Forum Themes

Our Investment Forums focus on four key themes:

Assessing Macroeconomic Drivers
Macroeconomic factors are playing a more important role in shaping the global financial system, most of all, the debt crisis faced across the EU and the US, the shift in global power from West to East and the potential of financial repression to arise in the near future. Although Australia has been able to successfully navigate the economic landscape since the GFC, helped by the demand for natural resources coming out of China, there are a multitude of risks intensifying that pose a threat to its future economic growth prospects.

The high Australian dollar has crippled the export market and many businesses and industries reliant on consumption by foreigners, labour productivity has declined and the demand for natural resources is cooling off as China’s growth slows. Whilst China’s growth tempering is a risk to the Australian economy, it also gives rise to concerns as to the sustainability of the emerging market growth story and whether the global interconnectedness between developed and emerging economies poses greater risks than what is sometimes assumed. Greater global interconnectedness has increased the importance of currency as a driver of portfolio returns and the risk it presents to investors’ portfolios.

Heightened participation in foreign investment markets and the level of currency volatility exhibited in recent years has brought more media and attention to the way funds manage currency exposures. Furthermore, it has placed industry practitioners under greater scrutiny, pressuring them to manage these exposures in the most optimal manner. Recognising the fluidity of global and domestic macroeconomic developments and the impact they can have on investment performance, investment strategy and member outcomes, necessitates constant review and analysis.

Revisiting Investment Strategies
Funds recognise the need to adopt a dynamic investment approach in building portfolios that effectively deliver CPI+ return objectives to members. Concerns about the ability of investors to meet return targets have provided impetus for rethinking investment strategies. This has led to heightened interest in alternative assets due to the lacklustre performance of core assets, reignited the public vs. private debate, questioning the validity of the domestic bias that currently exists and the realisation that a better understanding of risk is needed. As part of the increased focus on risk management, risk factor based allocation which enables investors to apportion portfolio risk to the various factors in line with the risk appetite of the board, members and stakeholders has gained increased traction.

Further complicating the implementation of investment strategies are the concurrent changes taking place in member demographics arising from growth in population size and longer life expectancy. These place further pressure on both superannuation and  insurance funds to fulfil the objective of their members, policyholders and stakeholders whilst taking both, increasing longevity and investment risk into consideration. In the not too distant future, drawdowns are expected to rise as the Baby Boomer generation transitions to retirement, thus placing further importance on meeting the retirement needs of members. For insurers, increased longevity risk presents a more challenging environment whereby producing sufficient investment returns to meet existing liabilities and ensure income protection becomes paramount.

Presently, the post retirement market is underdeveloped and lacks sufficient investment options to cater for the needs of those people transitioning to retirement. This highlights the need to develop and improve post-retirement solutions for members, better manage volatility and generate return on invested capital. In addressing these issues, investment strategies will be revisited along with finding the balance between sound asset allocation decision making and meeting member objectives, in both, the accumulation and drawdown phases, which requires ongoing consideration.

Calibrating the Organisational Compass
The Australian superannuation industry is currently undergoing a period of change. This requires funds to constantly evolve their practices and ensure alignment of internal and external objectives is achieved in order to effectively navigate the environment in  which they operate. This is a task that fund leaders are entrusted with, which they work tirelessly to manage as the industry continues to grow both in terms of total funds under management and individual fund size.

The growth in scale, whether organically or through merger and acquisition activity, is giving rise to internalisation of funds’ investment activities. Increasing complexity is pushing funds toward increasing internal resources as a means of improving their understanding of investment markets, investment management and their ability to identify investment opportunities. At the same time, funds are facing greater competition from the self-managed super fund (SMSF) and banking sectors, which continue to grow in size in terms of funds under management. This emphasises the importance of member engagement, communication, education and fund differentiation as tools for retaining members and keeping them invested for life. Also adding to the changing organisational landscape of superannuation funds are regulatory changes, increases to the SG, the introduction of MySuper and greater focus on risk management.

The Australian insurance landscape is also subject to transformation driven by increasing operational complexity and regulatory change. Wider constraints are placed on the way insurers invest capital to meet liabilities and the increased use of derivatives and synthetic instruments requires funds to develop internal investment teams with specialised skill sets. On the other hand, this also highlights the need to bridge the gap between the investment and insurance teams in terms of investment and actuarial knowledge, understanding and objectives.

CIE’s role is to bring these challenges to the attention of industry practitioners, explore innovative ways of addressing them and evaluate their implications for the Australian institutional investors. Furthermore, shifts towards insourcing and larger scale are expected to remain, presenting ongoing challenges and changes to funds internally and the environment faced externally. Consequently, CIE believes Calibrating the Organisational Compass is a theme that requires ongoing attention to ensure that change is managed optimally.

Evolution of the Regulatory Environment
The GFC highlighted a number of shortcomings in the regulatory frameworks governing the finance industry as a whole, and financial markets in particular. In response, the global regulatory environment is undergoing a period of transformation in a bid to create a more robust global financial system. The approach taken has been to allow governments and regulators alike to enact reforms that may increase transparency and accountability, to reduce volatility, and in the process improve functionality and sustainability. This has seen a wealth of regulation coming to life across the globe, including the Dodd Frank Act, The Volcker Rule, BASEL III, EU bail-in legislation, Solvency II and a host of others. Along with global regulatory reforms, the Australian superannuation industry has undergone a number of regulatory changes including the proposed increase of the superannuation guarantee (SG), the latest tranches of FOFA and Stronger Super reforms. As part of this, the powers given to APRA have increased the onus of boards, placing greater pressure on board members to elevate their level of investment knowledge and ensure independence of trustees. On the other hand, the more stringent capital adequacy requirements under LAGIC imposed on insurers highlight the need to make more capital efficient allocation decisions and place further pressure on insurers in meeting liabilities with a limited opportunity set of viable investments.

Reviewing the implications of and the mechanics behind implementing regulatory change will be an area of focus for superannuation and insurance funds over the coming years. The issues related to industry specific regulatory changes and those applying to the  broader domestic and global financial sectors will be addressed to varying degrees across CIE’s different investment forums/symposiums throughout 2013, along with a number of associated and related sub-issues.