Superannuation funds in Australia are not putting enough emphasis on data and technology as a tool to strengthen member engagement or as a platform for their business. There is plenty they can learn from Rayid Ghani, chief scientist for the Obama for America 2012 campaign, who was the keynote at the Conference of Major Superannuation Funds this week.

 

It wasn’t data that won Barrack Obama his second term as the President of the United States, it was analytics. This might seem like a frivolous distinction, but actually it’s important, and one that superannuation funds in Australia can learn from.

The distinction is this, data on its own is not a powerful tool, it’s how you analyse it and what action you take as a result of that analysis as to where the power lies.

The Obama for America 2012 campaign analytics team has been credited with winning the election for Barack Obama, and for changing the face of campaigning forever.

Obama’s team, which included Rayid Ghani, as chief data scientist, used analysis of data to raise $1 billion, identify and target swing voters, and influence behaviour through ad campaigns and social media.

The team had a very clear goal, to win, but it used analysis of the data it collected to achieve that goal in a sophisticated way.

“We had a goal ‘to win the election’,” Ghanis says, “but beneath that our second level goal was to increase our chance of winning not to get more votes.”

A vote can be had in three ways: to register a voter, change the mind of an existing voter, or push existing supporters to vote, and Ghani and his team looked at targeting and selecting individuals on this basis.

“On an individual basis we looked at who to register or who to persuade, and then once they were identified we worked on how to persuade them. You need to break it down, and data plays a role at each level.”

It is Ghani’s belief that super funds are not tapping into this simple but powerful tool of using data to make high level decisions about the direction of the company or to achieve a particular goal.

“It is common sense but not really common that you can use more data to be more rational,” he says. “You make decisions regardless, so if you have the right data it makes you be more rational. It also means you can manage risk better. If you are taking risk you know you are and can account for it.”

For example, he says if a super fund is trying to get a new member, or get a member to switch from another fund, there are a number of ways of doing that, including persuasion.

“This means you need to identify who is persuadable and focus on them, otherwise it is a waste of resources trying to persuade people who won’t or can’t be persuaded. This is where data can be useful in breaking down the problem.”

Ghani claims not to like the term “big data” because he doesn’t like the inference of size.

“Size is independent of how useful or effective data is. We focus more on actions and using data effectively; using it to be more rational and make better decisions,” he says.

The Obama analytics team contacted 54,739 voters from paid call centres and asked them how they planned to vote. They also used existing supporters as extensions of their own work, enabling them to reach out to an enormous amount of people – more than 150 million. This data was distilled down to individual-level predictions, including a score on an individual’s likelihood of supporting Obama. The data gave them a starting point for action.

A number of actions followed depending on what the data revealed.

This flexibility is a hard concept for most business to grasp, Ghani says, adding that the ability to evolve a plan depending on the data is an essential part of useful analytics.

“You need a good conceptual idea and plan, but if data is not available, or data tells you something new, it needs to be able to evolve,” he says.

If for example, a super fund plans to increase its membership of people under 30 but once the analysis is done it is revealed that’s not possible with the available resources, the plan has to change to either put in more resources or change the goals.

“This is hard for a lot of businesses to do. Most businesses are not used to uncertainty, and it’s hard to start a project not knowing if it’s going to work.”

One of Ghani’s tips to avoiding disappointment in a project in the form of cost or failure, and something that was done during the Obama campaign, is to design short projects, typically three weeks to a month.

In addition he stresses there needs to be a willingness across the entire organisation, a top-down support, to experiment with the projects.

“If you’re looking at the case of trying to persuade new members, how do I know that people are persuadable? What we did is try different tactics on a small set of people over and over,” he says.

“We were running experiments of different types every day, it could be anything like an experiment on how to write better emails. It needs to be part of the culture.”

One of the obvious distinctions in the superannuation market at the moment is the different levels of technology between industry fund sectors and the retail providers, particularly the banks.

But Ghani doesn’t believe this war is won, or that it is too late for industry funds to have success on this front.

“Industry funds need to focus on an end goal, not on being better at technology than the banks. Technology is a means to an end not a goal in itself,” he says.

In addition, and this is the good news for industry funds, he says banks have saturated their outreach.

“From what I see there is a lot that industry funds haven’t done in individual outreach, but banks are overdone,” he says. “Industry funds can be different because they don’t have a history. This makes it easier to have a new experience as customers are not immune to the communication. The brand and communication is a new experience, you are not competing with yourself.”

 

 

For the Centrica pension fund, which adopts a liability-matching portfolio approach, last year was busy for appraising new opportunities arising out of the fact banks are no longer lending. This year its focus is on being more dynamic. Amanda White spoke to chief investment officer of the £5.5 billion ($9 billion), Chetan Ghosh.

The Centrica pension fund adopt a liability-driven approach, with a separate hedging portfolio, and growth portfolios which have slight adaptations for the three underlying pension schemes.

Fundamentally, instead of a strategic asset allocation as an investment objective, the investment committee sets a liability-related target.

“We are trying to set the optimal portfolio to best capture forward looking returns anywhere in the world in any market. We are conscious of our risk parameter so all the hedging must bring investments back to permitted boundaries,” Ghosh says. “It’s best ideas adjusted for risk.”

The fund targets excess returns over gilts which must be done within permitted volatility boundaries relative to how gilts move.

The allocations are driven by the best way to achieve return targets and investments are allocated to asset classes on a bottom up basis, aggregating up to percentage holdings in return-seeking and liability-matching, rather than the other way around.

At the moment across three schemes 20 per cent is allocated to liability-matching assets and 80 per cent in growth above the risk free.

Last year the fund looked at the top-down philosophical view, which matched with the bottom opportunities, of exploiting opportunities due to the fact banks are not, or can’t, lend anymore.

Some of the investments the fund assessed, and adopted, included mining loyalties, and social housing.

“Both of these played to the bank financing theme. Mining companies can’t get the financing they used to, and in social housing banks have pulled new finance. In liability matching we want long-dated cash-flow generating assets and these fit,” says Ghosh, who was educated at The Kings College, University of London where he received a First in Maths.

Within the growth portfolio bank financing was also a theme with the fund looking at niche, illiquid credit opportunities including direct lending, mezzanine financing and senior loans.

Within equities the fund appointed three new global unconstrained mandates as well as frontier equities and small cap.

The fund outsources all investment, and only has an internal team of three looking after operations and administration, managers monitoring and project research into new asset classes as well as the generation of new ideas.

One of the defining characteristics of its outsourced model is it works closely with managers, both for new ideas, but also to tailor mandates and opportunities.

For example Ghosh and his team have liked the insurance theme for some time, and the fund finally allocated to insurance-linked securities, but after a long search to find the right manager.

“We have liked it for a while but it took us a long time to find the right manager with the right fees,” he says. “We removed the performance fee as we think for that asset class it is not appropriate.”

Forming a network of trusted partners in asset management and banking for the generation of new ideas was one of Ghosh’s first priorities when he came on board in 2009.

“I wanted to build a network of trusted partners in the asset management and banking communities so we were not overly reliant on our consultant,” he says.

“We say the door is open if you have something relevant, but if you abuse that then the door will shut on you,” he says, adding that managers have all had a respectful manner in presenting their ideas.

“The last 10 things we have done have come from the internal team, through this process, rather than from the investment adviser,” he says, adding the consultant, Mercer, is still very much on board.

Since 2009 the governance of the fund has also evolved, with trustees setting liability related objectives. The advantage of this approach, Ghosh says, is that trustees are not in decision paralysis.

The fund has three independents on the investment committee which the team believes makes it easy to process ideas, which the CIO implements.

And there are mechanisms in place to converse between meetings, so that investment decisions can be made quickly.

“In the UK traditional pension schemes haven’t sought to be dynamic, but it is a priority in 2014 to enhance how dynamic we are. We want to focus on taking advantage of extreme valuations of asset classes or sub asset classes,” Ghosh says.

 

 

This paper estimates hedge fund and mutual fund exposure to newly proposed measures of macroeconomic risk that are interpreted as measures of economic uncertainty.

The academics, from Georgetown and Stern, find the resulting uncertainty betas explain a significant proportion of the cross-sectional dispersion in hedge fund returns. However, the same is not true for mutual funds, for which there is no significant relationship.

 

To read the paper click below

Macroeconomic risk and hedge fund returns

Institutional investors are sheltered by competition, which in some instances can be beneficial, but it also means they are shielded from competitive forces that drive innovation. A new paper by Gordon Clark and Ashby Monk, looks at why the current model of either insourcing or outsourcing investment management doesn’t allow for innovation, and the models of cooperation and collaboration that can change that.

 

There has been a surprising lack of institutional innovation among asset owners, suggest co-authors Professors Gordon Clark and Ashby Monk, due in part to the fact the current organisation and management of these institutions has been stagnant since their establishment – in many cases 50 to 70 years ago.

This is an important observation in the context of the rapid rate of transformation in the investment management industry, and the rate of product innovation in global financial markets.

It’s a problem because the lack of innovation has transcended the behaviour of investors.

“The stasis of the sector has been such that these types of financial institutions have, on the margin, taken higher levels of risk in the hope of realising returns that could compensate or the low rates of institutional adaptation and development. At the limit, the crisis facing US public funds is illustrative of the costs and consequences of institutional stasis,” the authors say.

A new paper by Clark and Monk, “Transcending home bias – institutional innovation through cooperation and collaboration in the context of financial instability“, suggests that industry wide norms favour continuity and that investors must look to new organisational forms for innovation.

The paper argues there is now a premium on institutional innovation, whether internal or external, whereas in the past there was less emphasis on make or buy, as it was less important than issues of strategic asset allocation and investment management.

Cooperation or collaboration between institutions, they suggest, allows a space for senior managers to experiment and learn which can then be applied to their own organisations or external providers.

Clark, who is a professor at the Smith School of Enterprise and the Environment at Oxford University, says that whether managing assets in house or through an external provider, institutional investors, are not faced with an opportunity to learn a new way of doing things.

“The contractual basis for outsourcing is very sterile, the terms and conditions are so well known and are always the same, it doesn’t give you much of a relationship with providers,” he says.

Clark and Monk, who is the executive director at the Global Projects Center, Stanford University, argue the problem facing institutional investors is more than that of responding to financial instability, the aftermath of the GFC and on-going euro crisis. And that recurrent financial crises have masked a significant shift in the underlying properties of financial markets.

Responding to these circumstances requires flexibility in institutional form and function, and they argue that the current norms of in-sourcing or out-sourcing investment management don’t provide senior managers enough flexibility to respond to changing market conditions.

Cooperation, at a minimum, and collaboration, at a maximum, can be seen as opening up an “action space” for innovation otherwise denied by the norms and conventions of the sector.

While there are some barriers and costs to collaboration, as outlined in the paper, the benefits are many including giving senior managers opportunities to create, extend or modify the resource base of their organisation.

“It allows a space for in house managers a place to learn and experiment outside their own organisation,” Clark says.

The key to successful collaboration is an issue explored in another paper published last year in the Rotman International Journal of Pension Management.

In “Effective investor collaboration – enlarging the shadow of the future” author Danyelle Guyatt, tested an eight-step framework based on collaboration theory, and looked at how it worked in 12 real-world investor collaborations.

Guyatt found a number of factors underpinned effective collaboration: a high level of trust among members, a similar mindset, sharing common interests and an open atmosphere.

The groups that ranked highest in terms of effectiveness were typically smaller groups which suggests a correlation between the size and action of a group.

The effective collaborations also all shared a high level of active involvement from their members in small-group meetings, working groups, research groups and events.

On the flip side, those collaborations that didn’t work as well shared a lack of clarity about their goals, a fragmented target group, lack of trust, bureaucracy among implementation and not enough focus on outcomes.

 

 

 

 

Academics from the London Business School, Boston College and Temple University, examine the outperformance of US public companies following corporate social responsibility engagement. The paper, Active Ownership, shows that after successful engagements the companies experience improvements in operating performance, profitability, efficiency and governance.

The paper can be accessed by clicking here

This paper commissioned by the Norwegian Ministry of Finance investigates the possibilities for the Government Pension Fund Global (GPFG) to profit from liquidity premiums in  illiquid investments. It looks at the empirical evidence for the presence of liquidity effects in a broad range of asset classes: listed equities, corporate bonds, treasury and agency bonds, and alternative asset classes such as real estate and private equity.

 

The paper can be accessed here

The Norwegian Government Pension Fund’s potential for capturing illiquidity premiums