By Jerome Lander*
Media Super has been highlighted recently in the media as an underperforming fund. There is no need for Media Super to remain that way. Frankly, they look like they could do with some help!
One of the main opportunities Media Super has to add value to their members is in fact something they seem to think they don’t even need. I’ll explain below why Media Super can afford to employ a high quality investment professional as CIO. I’ll then explain why this is probably the best investment opportunity they could ever make using simple cost-benefit analysis. In fact read on and I’ll demonstrate how it has a 200-fold expected return on investment! This investment opportunity is in reality a capital allocation and resourcing decision – a key responsibility of the board and CEO. They are the only ones that can make this decision for the benefit of their members.
The reality is $4 billion is a wonderful size for a superannuation fund. So is $8 billion. And so are lots of other numbers if you’re willing to be thoughtful about it. Four billion allows you to employ highly skilled, experienced and proven investment personnel and to empower them to add value. It also allows the fund to access limited capacity high performing investment opportunities that big funds can not. A fund of this size should use its size to its advantage to add value, just as a bigger fund equally should use its size and clout to do so, albeit in different ways. To do this, they require genuine investment nous to recognise, act upon and manage the good opportunities that are regularly presented to them by fund managers and others. Appointing a capable and dedicated Chief Investment Officer (CIO) would help Media Super gain the investment nous they need to make better investment decisions and dramatically improve their performance.
So how much does a capable CIO cost? The total employment cost for a capable CIO is little more than 0.01 per cent of Media Super’s funds under management – that’s right, just 1 basis point. The cost of a small investment team is little more. This is a fraction of the fees that Media Super is paying for many of its other functions, few of which are capable of adding a similar level of value. To suggest that this cost is somehow unaffordable for any medium sized superannuation fund is simply disingenuous. Furthermore, a package of this sort could include a significant performance component which is only paid to a CIO who is achieving value adding objectives, rather than being paid for simply occupying the chair.
How much difference should a capable CIO make to Media Super’s performance? There appears to be numerous ways a CIO could add value to Media Super. These include:
> Skilled agency management. Media Super does not appear to have sufficient internal resources to effectively manage the large number of agency relationships it has, and therefore its costs with respect to these relationships. By ensuring it had an appropriate number of relationships, the exact look through costs and benefits of these relationships could be properly considered in the context of a simple cost-benefit analysis. Implementation and transition costs could be ascertained. Fees could be compared to industry best practice and renegotiated where appropriate from a position of strength, resulting in potential cost savings of more than 10bp, or an improved expected result for the fees which are paid. In other words, a commercial CIO – who was willing to negotiate and partner with service providers in an informed way – could do a lot to improve the value achieved from the fund’s service providers and to ensure their capabilities are best used.
> Better asset allocation. Media Super appears to have ample scope to better manage its mix of asset classes and vary these appropriately through time. Strategic partnerships with quality asset allocators could be considered and the information available to the fund better leveraged. Better dynamic asset allocation calls could be made. The rebalancing and currency approaches could be reconsidered. A CIO with investment strategy expertise could conservatively lead to an improvement of Media Super’s performance of more than 1% per annum.
> Better manager and investment selection. Media Super invests in a rather large number of fairly persistently underperforming investments who have little prospect of making a significant contribution to the fund. A full-time CIO, with the help of a fresh set of eyes, could, over time, reassess all of its fund manager relationships to assess whether they are prospectively value adding. The CIO could use the fund’s size to access niche investment opportunities not available to larger funds, along with ensuring the best investment managers are given more opportunity to contribute to the fund’s results. The removal of non-value adding investments – and potentially appointment of new ones – could conservatively add more than 1 per cent per year to Media Super’s performance.
> Better leverage the skills and knowledge of the asset consultant. Rather than being seen as a substitute for the CIO, the fund’s asset consultant should be viewed as complementary. An asset consultant can also be very value enhancing given the scope to influence the fund’s overall performance. They cost a similar (also trivial) amount compared with the importance of making good investment decisions. However, depending upon the nature of the arrangement, the asset consultant does not typically have the same scope of opportunity to add value as the CIO. For example, typically the consultants are unlikely to negotiate and align fees and service providers to the same extent as a dedicated CIO would do, or a specifically-asked person would do. To best use an asset consultant, their role should be highly tailored to complement the fund, and the quality and time allocation of the individuals involved should be emphasized over cost.
Adding up the above, the addition of a capable and suitably empowered CIO could add well over 2 per cent p.a. to Media Super’s performance, or a return of around 200 times the management cost! Even if you think all of these opportunities are a lot for just one or two individuals to fully explore, addressing any one of the above alone would more than justify the costs of appointing a CIO, with at least a 10-fold expected return on investment. The above outcomes will certainly not be achieved by having insufficient resources dedicated to good investing. Media Super needs to focus on value add, rather than costs and fees alone, to add value to its members.
But given Media Super’s history of poor decision making, could Media Super identify and attract a capable Chief Investment Officer to add value to their fund? Well firstly they would need to consider it important and to recognise the opportunity that exists. They would need to realise that the job of Chief Investment Officer is not purely a relationship role, or for show, and that good investing requires dedicated and capable resources and sufficient time allocation. In effect, they’d need to show that they valued the investment function, including by suitably empowering the role to add value and offering a commercial package. Even if Media Super was not up to the job of identifying such as a person using contacts in the industry, others are. An external party such as a capable search firm – given the mandate to find a high performing and knowledgeable investor to be CIO – should actually be capable of doing so.
*Dr Jerome Lander is managing director of ProCapital. He is also a consultant and a director of the Investment Management Consultants Association. He is a former general manager of investments at Workcover NSW, director of investment consulting at Russell Investments and head of research at van Eyk. These are his own views and were unsolicited by Investor Strategy News.