Super underperformance: Are in-house teams held to account?

Over the past decade, the way superannuation funds invest their members’ retirement savings has undergone a significant change.

As Morningstar Australasia's director of manager research ratings Annika Bradley explains, large funds have been increasingly bringing their investment management duties in-house.

Historically, large funds outsourced management of their investments to external fund managers.

AustralianSuper was one of the first to kick-start this trend in 2013. But what happens when internal teams don't deliver for members? Is it harder to sack yourself?

Ms Bradley spoke with AustralianSuper chief investment officer Mark Delaney at the 2023 Morningstar Investment Conference in Sydney.

Transcript: 

Annika Bradley: AustralianSuper's unlisted property book, has not performed as well as some of the other unlisted, illiquid parts of the portfolio. And one of the criticisms of internalisation, particularly at the large super funds, is it's challenging to sack yourself. It's really challenging to restructure an internal team. Can you speak to the AustralianSuper property experience?

Mark Delaney: Yep, I can. It has been really disappointing. It was long and the short the wrong strategy. So we had a strategy of overweighting retail. And having more international property than Australian property. Both of them were the wrong decisions. And with property, when you've got one, which is underperforming it's very hard to get out of because you never want to accept how bad it is until someone, until it gets really bad. Retail, got disintermediated by online shopping, and that affected all retail, but we had an overweight exposure to retail and we had a short exposure to industrial. So that was the worst of all worlds, and that's performed really poorly. We've got one good international investment, which is at King's Cross Estate, but the others haven't been very good at all. Our response basically has been to freeze the allocation to reduce the amount of capital going in there and then have to work our way out of that problem. So with private market investments once you've got a problem, they take five years or 10 years to five years to work your way out. They are not going to be solved in a hurry.

Your broader point about internal management. We've terminated internal fund managers for not delivering the performance we're after. If anything, they get more scrutiny than the external managers do because the investment committee, and everybody else is all over them. And we've actually hung on, when you look at over our history, we've hung on to external managers who haven't performed for too long. They used to be good ones, and now they'll just come back and it'll come good again. And how long does it take for you to give up faith? It's always when you look back on your record you should have got rid of them, when you first started to worry about them. How many of them come good after you first start to worry about them? One in three. Even when we know this, we still don't do it fast enough.

So, reluctance to do anything affects all investment decision making. With internal there's a few levers which I like about. The first one is that if we don't like it or what worries about the strategy, we can defund it pretty quickly. We can halve their allocation, cut it to a quarter or something while they're rebuilding or structurally adjusting. You can't go to an external fund management and say I'm going to cut your allocation by two-thirds and expect to get that back next year or the year after. And then if you don't think it can be rebuilt in a viable way, then you should terminate that strategy. Index it or hire an external manager and we've done that as well at times. So I hope we're not softer on internal staff than we are on external. I actually worry that we might be the reverse harder on internal than we are on external.