UniSuper striking own path with internal management, oversight
By Douglas Appell | November 26, 2012
UniSuper Management Pty. Ltd., the A$32 billion (US$33.2 billion) superannuation fund for Australia's university and research sector, has stepped off the beaten path in its efforts to lower fees, boost returns and better control volatility.
In recent years, the fund — the fourth largest in Australia's superannuation market — has led the pack in building internal money management capabilities, while taking broader control of asset allocation and portfolio oversight.
At a global pension symposium in Tokyo this month sponsored by Pensions & Investments and Nomura Securities, Terry C. McCredden, UniSuper's CEO, noted the fund no longer retains investment consultants, confident the money management and trading veterans it has assembled can do as good a job or better in areas ranging from asset allocation to selection of external managers.
Other investment areas where UniSuper finds itself outside of the mainstream include its decisions:
- not to tap external private equity or hedge fund managers, alternatives segments where reputations for skill have commanded the highest premiums;
- to restrict the fund's property investments to Australia and New Zealand; and
- to introduce a strategy, implemented in January, aimed at getting emerging markets exposure through consumer companies in developed markets, such as Unilever PLC and Nestle SA.
In a telephone interview, Mr. McCredden said the changes introduced since he took the helm at UniSuper in 2008 have helped facilitate a much more dynamic approach to asset allocation at the fund.
The decision to take key investment management functions in-house, in pursuit of lower fees and more flexible portfolio oversight, reflects a “fundamental view” that it was in the best interests of UniSuper's 480,000 members, Mr. McCredden said in his Tokyo presentation. “So far, we have been right,” he added.
Market veterans say UniSuper's moves can be seen as part of a broader trend at work as Australia's fast-growing superannuation funds, buoyed by government-mandated contributions and industry consolidation, look to put their new-found market heft to some advantage.
As fiduciaries, larger superannuation funds are saying “we have economic power, we should be using it” — an exercise that could see them evolving along the lines of sovereign wealth funds, noted Alex Dunnin, the Sydney-based head of research with Rainmaker Group, a superannuation fund and investment management sector research firm.
Amid regulatory efforts to promote low-fee investment options, having internal management capabilities could be a source of leverage for superannuation funds in lowering costs, both on the assets they manage in-house and in hammering out fee arrangements with external managers, agreed Damian Moloney, Melbourne-based CEO of Australian investment consulting firm Frontier Advisors Pty. Ltd.
Mr. McCredden said while cost wasn't the deciding factor in boosting the portion of assets UniSuper manages internally, it has been a significant and growing benefit, shaving A$25 million off the fund's fees for managing Australian equities — a 10-basis-point savings that goes “directly to members.” And with the continued growth of that internally managed portion, those savings will expand as well, he said.
When he arrived in 2008, Mr. McCredden said in the interview, an internal team of 24 was reviewing and monitoring UniSuper's external equity, bond and private equity managers, doing research, portfolio analysis and implementation. The team also was managing roughly 10% of the portfolio in property and infrastructure investments.
But starting with the hiring of senior asset management veterans, including John Pierce as chief investment officer in July 2009 and Simon Hudson as head of equities in March 2010, that amount more than doubled to 25% in the fiscal year ended June 30, 2011.
Today, UniSuper's 33-member investment team manages roughly A$12 billion, or 38%, of the fund's assets, including a $4.5 billion chunk of UniSuper's A$12 billion allocation to Australian equities that is set “to rise dramatically over the next two years,” Mr. McCredden said in his presentation.
This year, the team began managing a smaller (A$900 million) portion of UniSuper's allocations to non-Australian equities. That strategy seeks emerging markets exposure with less volatility through consumer products and services companies based in developed markets but which get a big portion of their sales and revenues from emerging Asia. Year to date, returns have come to 12% — “in line with our expectation and above our benchmark,” he said.
The fund's current internal management of A$1.9 billion in property allocations, A$1.7 billion in infrastructure and A$1.4 billion in bonds should likewise grow over the next few years, Mr. McCredden said. The remainder of the internally managed assets is in cash.
Officials at the fund — which had allocations to more than 50 private equity and venture capital firms as recently as June 30, 2009 — also decided they would handle all of UniSuper's private equity investments internally, willing to sacrifice the potential for premium returns to ensure adequate liquidity, said Mr. McCredden.
UniSuper's A$32 billion in assets comprises A$19 billion in defined contribution assets and A$13 billion in defined benefit assets. Mr. McCredden would not disclose asset allocation targets for UniSuper's defined benefit plan or the overall defined contribution plan.
Market veterans say while UniSuper might be an extreme example, there has been a broad-based move away from private equity and hedge funds among Australian superannuation funds since the global financial crisis.
In a telephone interview, Pauline Vamos, Sydney-based CEO of the Association of Superannuation Funds of Australia, said that move partly is due to the portability of superannuation retirement assets. The ability of members to move from one fund to another with 30 days' notice is a hurdle to putting a high proportion of assets in illiquid investments in Australia, she noted.
But Ken Marshman, chairman and head of investment outcomes with Sydney-based investment consulting firm JANA Investment Advisers, said the move away from private equity hasn't been across the board. Those funds with more established programs have tended to maintain them or even added to them, while many with less of a commitment to private equity pulled the plug, he said.
Ms. Vamos said UniSuper's willingness to take different approaches in managing its portfolio might be related, in part, to its being the only superannuation fund offering an open defined benefit plan alongside its defined contribution offering.
As for UniSuper's decision to do without a retainer relationship with investment consultants, market watchers say on that score they remain an exception to the rule.
By contrast, the fund's decided move into internal management is quickly becoming more commonplace. Three years ago, perhaps two or three of the top 10 superannuation funds were managing assets in-house, noted Frontier's Mr. Moloney. Now, perhaps half are and everyone else is looking at the question.
In September, Melbourne-based AustralianSuper Pty. Ltd., the country's biggest superannuation fund with more than A$46 billion in assets, announced it would build an internal management team capable of managing 30% of what the fund predicts will be a A$100 billion portfolio in five years. In a telephone interview, Susan Fairley, a spokeswoman for AustralianSuper, said her fund is looking to hire a head of Australian equities and professionals for asset classes such as property and infrastructure, as well as trading and technology teams, by the second half of 2013.
This article originally appeared in the November 26, 2012 print issue as, "UniSuper striking own path with internal management, oversight".