One of the ways investment firms can avoid herding and therefore promote investment outperformance is through their organisations’ culture and everyday work practices.
David Neal, the Future Fund chief executive, provided his insights and the fund’s outlook for markets at a sold-out Women in Super lunch in Sydney last week. The outlook is dangerous but truly long-term investors can take heart if they stick to some simple rules.
Since the Future Fund instituted its “one team one portfolio” strategy, it had been making different sorts of decisions, he said. Initially designed just for investments, the strategy had more recently been expanded to encompass all the body’s activities, including administration and IT, for instance.
“One team one portfolio” takes you to a different place, Neal said. “You tend to make decisions that you wouldn’t have made before.” It is one of three pillars the Fund manages to for its overall strategy. The other two are: to “leverage the best in the world”; and, to be “flexible, nimble and opportunity driven”.
He said the industry was not good at leveraging the insights of others, such as its external fund managers, and neither was it good at fostering diversity. “It seems obvious that if you need to make complex decisions then you need diverse opinions to collide… We don’t have a good gender balance but we have introduced strategies to address it, the main o0ne being to create an environment where [diversity] can flourish.”
The Fund has developed a culture, as some other big organisations have in recent years, of seeing work as an “activity” rather than a “place”. Staff can work from wherever they like, assuming targets and guidelines are met. This is an important aspect in fostering an environment of gender diversity in particular.
Referring to the current market environment, Neal said issues included “fairly full” valuations and low prospective returns. “The spread of plausible outcomes is unusually wide… We have a fragile environment.”
Neal said that there were “powerful, persistent contractionary and disinflationary forces” impacting the globe, with political instability, geopolitical tensions and social tensions – due to inequality – coupled with a perceived migration crisis for many countries.
Given that monetary policy was stretched – with low-to-zero interest rates and big government indebtedness – how would the world deal with a new shock?
“A shock could come from anywhere,” he said. “What we know is that it could be difficult to deal with… Where’s the safety net? The safety net has been used up.”
While he said the Future Fund did not expect a shock to happen anytime soon, it needed to position its portfolio to reflect the new risks. Over 2016 the fund had been building its cash reserves and it had also instigated discussions with the Government to review its returns target with a view to reducing it from its current CPI-plus 4.5 per cent to 5.5 per cent range.
In a telling slide Neal presented to the 200 Women in Super members and their guests, the Future Fund has comfortably outperformed all its big super fund peers both since inception in July 2007 and over the past seven years, even on a tax-adjusted basis.
The Fund has returned 7.9 per cent since inception, 10.0 per cent over seven years and 9.8 per cent over three years. This compares with, tax adjusted, a peer group set of returns of 5.1 per cent since July 2007, 8.5 per cent over seven years and 7.6 per cent over three years.
There are several reasons for this to do with how the Future Fund has been structured and how it has implemented its strategies, however a principal one is the long-term nature of its investing style and processes.
For instance, the Fund does not set itself a strategic asset allocation or “reference portfolio” by which to judge itself. Such benchmarks can strip out the market noise, which is a good thing, but they can also mean that “you listen to the wrong tune”, Neal said.
Since adopting a “one team one portfolio” approach, where every decision is judged for its impact on the whole organisation and not against a sectoral benchmark the Fund has tended to become more adventurous and less conservative.
Sandi Orleow, the Women in Super, NSW, chair and host for the event last Monday, who worked with David Neal at the former Watson Wyatt asset consultancy in the 1990s (as a mother of two young children), said that the flexibility of work hours and hours in the office usually meant greater productivity.