Australia’s pension funds are set to adopt a more hands-on

approach in managing their investments. This is in order to

achieve better cost-savings and generate greater oversight of their

portfolios, as they take on a broader range of alternative assets.

Superannuation funds have emerged with the scale and breadth of

capability to transform the way the Australian pensions industry operates.

Meanwhile, faced with challenging and complex liabilities, pension funds

are rethinking their asset allocation decisions. They realise that they have to

diversify their portfolios to achieve a better balance of risk and return.

A new State Street survey of 134 pension funds globally, conducted by the

Economist Intelligence Unit, delivers insights on the likely transformations

in the way the Australian pensions industry operates.

Pressing forward into alternatives

Australia’s pension funds have to strike a new balance on risk and return

as they seek to drive growth. A clear majority of those in the survey (86

percent) expect their institutions’ investment risk appetite to increase over

the next three years; a quarter expect this increase to be significant.

And they are pressing forward into alternatives, as the asset class is

increasingly seen as an effective investment strategy for enhanced returns.

Globally, total alternative assets under management have reached US$5.7

trillion, according to research produced by Towers Watson.1

Direct loans to third parties emerge as a key area for growth for Australia’s

pension funds: 69 percent of our survey respondents say that they will increase

allocations into this asset type. A significant proportion of them add that they

will invest more in single-manager hedge funds (65 percent), infrastructure

(60 percent), real estate (58 percent) and private equity (52 percent).

Transforming the Investment Model

86% of Australian pension funds expect their investment risk appetite to increase over three years.

Pension Funds DIY: A Hands-on Future for Asset Owners

aUstralia snaPshot

1 Global Alternatives Survey 2014 by Towers Watson, July 2014. http://www.towerswatson.com/en-ZA/Insights/IC-Types/Survey-Research-Results/2014/07/Global-Alternatives-Survey-2014

2

Pension Funds DIY: A Hands-on Future for Asset Owners Transforming the Investment Model

Jim Christensen, chief investment officer of Telstra

Super, shares his fund’s strategy for alternative assets:

“We’ve been entering a number of joint ventures with

several managers here in Australia. We like that model

because it gives us more transparency over the assets

that we’re buying into and it gives us more control in

terms of who we partner with. It’s been a deliberate

strategy to partner with managers where we have a

strong relationship.

“We’re also building what we call specialised

funds — for example, buying assets to lease to the

nondiscretionary retail sector. If we can get attractive

distribution yields and lock in long leases with them,

we think that’s a smart approach.”

sUPer fUnds lead the shift to diY

With increasing member contributions, Australia’s

super industry is growing rapidly with assets forecast

to reach as much as A$5 trillion2 by 2025, according

to consensus private sector estimates.

The super funds thus have the scale and sophistication

to take a more “DIY” approach to investing. This

trend is set to continue as our survey shows that 80

percent of Australian pension funds plan to manage

more of their assets in-house over the next three

years. Insourcing generates more administrative and

management cost-savings while giving them greater

oversight of their portfolios.

But there are risks as well as opportunities. To succeed

with insourced strategies, funds will need the advanced

tools and capabilities required to manage the new

investment mix. They will also need to attract and

retain specialist investment talent. They are already

better equipped than ever before to take on more risk

with improvements in data mining and management

and reporting.

Change in relationshiPs with external asset managers

Australia’s pension funds are looking for improvements

in the way they interact with their managers. More

than three-fifths (62 percent) of Australia-based

respondents struggle to get a complete picture of

risk-adjusted performance. Fifty-eight percent think

their asset managers’ interests aren’t always aligned

with their own. And funds are scrutinising their

asset managers on costs. But above all, they are

increasingly looking for deeper partnerships with asset

managers who share their values and can deliver more

tailored investment solutions.

2 Superannuation Statistics, October 2014, The Association of Superannuation Funds of Australia. http://www.superannuation.asn.au/resources/superannuation-statistics

“We recently signed an arrangement with a very significant global asset manager to become the first of a series of what we call global research partners. It’s more about making them an extension of our internal investment team and deepening the collaboration and the partnership that we have with them. So they now have a research agenda that we designed and that they are held accountable to. This embedded partnership model is a critical part of our strategy.”

– Richard Brandweiner, Chief Investment Officer, First State Super

4 out of 5 pension funds plan to manage more of their assets in-house

No change to proportion of our portfolio that is managed in-house20%

Increase the proportion of our portfolio that is managed in-house80%

Source: State Street 2014 Asset Owners Survey conducted by the Economist

Intelligence Unit. Australian pension fund respondents.

33

Pension Funds DIY: A Hands-on Future for Asset Owners Transforming the Investment Model

aUstralia’s Pension fUnds move towards a diY fUtUre

In this changing environment, super funds will have

five clear areas of focus over the next three years:

1. Evolve the risk profile and diversify investment. As

they continue to grow in scale, the super funds

will increasingly move to multi-asset portfolios that

include an array of alternative investments.

2. Build internal capabilities. Pension funds will

insource a greater proportion of management,

combining this with continued use of external

partners. Insourcing will require bringing in

specialist talent and investing in new systems.

3. Develop deeper partnerships. Australian pension

funds are shifting to fewer but deeper relationships

with asset managers who can deliver more tailored

solutions.

4. Improve risk management. More complex investment

strategies will place greater demands on risk

management, and require investment in specialist

tools and capabilities that enable analysis of total

risk and performance across portfolios.

5. Strengthen governance. There will be demands from

regulators and other stakeholders for increased

oversight, transparency and disclosure. This will

require stronger collaboration with external managers,

increased internal expertise, and potentially greater

use of consultants for specialist support.

“We had a strong conviction that our external management would improve by bringing funds in-house. We were always going to run a hybrid model where, by definition, a large percentage of our money is outsourced. Our internal and multi-manager people are all sitting in the same team. This means the multi-manager people are sitting with the people that manage internal portfolios and they share some responsibilities in terms of sector and company analysis. As a result, the quality of questions we’re asking external providers has improved; it’s now a two-way conversation, not a one-way presentation.”

– John Pearce, Chief Investment Officer, UniSuper

www.statestreet.com

4

Pension Funds DIY: A Hands-on Future for Asset Owners Transforming the Investment Model

©STATE STREET CORPORATIOn – All RIGhTS RESERvEd

aboUt the researCh

The research presented in this report is based on

a State Street global survey of 134 senior executives

in the pension fund industry. The survey was

conducted by the Economist Intelligence Unit in

August 2014. Respondents from 15 countries

participated in the survey, with the majority coming

from the US, UK, Australia and Canada. Respondents

were spread across public sector pension funds,

private sector pension systems and superannuation

funds, and mostly came from organizations that

oversee both defined benefit (DB) and defined

contribution (DC) funds.

To learn more, request our report: “Pension Funds DIY:

A Hands-on Future for Asset Owners.”

www.statestreet.com/vision/assetowners

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If you would like to discuss the results with a State Street expert, please contact:

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