manager is considering whether to advise clients to add a private debt allocation, too.

“This would be a new asset for us. We are still investigating how much it would cost and how we would implement it. A final decision hasn’t been taken yet,” Hollander says.

Other than this, Blue Sky has no plans to change allocations, based on an asset liability management study in 2015, she advises.

That’s not to say the manager isn’t preparing for new themes and ideas. One change on the horizon could come if the fund for KLM’s cabin staff shifts from defined contribution to collective defined contribution.

“This might trigger a different asset mix and a fresh approach but it won’t change much,” Hollander says. She also ponders whether pooling assets will continue to work long-term, because of the changing needs of the different schemes.

“We are seeing more difficulties around pooling because schemes want different things; for example, [environmental, social and governance concerns are] becoming more important for some than others,” she explains.

KLM continues to rule out any allocations to hedge funds.

“The reputation hedge funds have is not always fair. But strategies are not always that transparent and we’ve given up looking at it too much,” she says.

It means Blue Sky will have to look elsewhere for investment opportunities, such as the 10 per cent allocation to private equity, which will increasingly focus on direct investments. The team has two skilled in-house investment specialists and is “fully committed” to directs.

“We have enough in-house knowledge to go direct and this will save on fees,” Hollander says.

In the United Kingdom, the financial regulatory body that governs retail and institutional investment markets, the Financial Conduct Authority, is collating feedback on its draft report on the asset management industry. The 207-page document covers many issues, but a golden thread running throughout is the focus on clients’ value for money. At its simplest, for all asset owners, total returns matter and costs dilute those returns. Costs are higher for active investment management than for passive management and it is clear that persistent outperformance of passive management is difficult to identify and maintain.

This issue is in stark contrast to another concern the report tries to grapple with: the persistence of high margins in the asset-management industry. The investment industry as a whole does not appear to have significant barriers to entry and in spite of an extraordinary number of market participants (i.e., asset managers) there appears to be weak price competition. In other words, asset management fees have remained high compared with what you would expect in a crowded, competitive market.

These two points – persistently high margins and questionable value for money – are opposite sides of the same coin. Asset managers’ high margins, and the investment consultants’ cosiness with the asset management industry, cannot be consistent with best outcomes for asset owners. The situation implies that those asset managers and consultants (including those operating as fiduciary asset managers) are failing their clients and not acting in their best interests.

Questionable value and high margins are serious concerns and have lasting, real consequences. They reduce the total returns of asset owners and their ability to meet their obligations, which in some cases are pensions being paid to large portions of the population in states and countries. In a world of low expected returns, which is potentially what we are facing at this stage of the economic and market cycle, these issues take on an even greater significance, as asset owners increasingly look to maximise wealth through cost-cutting as well as by managing total returns.

It should be no surprise, then, that asset owners continue to shift towards passive investing over active. This trend is set to continue and active managers remain, rightly, under large pressure to amend their fee structures and reduce total costs.

Active, when appropriate

This does not, however, mean that active management should be expected to disappear; instead, we should expect to see its definition change. For instance, passive allocations in equities make sense, but some important markets, such as private debt, are relatively esoteric and can’t be accessed without a competent and careful investment manager. Real-estate portfolios are probably better managed when directly owned. Other asset classes, from shipping to infrastructure, cannot have their asset exposures replicated by a tracker fund. In these cases, active management is not better or worse than passive management. Rather, it’s a question of whether active or passive investment methods are appropriate for the asset.

When markets have total-return streams and risk exposures that can be easily packaged into a single security (like an exchange traded fund) at very cheap cost, that approach should be preferred. When markets have idiosyncratic return streams and demand more careful management of risks, use of managers is probably more appropriate. The idea for this approach is that cheap, indexed management balances more expensive investment managers that provide access to total returns that can’t easily be purchased in an indexed fund – this is called a ‘barbell’ approach. The corollary is that expense ratios should be driven as low as possible in liquid markets, such as equities, but would be expected to be higher in markets that clearly require more skill in portfolio construction.

Passive investing is equivalent to the democratisation of investment implementation for asset owners: it allows asset strategy to be implemented cheaply, transparently, effectively and in a timely way. It is simple and cheap to monitor. It allows asset owners to focus resources where investment managers can and should add value – in relatively esoteric asset management. It is, in other words, the best value for money.

 

Stefan Dunatov is chief investment officer at Coal Pension Trustees Services. The views expressed here are personal and do not necessarily reflect those of Coal Pension Trustees Investment Ltd

Mark Delaney sees an opportunity to make money from Brexit and a bright side to the tumult of US President Donald Trump. Having recently put the brakes on a real-assets shopping spree, AustralianSuper is now topping up on equities.

This comes as the $109 billion fund looks to more than double the proportion of capital its growing in-house team manages.

Last year marked a decade since Mark Delaney, then chief executive of Superannuation Trust of Australia (STA), and Ian Silk, then chief executive of the Australian Retirement Fund (ARF), pulled off a merger to form the country’s largest industry super fund, since known as AustralianSuper.

Silk was named AustralianSuper chief executive, while Delaney, who had been promoted from investment manager to chief executive at STA three years earlier, became his former rival’s second in command, with the dual titles of AustralianSuper deputy chief executive and chief investment officer.

They have proved a formidable duo in their respective roles ever since.

At a time when the Australian Prudential Regulation Authority is nudging sub-scale and troubled super funds to find merger partners, and the slow pace of industry consolidation has been widely blamed on self-interested executives and directors not wanting to cede lucrative positions, it is worth reflecting on the fact that had Delaney not been prepared to give up the mantle of chief executive, AustralianSuper might never have come into being.

Reminiscing on the negotiations, Delaney says he always hoped the deal would leave him in a good position, but was prepared to forge ahead regardless.

“When the STA-ARF merger was being discussed, it was just such a good idea for the members,” he tells Investment Magazine. “I thought to myself, if you’re looked after, well good. If not, no matter, you’ll find another job…and at least you will have achieved something.”

Being prepared to give up a little bit of status in the short-term in order to be a part of something bigger is a trait Delaney credits with shaping his career.

In 1981, the economics graduate started out in the banking division of Federal Treasury. In 1986, he left Treasury and moved back home to Melbourne for a job as an economist at National Mutual.

While still at the firm, which later became AXA, Delaney discovered an interest in investment strategy, qualified as a Chartered Financial Analyst, and made a move into the firm’s funds management division. By the time he left in 2000, Delaney was head of investment services.

It was Paul Costello, who later went on to become the inaugural chief executive of Australia’s sovereign wealth fund, The Future Fund, who hired Delaney to be the lead investment manager at STA in 2000.

The move to the industry super sector was a calculated one.

“Around about the time I was thinking about leaving AXA in the late 1990s, I was doing some work on corporate planning that exposed me to some projections of how big the superannuation sector, and industry funds in particular, were going to become,” he says. “A lot of people focus only on what seat they’ve got on the train, their title or whatever. Probably my strongest piece of career advice is to think instead about where the train you are on is headed. A growing organisation creates opportunities, while a contracting one is very difficult to work in.”

In 2000, Australia’s pool of compulsory retirement savings was worth $484 million, today it is valued and $2.1 trillion and is forecast by Deloitte to hit $9.5 trillion by 2035.

The idea of working in a system with mandated contributions was also attractive because of the opportunity it created to pursue long-term investment goals.

“I liked what industry funds were trying to achieve,” he says.

In 2006, at the time the STA-ARF merger was inked to form AustralianSuper, the combined entity had $18 billion in funds under management. Over the last decade, that has swollen more than sixfold, to $109 billion. It is the largest industry fund in the country.

“Scale brings lots of advantages,” Delaney says.

A worldly strategy

In 2013, he began bringing responsibility for some of the fund’s asset management in-house, starting first with unlisted property and infrastructure before dabbling in large-cap Australian shares. It is an experiment that is paying off. By mid-2015, it was forecast the strategy would save the fund $150 million a year in costs by 2018.

The proportion of funds managed internally now stands at 22 per cent, a figure Delaney hopes to get to 50 per cent within the next five years. Total funds under management are projected to swell to about $200 billion by 2022.

Internal investment teams are now in place across all major asset classes: property and infrastructure, Australian equities (large and small caps), fixed income, currency and, most recently, global equities.

“We have a target of running internal management to be at least one-third or even a half of members’ assets over a five-year horizon,” Delaney says.

Each team is allocated more capital progressively as they prove themselves. It has been just six months since the new global equities team, headed by Christine Montgomery, got its seed capital, and Delaney is happy enough with their performance to be ramping up their funding.

“We brought global equities in-house last because they were the hardest…but if the team proves to be skilful, then allocating them a large amount of money makes sense.”

Among other large Australian superannuation funds that have been busy building in-house investment teams in recent years – such as UniSuper, Cbus Super, First State Super, and more recently HESTA – there has been a reticence to dive headlong into picking global stocks.

It is often said that Australia’s geographical isolation and out-of-whack time zone puts home-based global equity managers at a disadvantage to those operating in offshore markets.

Delaney thinks such fears are overblown in an era of online updates and webcasting.

“There is a matter of distance, and the global team will have to do a bit of travel, but for a lot of companies, the information comes down through the web. So, they are at no more of a disadvantage than anyone else,” he argues. “And when you’re taking a long-term approach to investing, getting the news six hours late doesn’t make that much difference.”

The sheer scale of opportunities in global equity markets, compared with the local market, is exciting.

“Global markets are very deep, meaning we can run lots of money without running into any capacity constraints,” he says.

Musings on leadership

Delaney says the biggest challenges in implementing the in-house strategy have been on the people management side of things, rather than in investment management.

“Just before this interview, I was eating my lunch and reading the Harvard Business Review’s leadership edition thinking, ‘I’ve got to get a bit better at some of this stuff,’ ” he says.

AustralianSuper chair Heather Ridout is satisfied he’s got it covered.

“The leadership Mark has shown in building that internal team has been very impressive,” she says. “He’s got a great eye for hiring good people and has been strong at bringing the whole team along with him on what has been a step-change for the organisation.”

Delaney may have been indulging in a bit of false modesty about his leadership skills, but was clearly sincere when crediting those mentors who have helped him.

“Geoff Ashton, who was my chair at STA and then the inaugural chair of AustralianSuper, was the guy who really taught me how to be a C-suite executive. How to manage upwards and downwards,” he says. “Ever since, I’ve tried to emulate his combination of blunt feedback and practical advice.”

Another important mentor was former Reserve Bank governor Bernie Fraser, who chaired the AustralianSuper investment committee for the first 12 years of the fund’s life.

“Bernie taught me a lot about how to understand economies and markets, think about issues and come to decisions,” Delaney says.

“He wasn’t a theoretician, rather he was always big on the importance of seeing what was there, rather than looking for what you hoped to see.”

It’s a mantra Delaney has been coming back to a lot in recent months.

“Volatility is nothing new,” he muses. “Since 2014, global equity markets have had three moves of almost 20 per cent. The Trump phenomenon has really only corresponded to the last half of the last move. But, potentially, he could be more important.

“The orthodoxy of the period since the global financial crisis has been one of very low interest rates, very tight fiscal policy, a free-trade approach, and re-regulation of financial markets.”

Trump wants faster US economic growth, increased fiscal spending, less regulation, and big corporate tax cuts.

“All those things point to an environment that will tend to favour equities,” Delaney says.

Shifting the burden away from monetary policy onto other instruments will, other things being equal, put upward pressure on interest rates, he says.

Trump’s plans to repeal portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act could also be a boon for markets, if done right, he argues.

“I am no expert on Dodd-Frank, but there are undoubtedly parts of it that could be done better,” Delaney says. “After the financial crisis regulators prioritised system stability above system efficiency and capital allocation. We may now be seeing a righting of that.”

Delaney is unfazed by the wildcard element of some of Trump’s unpredictable foreign policy stances.

“The rest of the world is going pretty well. China has bounced off the bottom. Europe is going quite nicely and Japan’s going pretty well. Equity markets were up in 2016 because the world was recovering. In retrospect, we might view 2015 as a classic midcycle slowdown,” he says.

Another market shock of 2016, that on first take seemed likely to be negative for markets but has played out in unexpected ways, was the United Kingdom’s vote to leave the European Union.

“Brexit has had a material impact on the UK economy, the financial services sector in particular. But given the 20 per cent fall in the exchange rate, the competitiveness gains from the change in the currency may compensate for, or even swamp, the competitiveness losses from no longer being part of the EU trade zone,” Delaney says.

“The most important thing about Brexit was that it was the first really large cannon shot about the change in orthodoxy of how to do things. Trump was the second one. Our job as investors is to be opportunistic about how to make money in the world we are in. You can’t wish things were different.”

The fallout from Brexit is important for AustralianSuper’s small London office, which manages its UK property portfolio. In January 2016, the fund took a $900 million majority stake in a 27-hectare mixed-use Kings Cross development.

In October, AustralianSuper in a consortium with IFM Investors, lobbed a $16.2 billion unsolicited bid that the NSW Government accepted in exchange for 50.4 per cent of the state’s electricity poles and wires operator, Ausgrid, on a 99-year lease.

Now Delaney is putting the brakes on what has been a three-year long shopping spree for unlisted property and infrastructure, trimming the fund’s fixed-income holdings, and topping up on equities.

“We were large accumulators of unlisted assets for the period from 2013 through 2016 and we are slowing that down now,” Delaney says.

A combination of unlisted assets being relatively more expensive than they were and low interest rates already being priced in has made the sector less attractive than as it was three or four years ago.

The beauty of having stocked up on property and infrastructure when the price was right is that it can now be held for a long time, providing a source of diversification, capital growth and income.

An ability to give ordinary workers the chance to own a stake in things like Hawaiian shopping centres, international ports, and office towers is one of the things that gives Delaney the most job satisfaction.

“When I started at STA 17 years ago, I put all my super in the fund’s balanced option (which rolled into AustralianSuper’s balanced option following the merger). To this day, that’s the only place I’ve got super and I’ve never once made a single switch.”

And he plans to stay there for a long time yet.

Delaney is a vocal advocate of the need for older members to retain an exposure to growth assets into the retirement years.

“Someone retiring at 60 probably still has an investment horizon of 20 years. They need capital and growth,” he argues.

The imperative to help retirees keep building their balance is huge, given the average AustralianSuper member has a balance of just $47,000. Luckily 98 per cent of them are still in the accumulation phase.

This article first appeared in the March print edition of Investment Magazine. To subscribe and have the magazine delivered CLICK HERE. To sign-up for our free regular email newsletters CLICK HERE.