The strong performance of super funds since the global financial crisis has been underpinned by strongly rising equities markets globally.
As investment professionals directly involved in generating these strong outcomes for members, the real test is whether this can be attributed to true skill in delivering a successful year’s performance, or whether it is merely as a result of being in the right place at the right time to enjoy the ride on the equities upswing.
We should be able to directly link a fund’s investment performance to earlier decisions made – as well as to other decisions that are not made or simply avoided.
However we attribute success, investment performance continues to be overwhelmingly driven by the asset allocation decision – specifically, the equities allocation decision.
Yet how many of us reflect on the decisions that we made throughout the year, and those we actively chose not to make?
As asset owners and investors, we are largely influenced by what is happening globally, including market upturns and downturns.
Yes, we seek to apply our skills to identify changing market conditions and minimising investment volatility.
However, the best planning and foresight may not identify or mitigate the impact of negative equities markets, unforeseen volatility or regime changes.
This requires us to critically assess our operating environment or investment markets to determine those components of the investment strategy we can and cannot control.
Control the controllables
At Kinetic Super, we acknowledge the limitations to the level of control the fund has over its operating environment and we apply strategies that provide a sustainable approach to achieving resilient member retirement outcomes across a range of economic scenarios.
A competitive edge needs an investment team to convert the combination of its individual talent, intellectual property, resources and teamwork into investment outcomes.
It also requires a culture of development and challenge, a range of attributes across skills and attitude and a productive working environment.
This should create innovative solutions that allow the team to manage an investment strategy within a largely non-controllable environment.
Within these parameters we prioritise investment activities, deciding which are the most important, assessing the expected valued-add and its likelihood.
Only then can we direct the fund’s finite resources to those activities expected to contribute the most value.
Ultimately, the fund’s long-term investment objective is attainable only if those expected high-value activities are transformed into successful investment decisions.
But how much of that is positive alpha – disregarding whether it is due to skill or luck?
All investment decisions must reference the fund’s investment mission, beliefs and principles.
Often, many investment professionals ‘buy into’ the illusory superiority that they have above-average skills to outperform the market and competitors.
We seek to be grounded in our known skillset, acknowledging the inherent limitations of forecasting the economic environment over any time horizon.
This influences team and individual success, informing the generation and implementation of new ideas.
And it provides a fundamental unifying principle to prioritise, motivate and inspire, and to unite the efforts across the investment team and improve the quality of ideas generated and investment decisions made.
The mandate review
A classic example is the ubiquitous mandate review, where significant resources have historically been applied regardless of the expected return.
A shortlist of multiple prospective investment managers may increase confidence that the best candidate will be identified (ie, ‘illusory superiority’).
But I question whether this resource-heavy approach outweighs the opportunity cost of focusing on potentially higher-payoff investment decisions.
In any case, whichever manager wins, we can’t control whether any alpha will be produced.
In the long term, it may be best if we outsource the process and forgo the satisfaction of personally making that decision.
An outcome-focused – as distinct from a process-focused – approach puts the spotlight on the investment objective as the key measure of investment team success, rather than the continual grind of activities that ultimately add little value.
Kinetic Super’s approach is to spend an increasing amount of time on macroeconomic research and investment strategy decisions.
Combined, these have a much greater impact on outcomes compared with, say, manager selection.
The old management guru’s tenet – what can’t be measured can’t be managed – does not hold true where there has been a historical tendency to allocate resources to what are lower value-adding activities.
If your activity is ill-directed it does not matter how well it’s managed.
Working smarter
Real idea generation and innovation – something that has largely bypassed the pensions industry – is an activity that should be encouraged.
It is an opportunity to look up from our screens and think strategically about creating better outcomes.
However – and it’s the big caveat – for all the processes and controls in place, investment outcomes are largely driven by the vagaries of an investment environment that is predominantly uncontrollable.
Yet it is precisely this uncontrollable environment that we benchmark ourselves against.
Another challenge is filtering the overwhelming amount of sometimes conflicting data, commentary and analysis.
We ask ourselves “what really matters to our members in the long-term?”
Having a clear investment mission and a sense of purpose helps us to filter the avalanche of information.
The three key control attributes that frame our operating activities are:
- Controllable – dynamic asset allocation and investment manager selection;
- External – the macroeconomic environment, peer group strategy, investment manager outcomes;
- Influenced – the investment committee and board governance.
It’s also about judiciously sitting on one’s hands – the active decisions to do nothing.
These ‘decisions’ cannot be effectively measured, for a variety of reasons.
However, playing the long game is still important as a check against the behavioural desire for any activity that seems to respond to the immediate economic environment.
In the wash-up, whilst there may be fund-specific nuances that influence how an investment team operates, ultimately they should be assessed by the value-added – the super fund ‘alpha’, if you will.
This alpha reflects the sum total of the benefits from all activities undertaken by the investment team.
It’s a binary outcome – we have either produced positive alpha for our members or we have not.
Members do not benefit from those activities that do not directly impact the net return.
We can’t hide behind being in the right place at the right time to ride the equities wave – nor should we.
We have to stand up and prove to our members that we have done better than that.
At Kinetic Super our single-minded focus is to achieve the best outcome for members over the long term by harnessing our intellectual property and resources and making sensible decisions in an investment environment that is intrinsically uncontrollable.
Perhaps this will then lead to the real objective – superior and sustainable super fund alpha.
Paul Kessell is the chief investment officer of industry fund Kinetic Super.
