AustralianSuper first began operating in 2006 when the Superannuation Trust of Australia and the Australian Retirement Fund merged, seeing the benefits of size. That year, CIO and Deputy Chief Executive Mark Delaney was responsible for managing approximately A$21.3 billion. Almost 20 years later, he’s running Australia’s largest superannuation fund, with over A$380 billion ($239 billion) in assets and serving over 3.5 million Australians across a broad swath of professions.
And that is only set to grow in coming years with assets forecast to hit $310 billion within five years.
Delaney, 65, spends a lot of time thinking about that growth and the best way and models to manage a large super fund.
In a Feb. 28 interview with Pensions & Investments at AustralianSuper’s New York office, Delaney discussed the super’s investments in the U.S., investing from offices outside of Australia, how he thinks about growth and the pension plans he looks to around the world as models. (Questions and answers have been edited for clarity, conciseness and style.)
Q: As part of the Australian Superannuation Investment Summit recently held in Washington and New York, you said the U.S. has been through a period of exceptionalism and that “the U.S. has been the place to be” and “we think it’s good enough for a while.” Tell us about your plans for investing in the U.S. and growth areas you are targeting?
A: Everybody asks that in New York. They always ask, what areas you're targeting, what deals you're going to do? So we've got about $85 billion in U.S. investments now, two-thirds of them were in listed equities, the S&P 500. So privates get a lot of attention because it gets newsworthiness. But the bulk of our returns and our investments are in listed stocks, and that's really a question of the outlook for the market.
The U.S. is now such a big part of the index, it's unlikely it's going to be a small allocation anyway, but it's been the best place to invest, probably since the financial crisis, by a large margin. This and India, probably.
If you look at the long run numbers, it's often the best place to invest, but it goes through periods where it is a tough place to invest. The financial crisis, 1987, there's different views. So you just need to be mindful that it's a great place to invest, but it can have volatility.
Q: What's the split these days between U.S., Australia and other markets?
A: Australia is still the biggest equity allocation. We think of it in terms of how much do we have in Australia? How much do we have in international? Australia's got about 20-odd percent, and international’s got 30% to 33%, and the U.S. makes up two-thirds of international. So U.S, we're getting closer with the Australian weighting, but probably not quite there yet. Both markets have been fantastic long-term investments. If you invest in European stocks, you wouldn't have had the same experience, or Japanese stocks or other things.
Q: Wanted to ask about global offices. You have Beijing, London and now New York. How many people do you have across those?
A: There's three. Beijing was the first one. And that's still three people.
London was the second, 2015-ish, that's got 150 people, of which half are investment people. And here’s (New York) got 62 people, roughly half and half as well.
Why overseas offices? Because we had people dealing overnight the whole time, and the chance of a mistake being made was too large, and for private markets in particular, it's a relationship business, and being closer to people gives you better relationships. So that gave us that advantage as well. If you're in Australia, which is 24 hours away, the distance is so far. So we set out with the idea of doing private markets and dealing and a bit of transactions. And increasingly, we're also doing public markets now from both locations.
Q: How do you work across time zones? What do you do first thing when you wake up in the morning in Australia?
A: Everybody gets up and checks the markets, checks what happens overnight, see what's going on. Bang, bang, bang, check your emails and do it. And then you think about breakfast, or what are you going to do next after that?
London typically has calls in the evening, so you might start at nine or something, go home at five and two calls at six and seven and eight, and try not to do that more than two or three days a week, otherwise your day ends up being far too long. And because the listed markets team is in London, the issues are far more time sensitive. I have many more calls on London than New York. And I'll come here, say three times a year. And London probably three or four times a year, roughly for a week.
Q: Are you happy with the international offices now? Or do you have any other expansion plans?
A: We looked at all the others' experience, the Canadians… and concluded that having critical mass is one of the really important things. Having a very small office is very hard to operate, so you need a whole network of people. And I was talking to Paul Schroder (AustralianSuper CEO) this morning after one of our meetings, my reflection is that the bigger they are, the better they go. There's more people to talk to, bounce ideas off each other.
Q: So no future location plans?
A: No, I don't think so. We had this idea of having an office in Asia. The idea of investing more in emerging markets Asia was to be Hong Kong or Singapore because you can't really do it from Australia because Australia is still too far away, you don't get to see the companies or a feel for what's going on. But we can't find enough investment reasons, we think in the long return that's where it will go, but we can't find enough investment reasons to go now.
Q: Do you talk to your peers about what they're doing? And who do you talk to, the Canadians, CalPERS?
A: We talk to other pension plans often about the model. What are you doing? There’s the overarching governance arrangements you've got which are given to you, your operating environment. Then you've got your investment model. Am I going to be internal, external? How do you do that? And choices around the model are determined by the governance arrangements, how much flexibility you have in your governance arrangement. And then there's implementation, which is investment decision-making. We'll tend to focus on the first two of those rather than the third in conversations. How do you do it? And then the teams themselves will have more detailed conversations with the corresponding teams at the other funds. AustralianSuper is a pretty reasonable sized organization now, but we learn a lot off other pension plans. We spend our whole life copying them, learning off them.
So for many years, Ontario Teachers was the premier organization, really built one fantastic culture, tremendous investment numbers and innovative in how they did that. And their ideas fed into CPPIB (Canada Pension Plan Investment Board). For example, the Dutch had a different approach. (Singapore's) GIC’s got a slightly different approach. But if you get to know the people there, it's pretty interesting what they're doing, how they go about it.
We went to Norges (Norway's $1.8 trillion sovereign wealth fund)… We always went to go and see organizations who were bigger than us, to work out what they were doing, at the scale we're going to be at in the future.
And a few years ago, we went to see Norges just to give us an idea of how you do it when you make it at scale. And then you learn a lot from fund managers. They run global businesses. We went to J.P. Morgan this morning, spoke with the senior staff there, talked to them about how they're handling ESG, for example, you know a hot topic for pension plans. I went to Blackstone today and we speak to the senior people there about how they go about their decision-making and how they get their ideas, how they move their portfolio. So, investment people are always curious for new ideas, shopping around for ideas as to how to do things, to do things better, like you shop around for different business models for companies. Trips like this, you pick up information.
Last year we had a PPI (Pacific Pension & Investment Institute) conference in Tokyo, and we had a meeting with the president of (Japanese pension fund giant) GPIF. I read their annual report and their ESG statement, it was fantastic.
Q: What did it say?
A: Well, it just had a really detailed, clear exposition of what they do, why they do it, and how they put it into practice. Really well done. OK, gosh I wish ours was as good as this (laughs). So, I took it back with me. I took it back said, "We should do one just like this."
Q: We've seen the size that the superannuation system will reach in the next few years, surpassing $4 trillion in the early 2030s. How do you think about the next decade, potentially the size of the super you’re running, and what that means?
A: That occupies a lot of my time. We just had a strategy day with the investment committee on these topics. AustralianSuper has typically grown at about 20% per annum in assets, and members probably grown pretty close to that, too.
It doubles every five or six years. And so we always, when we do our projections, think it's going to slow down, but we're A$380 billion now, so if we double again in the next six years, that's A$760 billion and if we double again seven years after that ... Now the markets won't be as kind about things, but it could be a lot bigger.
Part of my job is to build an organization which has the ability to deliver strong returns to members at much greater scale. And that's why we went to Norges because we wanted to see what people did at much bigger scale.
And so unfortunately, the models we can copy off of organizations at much bigger scale are becoming fewer as we become larger. But a few of our overarching thoughts are that we want to maximize our ability to add value to the portfolio, rather than just being passively invested. We have to invest in scalable strategies. And when you look at the very large organizations, very few of them, I don’t think there’s any that use the external active manager approach. They're just too big to be able to farm out to external managers.
So this gets onto the topic: I think there's been three models you can use to really run a pension plan investment organization. There's model 1.0, which is external consultant-driven, external multimanager. There's model 2.0, which is a hybrid model of external and internal, depending upon your skill set, with consultant plus internal portfolio structuring advice.
And the third model is predominantly internal, whether it's with a leaning either towards private markets or to index or something. But it’s a predominantly internal model. We started out in 2006 or before that, with model No. 1. In 2015, we went to model No. 2, and now we're moving from model No. 2 into model No. 3. So that's why the overseas office is so important, because we're going to have to manage a large amount.
And as we become larger, the percentage of assets located outside of Australia will naturally increase. And so it's going to be much better to manage those pools of assets from the locations, particularly given the time zones and distance from Australia, than to try and do it from central Melbourne, just about the Antarctic sort of thing. And if we don't want to be passive, then we're going to have to be actively managing these sleeves ourselves, and we're going to need deep and very experienced teams to do it. And we've been progressively doing that over time, but we'll have more of our assets overseas, big chunk of our investment talent overseas. And hopefully we're successful in our execution.
Q: At what point do you think you will be almost entirely internally managed?
A: I don't think we'll ever quite get entirely internal because there's a lot of really smart people out there, and you don't want to lose access to them. So say we’ve got A$180 billion externally managed … we could have at A$1 trillion, A$180 billion externally managed, too. So I don't think that number is going to change that much. It's just all the growth is going to have to be filled up. (About $135 billion of the portfolio was internally managed as of Dec. 31.)
When I started, I was investing A$3 billion. The share market is still the same. Is it more complex than during the financial crisis? No, it's not. Is it more complex than during the Japanese collapse? No, it's not. Is the business model more complex? Yes, it is. The business of investing, running the pension’s investments, is more complex, but the investment markets and opportunity set isn't more complex than what it's been.
Q: What keeps you up at night? What are your biggest concerns?
A: You know, normally I'm pretty tired. I go to sleep pretty easy, but I do wake up thinking about investment topics.
The only time I really got up worried, couple of times, once during Japan I was quite stressed. I was very young. With the Japanese equity market sell-off collapsed, for months on end the market would open at 9 in the morning. Limit down. Close every day, and then have lunch right at the end to get it back off the limit at the bottom. And then they’d do that again the next day. Limit down.
During the financial crisis, late 2008-2009, I was in Beijing and the U.K. banks were collapsing, and Gordon Brown got his press conference. I was up watching that. You just knew things were right on the wire. This is when they nationalized all the U.K. banks, guaranteed the deposits, injected the capital. I thought this might be a solution, so that was one, but outside of really acute conditions, no.
