No shortage of ideas but alternatives uptake lags

Bev Durston
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When Bev Durston returned to Australia last year after seven years working overseas, mostly in London, she was surprised that super funds had not made more progress in adding additional alternatives strategies. She spoke with Greg Bright about the local industry and her time at British Airways Pensions and the Government of Singapore Investment Corporation.

Having spent most of her career in senior positions at asset-owning organisations in Australia, Singapore and the UK, Bev Durston is well known for her belief in the diversifying benefit of alternative investments. As well she should be. She invested about $1 billion over five years in an alternatives program for British Airways Pensions Investment Management and is currently advising Royal Mail Pensions in the UK on establishing a more extensive program.

But she is also passionate about driving member communications and education. Her recent focus is to promote the idea of super funds providing clearer information on what a member is likely to need in retirement.

“We have lots of tools which members can use for their calculations but many of these simply don’t connect well with members,” she says. “For example, if we tell them there is a one-in-20 chance of a loss or we are aiming for CPI plus 3-4 per cent, that doesn’t mean much to the average member. I think it should be compulsory to estimate the likely income stream in retirement as a percentage of current salary. Otherwise members don’t really know what to expect from an accumulation balance.”

In the UK, the pension regulator sets out appropriate assumptions for growth and inflation and it is mandated that all super funds have to use these assumptions to project an income in retirement (priced in today’s terms) on annual statements. 

“That way everyone can get a fair idea of their income in retirement compared to now. It is how the old DB (defined benefit) system used to communicate with its members, but DC (defined contribution) hasn’t embraced this. Only a handful of funds currently do it here.”

Durston was also a trustee of the smaller DC-version of the big British Airways DB pension scheme for which she worked and says a fund doesn’t have to be huge to have an alternatives program, with just 10-20 per cent of their assets – both British Airways funds total about $25 billion.

“If you take a $3 billion fund, you could definitely create something useful with around $600 million including some diversifying and opportunistic investments, if you had the inclination.”

Durston believes that Australian funds actually need to go beyond 10-20 per cent in alternatives, similar to many of the big European and North American pension funds and endowments.

“The DC funds here have money coming in the door,” she says. “They are at the immature and growing phase of their development which is ideal for less liquid assets.”

Durston started out as a proprietary trader in a London merchant bank before consulting in risk management with PwC. For the past 20 years however she has been firmly grounded in asset management building her wealth of experience in DB, DC, not-for-profit, commercial funds management and sovereign wealth funds for a number of organisations both in Australia and abroad, including SunSuper, Commonwealth Super Corporation and BT Funds Management.

More recently she worked for Government of Singapore Investment Corporation (GIC) in London as a Senior Investment Manager in Equities before joining the British Airways (BA) DB fund in 2008 as Portfolio Manager and eventually Head of Alternatives.

The BA alternatives program was designed to diversify the main portfolio away from equity beta and bond beta. It was opportunistic, rather than a “fill-the-buckets approach”, she says with a minimum return target of five per cent a year plus the need for capital preservation.

In her five years at BA investing $1 billion and committing more, the portfolio averaged a return of 16 per cent a year with a volatility of 6 per cent, easily beating its benchmarks.

“I had the opportunity to buy into the distressed cycle in 2008,” Durston says. “My lowest return was five per cent in 2011, when equities were negative, so the investments successfully achieved their objectives.”

Durston returned to Australia in 2013 as an independent consultant, establishing her company, Edgehaven, with the $7 billion Royal Mail Pensions Plan, a growing DC fund, as her anchor client. She is also a highly sought after speaker, most recently addressing the Teik Heng Tan Investment Innovation Institute Conference on the defined contribution obsession with liquidity.

This is a theme that Durston is passionate about sharing with the Australian industry. She is showing the contrast between domestic super funds with international sovereign wealth and pension funds, endowments and family offices with a clear insight to address: international funds invest more in Alternative and less liquid assets than we do.

There are some structural reasons for this – such as member choice, regulation, short-termism, lack of scale and fees – but there is no reason why these should predominate, Durston says.

“Whilst the regulator, APRA, requires a liquidity plan from a super fund, it does not want sub-optimal returns. It is net outcomes that matter.”

Some big funds such as Sunsuper – where she was previously Deputy CIO – have a considerable proportion invested in illiquids. Industry funds generally have more illiquids than commercial funds. SMSFs have practically no illiquids, except residential property, she adds.

“The alternatives programs of industry funds however tend to be concentrated in infrastructure and property. I’ve looked at between 35 and 40 different alternatives strategies over the years and prefer to be opportunistic in approach on a three-to-seven year view of the best investing ideas.”

Durston believes that there is no shortage of good ideas if you look for them. Whilst at BA she introduced one new investment fund on average every three months. Strategies tend to have a cycle with many asset classes peaking in three-to-seven year time periods. An example of one in its early expansion phase now is emerging market-distressed debt. “There has been an explosion of issuance from emerging markets,” Durston says, “and credit quality has commensurately declined”.

Other asset sub-classes that she currently endorses include collateralised reinsurance, absolute return, distressed real estate, and aircraft leasing (which Durston was unable to invest in at BA – “you don’t want to invest in your own knitting”).

Accessing manager skill, she says, is vital in alternatives. “You need to use specialist managers in many of these investments.” The current environment is “pretty hard” but Durston believes that there are always promising themes. Oil and gas, for instance “still provide promise for long term capital” and structured products, which became “really interesting” in 2008, will be good for another few years.

Apart from their investment strategies, Durston believes as an industry, Australia’s super funds could be more innovative in their solutions for members too. For instance, no fund offers a guaranteed return or a guarantee of capital. By OECD estimates, it would cost an individual account between 0.2-2.0 per cent for a limited guarantee, which at least promised members their cash back.

“Is this too hard?” she asks. “It would mean you might have to put up some reserves but you would be able to stand behind the super fund and promise your members a minimum income in retirement. This might act to stem the flows into SMSFs and engender fresh confidence from members in the DC system.”

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