While fronting the House of Representatives standing committee on economics last week, Justin Arter, chief executive of Cbus was asked on his view of remuneration between commercial fund managers and superannuation funds.
Mr Arter was formerly BlackRock’s country head of Australia before he recently commenced as CEO of the construction industry super fund in late August. Talking to Labor MP Daniel Mulino, he said he had “lots of observations” on pay in the fund management industry.
“Many commercial fund managers are very well paid and that’s why the business operates at high margins,” Mr Arter said.
Typical profit margins in asset management will be around 30 per cent, according to Cbus chief investment officer Kristian Fok.
“One of the things that you would understand around asset management businesses, and it’s an unfortunate fact, irrespective of the size of money, they tend to charge based on a percentage of the assets that they manage,” Mr Fok said.
“They have a sliding scale, that [for] every marginal dollar, they still charge us more. Asset management businesses are some of the most profitable businesses in terms of industry.”
Mr Fok talked to some extent about the movement of some of the super fund’s investment management in-house, which Mr Arter called a “value transfer away from commercial fund managers and their highly paid staff, across to members”.
“[It’s a] simple value transfer if you want to see it going from left to right,” the CEO said.
“Indeed, the commercial fund management industry is a highly paid industry. Yes I can say that having worked for the better part of three decades in and around that industry.”
Later he added: “Typically many of those people would be paid bonuses or awards for returns they’ve made, as a percentage, in some cases, of the underlying size of the fund, which can mean some of these people can be paid very large sums of money.”
Cbus has a range of external managers, including Hyperion, Vanguard and IFM Investors, with the fund managing a portion of its Australian equities portfolio internally, in terms of large caps and small caps, according to Mr Fok.
Currently, Cbus has 31.6 per cent of its funds under management looked after internally.
The fund decided to begin increasing its internal asset management capabilities in 2016, after it undertook a review.
“It’s taken a few years to build in all the operational processes and to hire the people and to have those people come together and to get corporate models around stocks put in place,” Mr Fok said.
The internal managers compete against the fund’s external managers, in an effort to secure higher returns.
“There’s no point in hiring people to save costs and then losing money or not being able to get the same returns, so that’s the function,” Mr Fok commented.
“When you can put a team in place and they can manage a billion dollars for fixed costs and if we can increase it to $2 billion – that extra $1 billion doesn’t cost us any more to manage,” he later added.
“It’s a really important aspect in terms of driving much better benefits to our members and it’s resulted – among other things including renegotiating external manager fees because we’ve got more leverage and more options – over the last three years we’ve reduced our MDR [mandatory disclosure regime], so the investment component of fees from 0.86 per cent and this year it’s down 0.56 per cent.
“That 0.3 per cent is equivalent of $150 million. It’s really substantial.”
But Liberal MP Celia Hammond poked holes in the executives’ separation from commercial fun managers when asking about Cbus’ ownership of asset managers. The fund is one of 27 shareholders that own Industry Super Holdings, which is in turn parent company to IFM Investors.
It also has holdings in a few other fund managers, with Mr Fok noting it “unfortunately” owns AMP, referring to the recent controversy at the listed wealth giant.
“[It] does make it a bit murky, just to look at it from the outside looking in, that sometimes you’re a bit scathing about commercial fund managers but you actually also own commercial fund managers and you use them for your business,” Ms Hammond stated.
“It’s just difficult to unravel.”
“Well we are a global investor and [for] some of our strategies, we invest in an index and if they [a listed company] happen to be of a significant size, then we will own it,” Mr Fok responded.
“Likewise, we employ fund managers that may have… business models which are adverse in terms of our fees, but great for making profits, so we will potentially own it.”
But irrespective of ownership, he added, any investment manager engaged by Cbus will be assessed across metrics such as absolute cost and net returns.
“Our team has full discretion as to whether they continue with any fund manager, or they take it away,” Mr Fok said.
“There is a governance framework around that.”
