Adrian Orr
Sovereign wealth funds must begin exerting collective pressure on the financial industry over costs, the seventh annual meeting of the International Forum of Sovereign Wealth Funds was told last week. The 29-member body represents 70 per cent of the world’s sovereign wealth fund assets.
Adrian Orr, the IFSWF’s chair – and chief executive of New Zealand Superannuation Fund – said: “The days of opaque fee structures – enabled by asymmetric information and as a shield for the supply of ill-defined skill – must be curtailed… Achieving acceptance for our definition of what it means to be a good sovereign investor obliges us to show how we have attempted to be one.”
The meeting, held over September 30 and October 1 in Milan, had about 250 invited attendees, including Australia’s Future Fund chief executive, David Neal, chair, Peter Costello, and communications manager, Will Hetherton.
But the meeting was not all about reducing costs. The debate around costs has moved to a new level in Australia in the past few months with the implementation of MySuper and the resultant shift to low-cost passive management by most retail and some not-for-profit super funds in their default options. But that’s a separate story.
At the Milan conference, the theme of the panel session in which David Neal participated included: “Discussions of coordination among asset owners are often framed by the question of cost reduction. To what degree can asset owners collaborate on other issues, such as shaping standards in the hedge fund or private equity industries, encouraging investment managers to be truly client-centric, or on environmental, social and governance risk management?”
Neal was in good company. The others on the panel were: Keehong Rhee, deputy CIO and head of research at the Korea Investment Corporation; Li Keping, vice chairman, president and CIO at China Investment Corporation; Lim Chow Kiat, group chief investment officer at Singapore’s GIC; and, Roger Urwin, global head of investment content at Towers Watson.
In Orr’s speech he said: “Understanding how much we pay to invest, to whom, for what, is very hard. The days of opaque fee structures – enabled by asymmetric information and as a shield for the supply of ill-defined skill – must be curtailed. IFSWF can help lift the lid on practices that have led to super-profits for a few and significantly reduced net-of-fee returns for the majority. Data and intellectual property can be shared amongst long-term investors for the betterment of all.”
Orr told the meeting that, done diligently, the sovereign wealth funds’ work would result in:
> Better global understanding of the purposes of SWFs and increased trust in their activities
> Improved investment opportunities for sovereign and non-sovereign investment funds working collaboratively
> Increased investment capital being mobilized towards activities that are desperately short of funding, such as infrastructure
> Increased capital being mobilized towards emerging and frontier markets, where expert, local, assistance is needed to support patient capital
> Better knowledge amongst recipient countries as to the characteristics of investable opportunities that appeal to the long-term investor; and
> A greater emphasis on the environmental, social and governance factors that are increasingly considered fundamental to long-term value, and thereby achieve better outcomes on these fronts.
“These outcomes are highly desirable and of universal benefit,” Orr said. “And yes, though the activities that target these outcomes are aspirational, they are easily achievable within the IFSWF framework.
“Opportunities for action abound. For example, we can collectively discuss issues that too often fall into the ‘curse of the commons’ bucket, whereby no one actor is incentivised to take responsibility for the outcome of their actions. Working together over time, with private integrity and mutual trust, the incentives change.
“For SWFs, climate change is one example right now where collective discussion is necessary and collective action meaningful.
“We can work with our home governments and regulators to ensure good investment practices and sensible rules. For example, the wave of post-GFC banking regulation imposes new capital adequacy requirements on banks. An under-appreciated consequence of this is the greater demand it places on the liquidity of institutional investors. It is up to us to speak more clearly (and, whenever appropriate, with one voice) on such matters.
“As managers of patient capital, we can do more to outline the governance practices that support sound stewardship and become more engaged owners as feasible. Again, it is early days but many SWFs are actively engaged in their own regions – and collectively with the likes of the UNPRI – to improve engagement and governance outcomes.
“We can also naturally be contrarian capital. Our horizon, liquidity, location, and operationally independent governance means we tend to ‘sell’ rather than ‘buy’ insurance – and in doing so provide liquidity – during difficult times.
“We have some duty of care to improve investment knowledge and understanding in our home countries. Far too little of the popular literature explains the methods required for success over the long-term. The more widely these are appreciated, the stronger the support we receive for our own activities—support that is invaluable when markets turn and the investment climate is grim. Investing for decades and centuries is boring. It requires deferred gratification with benefit transferred to future generations. Hence it is often not voted for or acted on. By leading through example, we can raise financial literacy and importantly put pressure on the transaction costs that permeate all levels of the modern financial system…”
For a copy of Orr’s speech, the meeting’s full agenda and a list of attendees, go to: http://www.ifswf.org/pr.php
