Managing superannuation assets in a new investment paradigm
Global Investment Insights
with Michael Wyrsch, Chief Investment Officer, Vision Super
Michael is the Chief Investment Officer and Deputy Chief Executive Officer at Vision Super, an industry superannuation fund with AU$11.5 billion in assets under management, currently.
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Interest rates (and inflation) appear to have bottomed and we look to be entering a new investing paradigm.
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In his role as Chief Investment Officer, Michael is responsible for providing strategic investment advice to the fund’s trustees, as well as being responsible for operational investment matters, providing investment advice and assistance to the Chief Executive Officer and trustees as required. Currently, the big areas of focus occupying his time include:
Dealing with Australia’s never-ending regulatory change. “Superannuation is increasingly expensive to deliver, and some recent changes have encouraged shorter term thinking. Compliance costs continue to increase materially and the risk of regulatory action has increased”, Michael highlighted.
How to generate real returns for members over the next ten years. “Expected returns for most asset classes, particularly defensive asset classes, are low. Building a balanced portfolio with decent return expectations and tolerable levels of volatility is increasingly difficult. We are building a defensive framework to try and deal with this issue”, Michael explained.
Impact of climate change and other environmental degradations on investor behaviour and returns. “This is not just a matter of what we invest in; these real world impacts will affect the financial well-being of our members in numerous ways. Governments will also be forced to regulate to try and deal with these issues”, Michael remarked.
What excites Michael about investments is the possibility of markets being affected by innovation and changes occurring across almost any discipline or industry. To that point, he sees climate and demographics as two themes that will affect investment outcomes monumentally over the next ten years.
Michael elaborated, “there will simply be no way to ignore the increasing physical impacts of climate change or the impact of degradation on the natural environment. Picking winners from that will not be easy, however.
Demographics is a slow burn, but I think it is having an inexorable impact. Interest rates (and inflation) appear to have bottomed and we look to be entering a new investing paradigm after nearly 40 years in the current one.
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There will simply be no way to ignore the physical impacts of climate change on the natural environment. Picking winners from that will not be easy, however.
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With regard to innovation, I think we will continue to see more quantitative innovations, more customised benchmarks, because they are now so easy to construct. We may also see the gradual disappearance of custodians. Should we really need them in a world with blockchain? I think we will continue to see huge strides in biotechnology with the biological sciences in a golden age.”
Keeping in mind the aforementioned themes which Michael expects to materially impact investment outcomes going forward, the evolution of his fund’s asset allocation over the next three years will primarily be driven by market and economic conditions, along with the evolution of the regulatory environment governing superannuation in Australia.
“I would expect to see more assets in the portfolio that hedge against inflation risk. This could include calls, trend following strategies and commodities. We will also see more investment in assets with exposure to the green transition. Given regulatory changes, the portfolio is also likely to hold fewer illiquid assets. Regulation is everchanging, unpredictable and is constraining us in how we manage money”, Michael remarked.
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Going forward I would expect to see more assets in the portfolio that hedge against inflation risk, more investment in assets with exposure to the green transition and fewer illiquid assets.
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Other than regulation, remuneration structure of the industry has been another factor Michael highlighted as inhibiting his fund’s ability to achieving optimal outcomes for members.
“Remuneration has been a big issue. Large payments tend to result in people thinking they must be worth it, and more, if they compare themselves to peers in the industry. This leads to a somewhat delusional view that they are better at their jobs than the evidence would suggest. We still work in an industry where luck plays an outsized role.
Bonuses are also problematic, encouraging short termism and often creating misalignments between the objectives of the individual and those of superannuation members.
In our profession I have found that most people want to do a good job and an additional financial incentive does not materially change that. Unfortunately, bonuses have become common practice to the extent that in some cases it is seen as a lack of confidence in an individual’s talents if one is not offered”, Michael explained.
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I think we will continue to see huge strides in biotechnology with the biological sciences in a golden age.
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Michael left us some reflections and lessons learned in his career from recent events that unfolded at the start of the COVID-19 pandemic.
He shared, “I’m quite interested in medical research and followed the pandemic story from the first week in January 2020. When evidence came through, increasingly strongly, that many of the infected were asymptomatic but that the mortality rate was only in the order of 1% we realised it was going to spread everywhere and that the market was not focused enough on the implications.
While still slower than we should have been, we were able to materially reduce our equity market exposure in early March 2020.
Importantly, a diversity of views in the team meant we started to allocate back to equities near the bottom.
There are a couple of lessons here I think, one is that curiosity about the world and how it works is a real positive in investments. You are unlikely to have a useful financial insight on something everybody is focused on. The other is around diversity of opinion. We were able to reverse direction relatively quickly because of the range of opinions in the team. Those who were right early were often wrong later. It is important to allow a range of views to be heard, not least from those who have not been correct to date.”
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We may also see the gradual disappearance of custodians. Should we really need them in a world with blockchain?
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Disclaimer
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