The investment governance frameworks for managing the waves of change
Global Investment Insights
with Craig Roodt, Director – Investment & Wealth Advisory, Deloitte
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Craig is a Director of Deloitte’s Investment and Wealth Advisory in Sydney, which works with asset owners and asset managers across all aspects of the investment value chain, empowering fiduciaries to maximise outcomes. This includes the practical application of investment governance frameworks, strategy development and implementation, and the effective measurement and optimisation of investment risks.
Currently the focus of Craig’s role centres around developing the required investment governance, through the entire investment value chain to respond to the current wave of changes impacting the industry. Much of this is related to regulation, for example, the Your Future, Your Super (YFYS) reforms and how performance is measured in a YFYS world.
Regulation’s somewhat contradictory demands present significant challenges for superannuation funds.
For instance, there is the demand for fees to be minimised, i.e., that investment management be cheap, while at the same time there is a very reasonable requirement that governance and risk management be uplifted.
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The operation of the performance test (YFYS) will lead to a re-allocation of risk budgets with even greater emphasis on performing against the benchmark rather than the outcomes intended for members.
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Superannuation funds have been told that they are to construct an investment strategy based on the needs of members, however they are evaluated against benchmarks that may be considered inefficient and ill-suited to the purpose.
The increasingly competitive nature of the industry, due to YFYS and the public offer nature of funds, also presents challenges for trustees and fund executives.
It is expected that the operation of the performance test will lead to a re-allocation of risk budgets with even greater emphasis on performing against the benchmark, rather than the outcomes intended for members. Downside risk protection is effectively de-prioritised since at least performing in line with the benchmark, in good markets and bad, is more important than outperforming (i.e., losing less) in bad markets.
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Downside risk protection is effectively de-prioritised since at least performing in line with the benchmark, in good markets and bad, is more important than outperforming in bad markets.
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The broader regulatory impact is notable because there has been a progression of regulation toward an environment where outcomes are evaluated and there is both a greater propensity for intervention, and faster intervention. This both increases the penalty for failure, while at the same time highlighting the imprecision of the promise to members/investors/customers, and the difficulty of managing outcomes precisely in advance.
However, there are other aspects of regime change that also demand ongoing focus.
The most obvious is the increasing emphasis on the management of ESG factors, most notably, climate change. These are now recognised as requiring consideration because impacts are real, irrespective of individual opinions.
The increased integration of ESG factors into investments is one clear development that will bring with it numerous investment opportunities, as markets and economies restructure in response to environmental issues faced, impacting all asset classes.
“As superannuation assets grow, more opportunities will be sought offshore across all asset classes, but particularly real assets (property and infrastructure) and unlisted equities. There has also been little Australian investment in Africa and South America, so these might receive more attention in the future”, Craig highlighted.
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Integration of ESG factors will bring with it numerous investment opportunities, as markets and economies restructure in response to environmental issues faced, impacting all asset classes.
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Craig is also excited by the continued search for uncorrelated returns; increasing consideration and sophistication of investment risk management; and the meaningful consideration and evaluation of ESG factors – “including the recognition that these should not simply be lumped together as the various factors are different”, he cautioned.
“These trends of course feed off each other; the search for uncorrelated returns incorporates greater factor risk analysis, for example”, Craig remarked.
Yet, the ongoing evolution and the complexity that comes with the changing investment landscape further complicates the investment governance task due to interaction of:
Increased scale (but acknowledging scale does not necessarily mean competitiveness)
The continued impact of regulation; and, regulators
The need to give greater attention to the retirement component and associated solutions
Increasingly complex investment approaches and asset classes
The realignment of risk budgets with even greater emphasis on relative performance
The results of the very low interest rate environment for over a decade
The need to consider possible regime changes in investment markets
“The likely end of the era of low rates, at the end of a long period of declining rates; and realignment due to changes in our approach to environmental issues are two examples of the sort of regime changes that can significantly impact investment models and outcomes. This calls for an increased degree of systems thinking, governance and risk management”, Craig concluded.
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As superannuation assets grow, more opportunities will be sought offshore across all asset classes, but particularly real assets (property and infrastructure) and unlisted equities.
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Craig Roodt, Director, Investment & Wealth Advisory, Deloitte
Craig Roodt is a Director in Deloitte’s Investment & Wealth Advisory practice, with more than 20 years financial services experience across the investment value chain focusing on superannuation and investment governance. Immediately prior to joining Deloitte, Craig was the Head of Investment Risk at the Australian Prudential Regulation Authority. His experience includes:
Developing key parts of the investment prudential framework in Australia, including SPS 530 Investment Governance and the Good Practice Guide to Unit Pricing
Leading specialist investment risk teams, reviewing investment and governance frameworks, policies and processes and customer outcomes at numerous superannuation funds and asset managers and recommending improvements.
Advising, developing and implementing liquidity management frameworks, processes, and stress testing programs, including investment strategy formulation.
Disclaimer
All information contained within this publication is general advice only, as the knowledge levels and needs of all individual and corporate investors vary greatly this publication should not be used solely as a decision-making tool, further opinions and information should be sought before making an investment decision. It is the recommendation of Global Investment Institute (GII) that you seek the opinions of a fee-for-service, independent investment adviser before making any investment decision.
The authors, directors or guest writers may have a financial interest as investors, trustees or directors in investments discussed or recommended in this document. It has been assessed by the editors that these financial interests have not had an impact on the material contained here within.
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