Internal managers under pressure to perform

AustralianSuper chief investment officer, Mark Delaney, has acknowledged internal managers at the fund are put under more pressure as he reflects on the fund’s poor property allocation. 

Speaking at the 2023 Morningstar Investment Conference Australia, Delaney acknowledged the “really disappointing” performance of its property investments, which had brought back focus to its internal investment teams.

The fund’s unlisted property assets were managed internally and had performed worse than other unlisted parts of the portfolio.

“We had a strategy of overweight on retail and a strategy of more international property than Australian. Both of them were the wrong decision and with property, it’s very hard to get out of. Retail got disintermediated by online shopping and we were overweight there then we had a short exposure to industrial so that was the worst of all worlds,” Delaney said.

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“Our response has been to freeze the allocation to reduce the amount of capital going in there.”

Some 54 per cent of the fund was currently internally managed and the fund was planning to increase this to 75 per cent in the future.

Delaney, who had seen the fund grow its assets from $6 billion to $300 billion, said the internal team was probably put under more scrutiny than external managers because “the investment committee was all over them”.

“We have terminated internal fund managers for not delivering the performance we are after, if anything they get more scrutiny as the investment team are all over them,” Delaney said.

This compared to scrutiny of external third-party fund managers, where he felt the fund had “hung onto” underperforming managers.

“When you look at our history, we’ve hung onto external managers who underperform for too long,” he said.

“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.” 

According to Delaney, a part of the value of internal management lay in the ability to quickly pivot and respond to changes.

“If we don’t like [a strategy], we can defund pretty quickly. We can halve or cut the allocation while they rebuild the strategy. You can’t go to an external manager, cut the allocation by two-third, and expect to get that back the next year,” he said. 

He also touched on the future of superannuation and said the tailoring and personalisation of super offerings would be crucial, he added. 

Delaney considered the example of Vanguard Super’s 36 Lifecycle propositions, launched in November 2022, which would adjust the asset mix of a portfolio according to age. 

“The life cycle itself needs to reflect a person’s circumstances. You can’t put a person on autopilot,” he said. 

“Clearly, as a person gets older, derisking their portfolio to some extent is a good idea because their ability to recoup losses is smaller, but not derisking to the same extent that they don’t participate in the upside.

“If they got to 65 and you derisk the portfolio, that’s not bad, but you’ve got to have a lot of money to start with to do that. Otherwise, what you’re implicitly saying is, ‘I’m not going to be able to grow those people’s assets for the next 25 years of their life’. Most people aren’t in those circumstances.”