Swiss asset manager Compenswiss was established in 1948 to manage the assets of three Swiss Federal Social Security Funds: Old Age and Survivors’ Insurance (AHV), Disability Insurance (IV) and the Income Compensation Scheme (EO). Almost 60 years on, Compenswiss is continuing the development of a sophisticated strategy, investing assets of CHF34.8 billion ($34.8 billion) in a way that provides returns but is also low risk and has a high level of liquidity.

“By law, we must be fairly liquid and ensure our treasury has enough cash to deploy during the year. Building up a portfolio within these confines that delivers both returns and liquidity is a fine balance. We sometimes liken it to squaring a circle,” says Frank Juliano, head of asset management, speaking from Compenswiss’s Geneva headquarters. After deductions for hedging, the fund posted a return of 3.93 per cent in 2016, in spite of nearly a quarter of the return-seeking portfolio lying in negative-yielding bond investments.

The three schemes are managed on a pooled basis to keep costs low. Yet each scheme’s different asset and liability projections are met via an innovative structure that moves assets between a market (or return-seeking) portfolio, and a basis portfolio in cash and money markets.

Two portfolios are better than one

“The scheme’s assets are invested in a combination of the market and basis portfolios, according to their own risk/return profiles. We realised that the different schemes were facing different futures and that each had a different risk tolerance and cash needs.”

The vast majority (93 per cent) of the funds’ assets are in the market portfolio, half of which Juliano’s internal team manages. The interplay between the return-seeking and basis portfolios becomes particularly important during spikes in market volatility. The asset liability management (ALM) unit has developed a volatility tracking process, which means that a sharp market move triggers a decrease in risk according to the needs of each portfolio.

“When markets are volatile, we sell part of the market portfolio and invest in cash, bringing the risk portfolio back into a defined band.” The last time the volatility tracking was triggered was the summer of 2015.

Assets in the market portfolio are split between a 21 per cent allocation to Swiss bonds and loans, a 44 per cent allocation to foreign bonds – including high yield, credit and senior loans – a 24 per cent equity allocation, an 8 per cent real-estate allocation, and a 1 per cent allocation to commodities. The remainder of the market portfolio is in cash.

The allocations within the market portfolio have changed over time in a dynamic process that Juliano says is essential because of the confines of the local investment universe.

“Switzerland is a small country, with a strong currency and negative interest rates. We have to diversify the portfolio to find returns.”

Last year, the fund added an allocation to European high-yield and local currency emerging-market debt; it already had an allocation to hard currency emerging market debt.

Real estate grows in importance

Other recent allocations include foreign real estate, accessed via core real-estate funds in Europe and Asia. In the real-estate allocation, Juliano is also contemplating investments into value-add and opportunistic, and diversifying the portfolio across geographies and time spans. Such flexibility means real estate has become an important portfolio for delivering Compenswiss’s need for both returns and liquidity.

“We can invest only a limited portion into less liquid assets and, at this stage, can’t do the long time horizons of private equity and infrastructure. Increasingly, real estate has become a priority.”

Most allocations at the fund were managed externally until 2009. Today, half the portfolio is managed externally and half by Juliano’s internal team, in a decision-making process shaped by the extent to which internal management of an allocation can reduce costs, the ability to hire the right staff, and the operational risk of Compenswiss running the allocation itself.

“The availability of skills is an important consideration around internal and external management,” Juliano explains. “In Geneva, we have some good equity managers, but it is hard to find credit and high-yield managers. Also, the further you are from the market, the more difficult internal management is. For example, we have very limited access to the primary US credit market here.”

Currency risk becomes priority

As the fund diversified its asset base and invested outside Switzerland, managing currency risk at a portfolio level became another priority. Compenswiss’s Treasury Department runs a currency overlay program that covers roughly three-quarters of the fund’s currency exposure, through a dynamic and systematic process. It is not a full hedging program because of cost constraints, Juliano explains.

“We still keep some risk because hedging is costly. The Swiss base rate is -0.75 per cent. To hedge any currency involves paying the interest rate differential, so there is that trade-off between the currency risk and the cost of hedging.” In a recent example of the strategy at work, the investment committee took the view that hedging the fund’s Euro/Swiss currency risk ahead of the United Kingdom’s vote to leave the European Union last June was worth it.

“We increased our hedging ratio on the euro/Swiss exchange rate. Our fear was that should Brexit happen, the euro would fall and the Swiss franc would become a safe haven currency,” Juliano says.

Eleven elected members sit on the Compenswiss board, mostly drawn from representatives of the funds’ employers and employees. The investment committee prepares scenarios and proposals, which the board then scrutinises before approval.

“The board approves the risk budget, the asset allocation, the fluctuation bands of each asset class and the managers, and we then manage and execute investments according to their guidelines. It is a very transparent process and the universe is well defined,” Juliano says.

 

Institutional investors all over the world are grappling with the fact investment markets will not deliver what they once did, so their ability to reach their return targets is compromised. Rather than take on more investment risk, they are looking to reduce those targets. So what changes will that mean?

The chair of the $A127 billion ($97.6 billion) Future Fund and former Australian federal treasurer, Peter Costello, told a media briefing in January that the fund’s target investment return of 4.5 per cent to 5 per cent above inflation was likely to be unsustainable without taking on excessive investment risk. Costello said that even though the fund’s actual returns since inception have averaged 7.7 per cent a year, and it has met its return targets over the past decade, those goals should be adjusted for the next 10 years.

He did not suggest an appropriate revised target, nor did he suggest changes to the fund’s long-term asset allocation ranges were necessary. As of December 31, 2016, the Future Fund held more than 19 per cent of its assets in cash, reflecting what Costello described as “elevated risks [from] geopolitical factors”.

Lowering return targets often has a disproportionate effect on a fund’s liabilities, because investment earnings typically make up the lion’s share of funds’ revenue. A National Association of State Retirement Administrators (NASRA) issue brief, Public Pension Plan Investment Return Assumptions, states that about 63 per cent of public pension fund assets have been accumulated through investment earnings, with about 25 per cent from employer contributions and 12 per cent from employee contributions.

In February, the NOK7.7 trillion ($913.46 billion) Norway Government Pension Fund Global (GPFG) announced it was reducing its target real rate of return to 3 per cent. At the same time, the fund announced it was increasing its strategic benchmark allocation to equities from 62.5 per cent to 70 per cent. Full details and the reasoning behind both moves will be presented to the Norwegian Parliament at the end of this month.

In a statement, the Norwegian Ministry of Finance and the Office of the Prime Minister said the estimate for the expected real return on the GPFG has been 4 per cent since the introduction in 2001 of the so-called fiscal rule, or handlingsregelen. This law states that spending of revenues from the fund over time will be equal to the fund’s real rate of return.

“Returns are likely to be lower going forward, as assessed by two separate public commissions (the Thøgersen and Mork commissions) and Norges Bank. We must adapt to this fact. We, therefore, propose to adjust the return estimate downwards to 3 per cent,” the statement read.

It also explained the fund’s increased exposure to equities, stating that the expected return on equities “exceeds that of bonds, thus supporting the aim of increasing the fund’s purchasing power”.

“At the same time, equities carry higher risks,” it stated. “The proposal to increase the equity share is based on a comprehensive assessment of the recommendations received.

“All in all, the government considers an equity share of 70 per cent to carry acceptable risk. The downward revision of the return estimate underpins the long investment horizon of the fund, a prerequisite for holding a high share of equities.”

 

CalSTRS review recommends lower target

US public-sector pension funds grappling with the likelihood of lower investment returns over the next five to 10 years are preparing stakeholders, including fund members, governments – and ultimately, taxpayers – for the possibility of higher contributions to meet pension funding liabilities.

In February, the California State Teachers’ Retirement System (CalSTRS) revealed that it had a less than 50 per cent chance of reaching its 7.5 per cent return target, based on its current strategic asset allocation, capital market assumptions and inflation predicted at 2.75 per cent.

The prospect of the fund missing its target rate of return is included in a paper presented to the board that recommended a reduction in the target rate to 7.25 per cent, to be phased in over two years starting on July 1, 2017.

The recommendation followed CalSTRS’ regular four-year study of actuarial and demographic assumptions used to monitor the system’s funded status – including the returns and contribution rates necessary to ensure the system is fully funded.

The previous study was completed in 2012. The one planned for 2016 was delayed by 12 months to take into account additional data, including updated member mortality information, and stated that while the fund’s strategic asset allocation remains appropriate, it cannot reach the higher target with that allocation nor without taking on greater risk.

Long-term, short-term projections diverge

US-based NASRA’s brief, updated in February this year, states the lower-for-longer investment environment since the global financial crisis (GFC) has affected return assumptions, but funds have more recently faced another issue.

“One challenging facet of setting the investment return assumption that has emerged more recently is a divergence between expected returns over the near term, that is, the next five to 10 years, and over the longer term, that is, 20 to 30 years,” the brief states. “A growing number of investment return projections are concluding that near-term returns will be materially lower than both historical norms and projected returns over longer timeframes.

“Because many near-term projections calculated recently are well below the long-term assumption most plans are using, some plans face the difficult choice of either maintaining a return assumption that is higher than near-term expectations or lowering their return assumption to reflect near-term expectations.”

Targets dropping at public funds

NASRA analysed 127 public pension funds and found that at least 65 of them have reduced target rates of return since 2012. Each of the 65 reduced its targets after applying expected future returns to existing strategic asset allocations, NASRA’s report stated.

“The median return investment assumption was 8 per cent in 2011 and is now [in February, 2017] 7.5 per cent,” the report stated. “The number of plans with an investment return assumption below 7.5 per cent has been steadily increasing since 2009. In that year, only six of these plans had an assumption below 7.5 per cent. Today, 34 of these plans have an assumed investment return of 7.25 per cent or less. Of these 34 plans, 17 have adopted an assumption of 7 per cent or less.”

Just before Christmas last year, the $306 billion California Public Employees Retirement System (CalPERS) board of administration announced a reduction in the discount rate used to calculate future pension liabilities, from 7.5 per cent to 7 per cent, to be phased in over three years starting in 2018-19. It’s not the first time in recent years CalPERS has reduced its discount rate, having cut it from 7.75 per cent to 7.5 per cent in 2012.

The board said it would review the fund’s asset allocation during its next regular asset-liability management cycle, a process that ends in February 2018.

Divestment has long been a controversial topic and practice in the investment industry.

For decades, institutional investors around the world – many encouraged by stakeholders – have chosen to divest from specific asset classes, sectors or companies on ethical or financial grounds.

The fossil-fuel divestment campaign is very much alive today; 155 foundations have signed the Divest Invest pledge and the value of assets represented by institutions and individuals committing to some sort of divestment from fossil-fuel companies has reached $5 trillion.

Beyond the adverse moral implications of investing in products that are precipitating climate change, divestment campaigners argue that fossil-fuel investments expose institutional investors to the risk of stranded assets, implying that when industry or government acts to effect a swift transition to a low-carbon economy, many fossil-fuel reserves will be rendered unburnable and thus sharply devalued.

Although this argument has merit, there are reasons for investors to take a more nuanced approach to managing climate-change risks in their portfolios. Investment professionals often push back against divestment pressure, given a number of theoretical and practical issues with taking such a blunt action in a fiduciary context.

Most notably, practitioners typically argue that divestment limits the investable universe, which, according to Modern Portfolio Theory (MPT), inherently reduces long-term risk-adjusted return potential. In addition, investors may prefer to stay invested in fossil-fuel companies in order to engage with management and influence change.

Similarly, investors have been grappling with how best to profit from investments in ‘climate solutions’, defined generally as technologies that reduce greenhouse-gas emissions or improve the resilience of assets against physical climate impacts.

Investors harbour many different views on how to position such investments within a portfolio (that is, as a hedge against deterioration in fossil fuel-intensive assets, as a pure source of alpha generation within a thematic portfolio, or as some combination of the two).

Questions also persist about the size and diversity of the opportunity set and the ability for investors to access this theme across asset classes. Past attempts to capitalise on climate solutions have also been hampered by over-exuberance (for example, early-stage clean tech underperformance in the mid-to-late 2000s) and regulatory risk (as in Spain).

Answering these questions can prove challenging for investors operating within existing dominant risk-modelling and management frameworks.

Back-testing in a time of climate change

To understand the impact of fossil-fuel divestment, or investment in climate solutions, on portfolio risk/return, practitioners naturally turn first to the historical record, though the question remains as to what extent past data can be relied on to make long-term predictions regarding the future effects of climate change, which is a phenomenon that has not yet fully manifested and has no proxy in history.

It is also unclear to what extent markets are pricing climate change into valuations and what potential large changes in policy, technology and weather patterns may unfold over the coming years and decades.

Moreover, most asset allocation modelling tools in use today are based on MPT and heavily influence most strategic decisions.

This speaks to the power of quantitative modelling techniques and their ability to reduce complex systems into more readily interpretable numbers. However, we believe that the full complexity of economies and markets cannot be measured or captured entirely in mathematical models and that these models benefit from qualitative supplementation.

To this end, we have attempted to marry a complex risk with an existing quantitative risk-assessment framework, to make it more approachable. Our technique for climate-change risk assessment was initially described in our Investing in a Time of Climate Change report.

This research informed the development of four scenarios aligned with temperature rises 2-4 degrees above pre-industrial average. It also identified four risk factors: technology, resource availability, physical impacts and policy (TRIP). The scenarios developed reflect plausible outcomes and represent a broad global consensus on how certain futures might unfold. The multiple risk factors acknowledge that climate change is not one risk; rather, it is a diverse basket of risks that manifest economically in different ways.

The low-carbon transition premium

In a recent paper, to test whether the investment decisions the Divest Invest pledge contemplates might result in a low-carbon transition premium, we developed several asset classes that were fossil-fuel free and sustainable, with associated TRIP factors.

Sustainable investments are typically positioned to avoid areas most exposed to risks climate change poses, while being positively aligned with the shift to a low-carbon economy. In developing the sustainable asset classes, we assumed such investments had greater positive sensitivity to the technology and policy risk factors, relative to standard asset classes.

Using these new asset classes, we built a sample Divest Invest foundation portfolio, ran it through our climate change model and compared it with a more traditionally managed ‘base’ foundation portfolio, one that maintains exposure to fossil fuels and does not tilt towards climate solutions.

We found that the Divest Invest portfolio outperformed the base portfolio under our +2 degrees transformation scenario.

This result is attributable to the Divest Invest portfolio’s lack of exposure to fossil fuels and its tilt towards sustainable assets, suggesting that if an investor envisages a favourable policy and technology environment leading to a +2 degrees outcome, then both reduction in exposure to carbon-intensive assets and positive allocations to sustainable investments should be considered to improve results.

This being said, the future of climate-change mitigation action (including global or regional policy and continued technological advancement) is uncertain, and other climate-change outcomes are possible.

For instance, while our transformation scenario is broadly consistent with the baseline goal of the Paris Agreement, the ability to meet this goal will be influenced by global ambition (for example, the Paris Agreement also includes a reference to a more desirable +1.5 degrees outcome) and political realities (the country emission commitments submitted going into Paris are not yet sufficient to meet a +2 degrees goal). Other scenarios thus warrant further consideration if investment decision-makers deem them more probable or more important – from a risk-management perspective – over the relevant time horizon.

Investors can use a climate scenario analysis to better determine if they wish to be climate-aware future takers or future makers. Future takers will manage climate-change risks and pursue related opportunities, irrespective of which scenario comes to pass.

Future makers will determine which scenario is best for long-term investment outcomes and make a concerted effort to influence its occurrence. As an increasing number of investors look to position themselves either as future takers or future makers, continued market innovation to meet related demand for investment solutions that positively align portfolios with a shift to a low-carbon economy will be critical.

Progress is being made in scaling certain market segments (for example, the growth in green bond issuance), and an increasing number of funds are being developed to suit a broad range of investors, though much more remains to be done. We look forward to working with a range of investors to help them understand their climate risks and develop appropriate risk management.

Alex Bernhardt, is principal and US responsible investment leader at Mercer

 

New Zealand Super has pulled back its strategic tilting positions for the first time since the program was introduced in 2009, as it sees most asset classes returning to long-term fair value.

The strategy has added an annualised return of 1.2 per cent for the NZ$34 billion ($24 billion) sovereign wealth fund since inception; however, David Iverson, head of asset allocation at New Zealand Super, says prices are now closer to fair valuations, so the relative sizes of the tilt positions will be pared back.

The tilting decisions are driven by the fund’s view on how current prices compare with estimates of the fair value of assets based on long-term fundamental and economic factors.

Even though the tilting is executed through short-term trades, Iverson is firm that it is a long-term strategy, because it is all based on long-term valuations. Momentum, for example, is not a signal the fund uses in its tilting decisions, because it is a short-term behavioural signal.

The relative sizes of the positions are determined by how far current prices have deviated from the fund’s assessment of fair value and the relative confidence in tilting that asset.

“We started this program after the [global financial crisis] and have had those positions on for a long time. Now we see prices closer to our fair valuations and there is less opportunity,” Iverson says. “This is new for us…Prices are closer to our fair values in equities and currencies.

“One of our beliefs is that a long-horizon investor can outperform short-horizon investors. We can do everything short-horizon investors can do, and more,” Iverson says. “The illiquidity premium is a fact, but that is not the only way to act long term. You can also take advantage of short-term activities.”

More active in unlisted assets

The fund does its strategic tilting in-house, and has a team of four dedicated to it, partly to reduce transaction costs, but primarily because of the difficulty in getting a manager to maintain the discipline of acting long term while transacting in the short term.

While the strategic tilting program, which has done much of the heavy lifting for the fund over the past seven years, will not be as active, the fund is taking active risk in a number of other areas, particularly in unlisted, including timber – which is run internally – distressed debt and life settlements.

All of its active risk decisions are based on a long-term outlook.

“For example, in distressed credit, we look at where we are in the cycle and how attractive it is, our views on loan default rates, downgrades versus upgrades, spreads in the credit bands, where we are in the cycle and the ride through. We have been in distressed for a while. We were in European distressed debt, now the US has started sparking and we’re looking at that,” he says.

The fund’s timber allocations are primarily managed in-house, while European distressed debt is managed externally (by Bain), as is US life settlements (by Apollo).

New Zealand Super uses a reference portfolio to benchmark the performance of its actual investment portfolio and the value it is adding through active investment strategies. The reference is a low-cost, passive, listed investments portfolio split 80:20 between growth and fixed income investments.

About two-thirds of the fund is invested passively and in line with the reference.

As an active investor, NZ Super then adds value to the fund using illiquid assets, manager selection and trading activities.

The fund’s active risk falls into five baskets: asset selection; market pricing – arbitrage, credit and funding; market pricing – broad markets; market pricing – real assets; and structural.

The strategic tilting falls into the market pricing – broad markets bucket. Timber and life settlements fall into the structural bucket.

At the end of February 2017, the actual asset-class exposure of the fund was global equities (66 per cent), fixed income (11 per cent), timber (5 per cent), private equity (5 per cent), New Zealand equities (4 per cent), infrastructure (3 per cent), other private markets (3 per cent), other public markets (2 per cent) and rural farmland (1 per cent).

In the 12 months to the end of March 2017, the fund returned 23.14 per cent versus the reference portfolio of 19.78 per cent; in effect, adding 3.36 percentage points over the year.

Since inception in 2003, New Zealand Super has returned 10.04 per cent, versus the reference portfolio of 8.67 per cent.

Howard Brindle, the chief operating officer at Universities Superannuation Scheme Investment Management is one of the most experienced investment operations executives in the pension industry. Before joining the £57 billion fund ($69.3 billion), which runs about two-thirds of its assets in-house, he was head of JP Morgan’s European Transfer Agency Product and chief administration officer for Lehman Brothers Asset Management Europe. He talks about business transformation and the importance of talent.

Top1000funds.com: What is the most critical operations factor for dealing with growth?

HB: In my experience, it’s the strength and experience of your people. You need strong, experienced senior staff who understand how investment businesses work. Attracting good quality people involves a number of things, not just remuneration; developing a positive culture is important, certainly in terms of retention, and is something we focus on a lot at USS. Having strong senior staff also helps, as good people tend to hire good people.

Of course, being at one of the biggest and most innovative pension schemes in the country helps, too. Working in a pension fund is an incredibly attractive alternative to hedge funds and big banks. We provide all the complexity, challenge, variety and pace of those environments, but with less artificial client-related deadlines, and without the internal bureaucracy of a large organisation. As a result, we are able to attract and retain top-quality talent, and can give them as much responsibility as they are able to handle.

What are the critical systems and processes superannuation funds should have in place if they are to bring assets in-house?

The benchmarking is clear: when a certain scale is reached – I would say greater than £5 billion per asset class, maybe £10 billion for equities – the cost advantage means that in-house teams perform better. I’d caveat that by saying you should in-house only assets for which you have scale and only when you are confident you will be invested in them for the long term.

For a defined benefit scheme, or any multi-asset fund, the starting point is an investment book of record, with a consolidated record of all assets, linked to a risk system. Asset allocation decisions are the biggest investment decisions a scheme makes. For single-asset, defined contribution funds, an investment book of record is not as relevant.

Is it essential to have good performance analysis tools? Should trading be done in-house and if so what systems should be used?

For managing the actual underlying assets, portfolio management is the most critical system. Performance reporting, accounting, valuation, collateral management – they can all be outsourced effectively. But a portfolio management system is key. Historically, these were different per asset class, but now there are solutions (for example, Bloomberg AIM, BlackRock Aladdin) that can cover most asset classes from a single system, and can also support processes from front to back. Having a simple core system architecture is a huge benefit.

Trade execution can be outsourced, although not as easily. However, we’ve not felt the need to do so, [thanks to] more electronic trading venues, more seamless integration of execution venues with core portfolio management systems, and appropriately skilled portfolio managers.

To get the most out of our core systems, we use a highly skilled in-house development team that enables us to support any new business initiatives, such as integrating new teams, new external managers, new analytic systems, new reporting and so on.

What type of staff do you need to manage and monitor systems?

You need people who are skilled and experienced in investment operations and IT. Find them, employ them and look after them.

How should you reward in-house investment staff, and how do you make them accountable?

The starting point needs to be the philosophy. What are you willing to pay for above-market performance? With scale, the cost-benefit to the scheme will be there, but the compensation philosophy, the governance and the sponsors need to be aligned.

Investment performance has a significant impact on overall funding levels, so it is arguably in the best interests of our sponsors and members for us to offer largely performance-related packages that attract and retain good-quality staff who can continue to achieve fantastic results on their behalf.

Being a captive asset manager has tremendous benefits if you can take the long view. We measure and reward staff based on performance over a five-year horizon using a formulaic underpinning to compensation, but it cannot be based just on the numbers. We always apply a discretionary overlay to ensure pay is fair and proportional to individual contribution and performance.

How can pension funds work better with their custodians and other providers to get more transparency around their data? What is the best way to use the data that you do have; i.e., how do you interpret data for efficiency and better decision-making?

Larger, more complex funds, like USS, can no longer rely on custodians to provide all the data. If you trade exchange-traded derivatives or over-the-counter derivatives, these may not be cleared through your custodian. Custodian data is also based on confirmed trade data and can be slightly out of date as a result. We reconcile our records to our custodians every day on T+1, but we also reconcile to external manager records, to the clearing houses and valuation agents. This puts a burden on the in-house operation, but means we are not reliant on a single partner, and operate using multiple custodians and clearers.

What is a reasonable budget for technology? How could operating budgets be best allocated and managed?

USS has taught me that it’s better to have quality over quantity, and that you shouldn’t underestimate how much you can deliver if you give good people, who understand the business and technology, the right tools and support. We support a £57 billion fund; about 69 per cent of assets are managed in-house, with more than 100 portfolios and more than 1000 transactions a month. We have an IT team of 10 people and an operations team also of 10 people. Our investment book of record is internally developed, all our system integration is managed in-house and we are able to respond quickly and efficiently to new demands. We’re quite unique in the UK, which, together with our size and scale, drives our innovative, cost-effective, in-house approach.

As adept at giving orders as taking them, REST Industry Super’s Brendan Casey juggles his dual careers in military operations and investment operations with aplomb.

Managing $42 billion in investments at one of the country’s largest superannuation funds is a big job but, even on its toughest days, the pressure pales in comparison to working under enemy rocket fire in Afghanistan.

REST’s recently appointed general manager investments, Brendan Casey, says 32 years in the Australian Army Reserve, including an active deployment overseas in 2011, have shaped him for the biggest civilian leadership role to date of his varied career.

“Leadership, planning and resilience are the qualities the army has given me,” says the former chemical engineer turned quantitative analyst, turned stockbroker, turned asset manager, turned investment operations expert.

A defence background that has taught Casey how to both lead and follow orders is set to prove invaluable in working with the REST investment committee – well known as one of the most hands-on in the industry.

Casey recently sat down with Investment Magazine at REST’s Sydney offices, in his first media interview since joining the superannuation fund on November 1, 2016.

He painted a picture of himself as a man not easily ruffled.

“[In Afghanistan], I went through six months where every other day people were rocketing our base,” he says. “People were dying every day. That was such an extreme level of stress. I can’t imagine anything happening here that could come close… It is much easier working in a civilian environment…much gentler.”

“The beauty of that is that I’m always calm and it’s hard to stress me.”

Immediately prior to joining REST, Casey spent a little over three years at ASX-listed insurance and wealth management firm Suncorp as its head of investment operations.

At REST, he fills the fund’s top investments job, which had been left vacant for five months following the departure of Ronan Walsh in May 2016, after just six months in the position.

REST independent chair Ken Marshman told Investment Magazine Casey’s “terrific” background in investments and investment operations made him an ideal candidate for the role, and that he was also impressed by his life experience beyond the financial services industry.

“He has a very diverse set of backgrounds and interests; a wellbalanced but very active life,” Marshman says. “He appears to be driven to excellence…and his track record shows a high level of mental agility.”

Casey started his professional life as a chemical engineer working internationally for DuPont and gained a PhD in chemistry, specialising in polymers. A dearth of career opportunities for senior scientists at home in Australia, where he and his wife, who also holds a PhD in chemistry wanted to raise their family, led to a career change.

After answering a advertisement in the Sydney Morning Herald titled ‘Move from science to finance” Casey landed a job as a quantitative analyst at County (now Citi) and never looked back, proceeding to rise to head of portfolio and trading, then moving on to various roles with Commonwealth Bank of Australia before landing at Suncorp and now REST.

Former Suncorp chief investment officer Nick Basile, recruited Casey as his deputy at the insurer, having previously been his boss at CBA.

Military precision

Basile says Casey has a “firm but fair” management style that “gets things done.”

“Probably the best recommendation you can give someone is to hire them again,” Basile says. “He tends to have very high expectations of his team, but he communicates goals early and clearly and delivers.”

Basile says Casey was always clearly ambitious and sought out career development. And as he was building his career in the financial services sector, he was simultaneously progressing up the ranks in the Australian Defence Force.

At the age of 19, Casey was already commanding a 10-man section in the infantry. Today he is responsible for 14,000 high school cadets as the commander of the NSW Australian Army Cadet Brigade. The plan is that his next assignment will see him promoted to brigadier general in the Army Reserve, in charge of 5000 adult service personnel.

It is notable that someone so ambitious and experienced at leading others is also comfortable following orders.

Most super funds of REST’s size employ a CIO to lead their investment strategy, under the guidance of the board’s investment committee. At REST, the investment committee, working closely with the fund’s longstanding asset consultant JANA, has always taken a much stronger role.

Casey says the fact the fund was recruiting for a general manager investments to implement its strategy, rather than a traditional CIO to set the strategy, was exactly what appealed to him.

“The job description matched me so perfectly,” he explains. “The investment committee fills the role of a strategic CIO and I fill the role of an operational CIO.

“Day-to-day decisions a CIO might make, I make. But longer term decisions go to the investment committee, which meets monthly.”

REST’s investment committee is led by fund chair Marshman and comprises five other trustees, plus JANA founder John Nolan, who sits on the investment committee as a non-voting member.

JANA executive director John Coombe, head of research and investment outcomes Steven Carew, senior consultant Matt Griffith and consultant Matt Gadsden also attend REST investment committee meetings.

The industry fund’s ties with its National Australia Bank-owned asset consultant, which has held the mandate for 26 years, clearly run deep.

Marshman is a former chief executive and chair of JANA.

So far, Casey is finding the close working relationship with the investment committee and its advisers constructive.

“JANA obviously have a house view but they’re willing to challenge that thinking on [how well it applies] for us,” he says. “They definitely speak their minds, especially John Coombe – he is not one to be handcuffed.”

Tilt to cash

The portfolio strategy Casey has been tasked with implementing over the short term is to tilt away from equites towards cash and credit securities.

REST is already holding 6 per cent of the portfolio in cash, ready to buy bargains in the event of a market dip.

This is driven by a view that equity markets are overvalued in a low interestrate environment and fear of heightened geopolitical risk, following Brexit and the election of Donald Trump as president of the United States.

“There are different views within the investment committee on whether things are going to be positive or negative because of Trump,” Casey says. “A lot of people think there will be a short-term boost in the US economy, but there is concern as to whether it can sustained…and what effect his policies might have in other markets.”

Another element of REST’s investment model that is different to other funds is its heavy reliance on subsidiary Super Investment Management (SIM): a separate, but wholly owned, externally operated funds management business.

“Across the industry, there is a push towards in-sourcing, but REST has always had a pseudo-internal investment team,” Casey says.

REST does not manage any investments internally, but has about 20 per cent of its mandates with SIM, an arrangement set up more than two decades ago.

Since its creation, SIM has been forbidden from taking on any clients other than REST.

“That is a philosophical approach in that we want them purely focused on REST and returns for our members,” Casey says.

It is also REST policy that SIM cannot be the fund’s exclusive manager in any asset class, with the exception of cash management, to keep the business on its toes.

“We perform due diligence on SIM, receive monthly reports, and assess them against benchmarks and their peers, just like any other manager,” Casey says.

The REST model of having a powerful investment committee fulfilling the strategic CIO role, a general manager investments focused on implementation, and external fund managers (including the wholly owned SIM) carrying out the day-to-day trades is unique in the industry.

“It is not typical, but it has obviously worked very well, as can be seen by how well the fund has performed and the great returns delivered for members,” Casey says.

The fund’s MySuper option – REST Core – was the top-performing growth fund in Australia over the 10 years to June 2016, with an average annual return of 6.4 per cent.

Casey hopes to add “a couple” of new roles to his team of 11 direct reports at REST, but says he is more concerned with building capability than headcount.

“The biggest area where I want to work with my team on lifting their capabilities is improved project planning skills,” he says. “Defence is all about planning…the finance sector not so much.”

With $42 billion in funds under management, REST is placed as the ninth-largest super fund in the country by funds under management.

But with more than 2 million accounts, it ties with its biggest rival ($103 billion AustralianSuper) as the super fund with the biggest membership.

This fact hints at one of the biggest challenges for REST’s executive management: looking after the interests of members with meagre balances.

REST is the default fund for some of the biggest employers in the retail and hospitality sector – such as Woolworths, Coles and McDonald’s.

More than half (51 per cent) of REST’s members are under age 29. Most members were automatically signed up to the fund when they got a low-paid casual job early in their working life.

Educating young members about the importance of super and how small contributions made early in life can add up to a better retirement is an important focus for the fund.

The demographics of REST’s membership also have a direct impact on the investment strategy Casey is tasked with implementing.

“Our members have got a long future ahead of them, so our style is to focus on growing long-term returns,” he says. The fund’s core MySuper strategy has a 78 per cent allocation to growth assets.

Frustratingly for Casey and his team, one of the most important drivers of total net returns for their most vulnerable members is completely beyond their control.

It is required by law that all super funds automatically sign default members up to a group life-insurance policy that includes three types of cover: death, total and permanent disability (TPD), and income protection.

The relative merits of default group life insurance, particularly for members with low balances – for whom the premiums leave a heavy dent in their retirement savings – is the subject of hot debate.

 

 Insurance dilemma

Each year, some default members with low balances pay out more in insurance premiums than they receive in investment earnings.

It’s a perverse situation, where default insurance premiums are eroding the retirement savings the scheme is intended to protect.

This is particularly challenging at the moment, when sluggish global growth means super funds are likely to struggle to deliver the type of average annual investment returns members have grown used to in the past decade over the 10 years ahead.

Casey told Investment Magazine that the insurance conundrum is an issue he has discussed with REST chief executive Damian Hill, who is a contributor to the Insurance in Superannuation Industry Working Group established in December 2016 with the goal of producing a new code of conduct by the end of 2017.

REST now has the simplest and cheapest default group life-insurance policy of any super fund in the market.

“That is intentional, because it is arguable whether very young people get much benefit from default life insurance,” Casey says.

Basic cover for total and permanent disability and income protection tends to represent good value to most members, but for the large swathe of REST’s members, who are aged under 25 and don’t have any dependents, the value of death cover is highly questionable, he says.

In the coming months, a parliamentary joint committee will examine the question of whether death cover should remain a mandatory default inclusion for default super members.

“It’s a question that is definitely worthy of a review,” Casey says.

This article first appeared in the February 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.