But Scott Bennett, head of quant research at Northern Trust Asset Management in Australia, has detected a shift in mindset among the country’s big institutional investors and especially Vanguard’s clients-come-competitors in the super sector.
“With larger players leaving, it throws up the opportunity to rethink how they structure their portfolios,” Mr Bennett told the Financial Review. “That is where we are seeing a lot of discussion.”
Although the kinds of passive or index investing strategies pioneered by Vanguard – in which investors sought to mimic the performance of the broader market rather than actively selecting investments in an attempt to outperform – had been increasingly popular with super funds over the past two decades, many were changing gear, Mr Bennett said.
Moving on
“Those with large passive books are not looking to migrate from one index account to another index account,” he said. “They are moving on from vanilla, passive product.”
That is partly because many are stepping up their focus on environmental, social and governance (ESG) factors when investing – 18 of the largest superannuation investors have pledged to deliver net zero carbon emissions in their portfolios over the next 30 years.
Others have gone further, such as Aware Super (the rebranded and merged First State Super, VicSuper and WA Super), which has slashed its carbon emissions by selling its shares in the highest-emitting companies.
“It is increasingly difficult for them to find a pool that does all of that, whether a unit trust or exchange-traded fund,” said Mr Bennett, who also heads client solutions for Northern Trust’s Australian asset management division.
“Even if they don’t want a fully bespoke solution, we are getting demand for some kind of ESG overlay and those requirements tend to be different for each individual asset owner.”
The growing appetite for more active and ESG-themed investments might help explain why the superannuation industry pushed back so hard against the methodology of the Morrison government’s performance-testing reforms, which some critics have argued contain an in-built incentive for funds to stick to passive investments.
That methodology – closely based on an equation developed by the Productivity Commission – will involve super funds being benchmarked in each asset class against a basket of 12 indices, which some believe may cause hesitancy in some funds to attempt to deviate too far from those indices.
Returns the priority
Superannuation Minister Jane Hume previously warned that funds must be focused on investment returns first and foremost, and that ulterior motives such as carbon reduction should be secondary.
She has since watered down suggestions that the reform could lead to more index-tracking, and has encouraged super funds to pursue whatever strategies are in their members’ best interests.
The reforms were translated into draft legislation late last year after being announced among a raft of shock measures in the October budget.
Asked to comment on fears that pending legislation could turn the trajectory towards more active investing around, Mr Bennett said research had proved that investing with an ESG lens had a material pay-off.
“Returns are paramount, that is what needs to be delivered to end members,” he said. “We don’t think it needs to be ESG or returns. ESG is a great complement to an investment process … higher ESG rating companies have lower volatility for example.”
Northern Trust’s $6 billion haul from local and New Zealand managers in 2020 represented a 50 per cent growth rate for the US-based investor.
Mr Bennett said it had a pipeline of new business from Aussie super funds, including from those that had largely in-sourced their investment functions.
“Australia is a market we are stepping into,” he said, adding that Northern Trust would continue seeking to claw business from the cohort of former Vanguard clients. “We’re all in on this market.”
The world’s largest asset manager, BlackRock, picked up close to $2 billion from former clients of its rival, Vanguard, including a $591 million ETF block trade in October, believed to be the largest of its kind in Australian history.
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