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Asset owners acknowledge ‘return penalty’ of poor investment governance

By Rhea Nath
3 minute read

A survey of over 20 Australian institutional asset owners has found the majority believe poor investment governance could cost their portfolios 1 per cent or more per annum in returns.

A new report by KPMG Australia and Frontier Advisors has unpacked the importance of good governance practices towards mitigating risks and fostering growth.

Surveying 22 Australian asset owners, representing some $800 billion in assets under management, it found two-thirds believe poor investment governance practices could see disproportionate penalties in the form of lower investment returns.

Some 68 per cent believe this could mean a return penalty of at least 1 per cent per annum.

For a super fund member aged 25, the impact of this 1 per cent reduction over the course of a working life could be up to 40 per cent, or half a million dollars, less in retirement.

Meanwhile, 14 per cent of respondents forecast potential costs of -0.75 per cent per annum and 11 per cent predicted this to stand at -0.5 per cent.

Just 3 per cent believe there is no cost impost of poor governance.

Elaborating on the findings, KPMG Consulting partner Platon Chris shared the “very clear recognition” of the potential value derived from or potential capital eroded by the gap between well-governed and poorly governed funds.

“This comes from the coalface – the funds themselves. The importance of the implementation of robust investment governance frameworks by asset owners cannot be overstated,” he said.

A third (30 per cent) of respondents believe improved governance practices can yield a dividend of 0.75 per cent or more per annum.

According to the report, along with enhanced performance, implementing effective risk management processes could foster a culture of accountability and enhance competitiveness and profitability in well-governed asset owners.

“Good investment governance is paramount as it safeguards stakeholder interests, promotes market stability, ensures long-term sustainability, enhances performance and facilitates regulatory compliance,” explained Sarah Cornelius, head of investment governance at Frontier Advisors.

“By adhering to principles of transparency, accountability and integrity, asset owners can build trust, attract capital (or new members in the case of super funds), and also attract top talent and foster innovation. All of which creates long-term value for stakeholders.”

Based on the survey of Australian asset owners, the average self-ranking of investment governance stood at 7.7 out of 10.

Key areas of focus

Interestingly, with funds needing to consider numerous lenses like ESG, risks, and regulatory benchmarks, the increased complexity in examining portfolios was cited as the biggest area of threat (37 per cent) to future governance. This was followed by too much focus on the short term (32 per cent).

Other major areas of threat included keeping pace with accelerated advancements in technology and the challenge of continued regulatory change.

Chris observed: “Governance practices which have served us well in the past may not be as suitable for the future environment – the evolving landscape of technology, ESG, climate factors, a dynamic regulatory environment, coupled with the increasing globalisation of markets, is putting pressure on investment governance models and capabilities to adapt and innovate. Cyber security breaches and the ever-increasing threat of cyber attacks also pose real challenges.

“Traditionally, investment governance structures have been rigid and hierarchical. With the current, and likely future, environment being more volatile, investment governance models will need to exhibit the ability to be nimble and adapt, and avoid group-think through recognising the need for diversity in decision making.”

The survey also found the complexity of investment governance extends beyond large asset owners, with almost 95 per cent of respondents acknowledging the heightened intricacies faced by smaller asset owners.

This could extend to a number of areas, such as limited resources to undertake comprehensive risk management and due diligence; potentially ad hoc decision making due to a lack of formalised investment governance processes; and challenges in establishing and maintaining a strong culture with limited resources.