In 2003, the founder of Intech, Ron Liling received the Asia Consultant of the Year award from Global Money Management. When nominating Ron for this award, I made the following comment:
These surveys of investment managers were the precursor to the often despised (and occasionally temporarily loved) surveys by Chant West, Rainmaker and SuperRatings of superannuation funds.
Whilst at the time of the nomination I was a fellow director and shareholder of Ron (yes, totally unbiased viewpoint), I wouldn’t change a word of that nomination today.
It’s easy to blame others for our own failings
Surveys are often blamed by funds for causing short-termism. That is, members will react to the information and make bad decisions as a result of seeing this information. Well, yes, a very very very very (is that enough verys) small minority of members may make a change due to seeing a survey, and perhaps some were in the wrong investment option in the first place. These same members may even sell their shares after seeing the latest share price in their daily newspaper, on their phone or tablet, etc!
Most discussions I had with people during and after the global financial crisis (has it ended yet?) outside the industry was focused on the fact that their capital went backwards, and surveys were never mentioned.
“Firstly the government takes 15% of my money and then my super fund lost my money.”
Internal creation and obsession
The reality is that the obsession with the performance of peers is an internal construct of superannuation trustees, investment committees and investment teams. Unfortunately, the reaction of many is to throw stones at surveys, rather than think more deeply about the problem. Would you really want to go back to the days where life companies (member owned mutuals – sound familiar!) provide little to no disclosure? The 50/50 split between BT and MLC balanced funds may become the preferred investment strategy again!
Unfortunately, it is our human nature to not want to look different, at least in a negative way. As investors, we need to accept that peer risk is a commercial reality. We operate in a competitive environment where consolidation is a top agenda item for most funds. Superannuation is also highly regulated and being different does draw the attention of regulators (As a side note, I certainly hope that there is more to the regulators attention on MTAA than just a poor patch of investment performance).
Peer risk a critical consideration
The negative aspects of peer risk are widely criticised, however it is arguably one of the most important factors for funds to focus on, but not in the same way as is currently the case. Funds should embrace an understanding of peer risk in terms of the tolerance of the trustees, investment committee members and investment teams to looking differently from peers.
What a fund should seek to avoid at all costs is making reactionary decisions driven by their sensitivity to relative investment performance. Because, invariably, the following types of decisions will be at the worst time:
- changing investment strategy
- changing investment consultants (you know who to call!)
- terminating CIOs
- changing investment committees and trustees
As another aside, it is quite amazing, and not in a good way, the lack of change amongst CIOs and trustees given certain performance outcomes – says something about fund governance!
Avoiding bad reactionary decisions
We are all human (well most of us) and fallable (present company exempt), and it is important to understand when our patience will be tested, and when we may make bad decisions. The better we understand this, the less likely we will make bad decisions on behalf of our members.
I have been using a survey analysing peer risk at board and investment committee strategy days which I have facilitated. The purpose of the survey is to start a constructive discussion and heightened awareness of peer risk. It would be great if you would take 5 minutes to complete a simplified version of this survey and I will share with you the overall results (individual results will be anonymous). Feel free to share this newsletter with your colleagues and get them to complete the survey as well.
Focus on peer risk for the right reasons
There are very good reasons to focus on peer risk, but most of the current focus is destructive to the financial welfare of members. A more sophisticated response is required which recognises our natural desire to avoid being different and focused upon in a negative way.