ASFA Annual Conference – Manager Due Diligence and the Super Industry

Alex Wise, Head of Castle Hall Australia, attended the Association of Superannuation Funds of Australia conference in Adelaide, South Australia.  With over 1,600 attendees from the local and regional pension industry there were some interesting talking points:

• One soundbite picked up from the Pension Regulator, APRA was a comment that “…the challenge for the industry is to perhaps shift from peer performance comparisons to thinking about measuring themselves against outcomes… if we’re thinking about how do we deliver a stable retirement income over time for a large proportion of members, what are the product structures / options we put in place to manage that and get the right outcomes?”. Fees paid to investment managers has been a key issue for many Supers, with “2 and 20” a difficult sell when a small hedge fund / private equity allocation can absorb a high percentage of a Super’s overall fee budget. However, absolute return products remain of interest given correlation benefits and opportunity for long term investors to capture a liquidity premium. Will a focus on outcomes create renewed interest in alternatives – even if alternative investment fees are significantly higher than passive equity and bond allocations? 
• Some big international names were there too, Bill McNab, Chairman and former Chief Executive Officer or Vanguard (USA) no less, offered guidance to “Hire great people, never forget you’re a fiduciary, create value and always do the right thing”. While this message came from an asset manager, it applies equally to asset owning organizations. As fiduciaries, what can Supers do to better structure their due diligence programs? One thing Castle Hall has observed in this regard is a trend towards improving due diligence governance including the adoption of a Due Diligence Policy. 
• Post-Royal Commission, it wasn’t surprising that trust was a theme to the conference. Australia is notable for its early adopter interest in blockchain. Blockchain’s potential role as an industry panacea was touted as solving this problem by one expert “…if there is trustable information, that no single party can change, then I think you come out in a world where there is greater confidence in the entire system”. Indeed, but from Castle Hall’s perspective, due diligence information is unlikely to be held in a centralised ledger any time soon.  So, don’t forget to Trust but Verify! 

From Castle Hall’s side it was good to engage with the pension community.  It was notable that many trustees were unaware of their organization’s internal approach to Operational DD, in spite of APRA’s recent commentary on the issue.  However, all were interested in the operational risks associated with complex strategies and boutique operators, together with the need to progress from the legacy “point in time” diligence approach to an active process of ongoing risk monitoring.