Departing CEO sees bright future for Sunsuper

Scott Hartley, the CEO of Brisbane-based Sunsuper, announced May 31 that he's ready to move on, confident he's positioned his A$66 billion ($45.7 billion) superannuation fund to keep growing strongly, even as growth in Australia's retirement sector becomes harder to come by.

Mr. Hartley, who took the helm in January 2014 when Sunsuper was managing A$25 billion, said in a June 3 interview he has met his goals in terms of building an inclusive, collaborative investment culture capable of ramping up the fund's growth nationwide.

He said, meanwhile, that if he were instead starting out five years from now to tackle those challenges, the going would likely be considerably tougher.

With Australia's modern super system turning 30 this year, the amount of money being paid out to retirees continues to grow, offsetting an ever-larger portion of employers' compulsory contributions of 9.5% of salaries which drive the accumulation of retirement pools in the country, said Mr. Hartley.

That's led to a deceleration of growth in the industry's annual net inflows — to roughly 2% of assets under management now from closer to 6% or 7% a decade ago — bringing the day when inflows and outflows become balanced, and then negative, within view, he said.

Some industry veterans contend the super system's tailwind from net inflows should persist considerably longer.

Depending on the demographics of their memberships, some super funds may be fac- ing the end of net inflows already, said Martin Fahy, Sydney-based CEO of the Association of Superannuation Funds of Australia. But with industry consolidation, a coming boost in the compulsory employer contribution rate to 12% and the prospect of continued investment returns, one would expect that day of reckoning for the broader system to be "quite a ways off," he said.

Data from the Australian Prudential Regulation Authority, which oversees super funds, showed net inflows for the superannuation industry falling to A$37 billion for the year ended June 30, 2018, from A$43 billion the year before. It was the lowest annual tally for net inflows since A$35.9 billion for the June 2011 fiscal year.

Others contend the eventual end of net inflows won't be such a body blow.

Contributions should exceed benefits payments for at least the next 10 years, said David Knox, a Melbourne-based senior partner at Mercer Australia. And with systemwide assets expected to jump to A$5 trillion over the coming decade from A$2.8 trillion today, investment income should keep funds from getting squeezed even after net inflows come to an end, he added.

The gap by which contributions are outpacing retirement payments is certainly narrowing but on a broader view, investment income is a far more consequential factor, agreed Ross Clare, ASFA's Sydney-based director of research, in a separate interview. "I don't see the cash flow thing" imposing major constraints on super fund managers over the coming 15 to 20 years, he said.

Mr. Hartley disagreed, saying flows should "gradually turn negative" within five years maximum. "The system will get to zero growth" even if boosts in the compulsory contribution rate push back the timing a bit, he said. Meanwhile, hanging hopes on investment returns now could prove a double-edged sword at this late point in the investment cycle, he added.

Along the way, all things being equal, net inflows into super funds will narrow as the industry continues to mature, Mr. Hartley said.

Sunsuper, with a strategy focused on building multiple channels to fuel growth, has decidedly bucked that trend, with net inflows during the current year set to rise to A$5 billion from A$2 billion in 2014, he noted.

About three years ago, for example, the fund disbanded its internal team of advisers for retail investors in favor of working with external advisers, offering them advice and investment strategies that they, in turn, can recommend to their clients.

Sunsuper's decision to work with external advisers, as opposed to fielding an internal team to offer advice to a super fund's own members, is "unique" among Australia's major not-for-profit industry funds, said Philip Kewin, the Sydney-based CEO of Australia's Association of Financial Advisers Ltd.

While the number of those retail clients don't make a big dent in Sunsuper's current membership of 1.4 million, the average size of their assets is large, noted Mr. Hartley. With the number of advisers working with Sunsuper now rising to 3,000 — roughly 20% of the country's estimated 15,000 advisers — from 100 five years ago, the amount of retail assets invested in Sunsuper's investment strategies rose to A$4 billion in April, up from A$3 billion in June 2018 and A$500 million five years ago, he said.

On a flow basis, Sunsuper anticipates roughly A$1 billion of net inflows this year from "external retail advisers," a turnaround from net outflows to the retail adviser channel of approximately A$300 million in 2014, said Mr. Hartley.

Another channel Sunsuper has pursued is corporate pension funds, an area in which the fund has logged "substantial growth" over the past five years, Mr. Hartley said. Since 2014, Sunsuper has won more than A$7 billion in corporate super mandates — 70% of the mandates in play over that four-year period — lifting Sunsuper's total funds under management from that market segment to A$18 billion from A$4 billion in June 2014, he said.

Underlying that growth across channels are Sunsuper's strong investment returns, Mr. Hartley said. The fund is perennially a top-10 performer in annual rankings, and often in the top five.

Mr. Hartley said transforming Sunsuper's investment culture over the past five years is "what I'm most proud of."

He said most of the investment team's alpha comes from asset allocation and its investments in illiquid private markets asset classes, which count for almost 30% of the organization's biggest offering — its balanced fund.

The investment team, like teams elsewhere, is facing a test now in the form of a fully priced "late cycle" market which — in a sign of the challenges facing investors now — could still be being described as late cycle a year from now, he said.

Sunsuper's investment team is well positioned for this environment, with heavy allocations to illiquid markets that should act as a shock absorber if the market corrects, said Mr. Hartley.

Sunsuper's overall asset allocation of 10% to property and roughly 6% apiece to "private capital" and infrastructure, meanwhile, is something "we can afford" to do because of the virtuous circle between net inflows and "being able to invest for the long term," said Mr. Hartley.

If and when those net inflows diminish, Sunsuper's investment team will "have to be mindful about that exposure," and at some point "ratchet back that allocation," he said, adding "we've done a lot of analysis on that, what the trigger points are."

A growing number of funds now are modeling for such a liquidity-constrained environment, even though most expect that moment when net inflows end will be further off than Mr. Hartley seems to be anticipating, said Eva Scheerlinck, CEO of the Sydney-based Australian Institute of Superannuation Trustees.

Mr. Hartley said anticipation of tougher times ahead didn't influence his decision to leave Sunsuper — after his successor has been selected. The organization has "fantastic momentum ... conditions are as good as they can be ... but personally I'm ready for my next executive leadership challenge," he said.

As for the timing of his decision, Mr. Hartley said it takes five years to set and achieve goals, while at seven years, "you're probably wearing out your welcome."

He said while he's open to new opportunities to help an organization, either at home or abroad, reach its full potential, he won't take a job with another super fund. "I don't want to compete with Sunsuper," he said.