Australian pension fund HESTA is considering creating an internal fundamental Australian equities capability in an effort to address capacity constraints and drive company engagement.
HESTA chief investment officer Sonya Sawtell-Rickson said it would help the fund deliver better outcomes for members.
“I think there is a lot of benefit to us if we had a fundamental Australian equities capability that we can then leverage to engage with companies on long-term, strategic business plans,” Sawtell-Rickson said in an interview with [i3] Insights. “We are trying to shift the conversation from quarterly earnings to three to five year strategies.”
In the past two years, HESTA has implemented a total portfolio approach and enhanced its capabilities in whole-of-fund research, strategy, economic forecasting, risk management and investment execution.
“Our next stage is really about internalisation of asset management. We’re finalising the business case for consideration by stakeholders,” she said. “If we do move ahead, it will be a carefully considered, priority-based approach with the first area of focus likely to be Australian listed equities.”
I think there is a lot of benefit to us if we had a fundamental Australian equities capability that we can then leverage to engage with companies on long-term, strategic business plans
In 2016, the fund did a complete review of its investment process as its continued growth meant it faces new challenges and opportunities.
“It is really recognising that what HESTA has done in the past has been incredibly successful. It is a great fund that delivers strong long-term performance for our members,” Sawtell-Rickson said.
“But there is an acknowledgement that what has worked in the past might not be optimal for the future. What should change when we become a $100 billion fund? How does it impact our opportunity set and our ability to generate returns?”
“It has been a very broad journey. We’re looking at our investment process, enabling talent and culture, and investment systems and data. It is also about governance from the Board through to the Investment Committee, Audit and Risk Committee, and our recently established Impact Committee. This Committee will drive HESTA’s continued positioning as a fund that not only delivers strong investment performance, but also has a positive impact on the economy, environment and society that our members retire into.
HESTA is also exploring the use of big data by its internal investment team. Last year, it hired Michael Kollo as General Manager of Quantitative Solutions and Risk to lead this effort.
“We all know that investments is a very data-rich environment and it is only getting richer as data is more readily available, the frequency of that data is higher, alternative data is emerging and is starting to build up time-series,” Sawtell-Rickson said.
“Data is already a big part of our business and it is only going to play a more important role. We need to make sure that we have the ability internally to clean data, structure the data and build algorithms to interpret the data and systematise as much as possible to assist our investment decision-making processes.”
In the long run, the fund might also explore what benefits machine learning can bring to the process.
Data is already a big part of our business and it is only going to play a more important role. We need to make sure that we have the ability internally to clean data, structure the data and build algorithms to interpret the data and systematise as much as possible to assist our investment decision-making processes.
“We are using best-in-class software models that give us the flexibility, in time, to add enhancements such as machine learning strategies into our process,” she said.
Increasingly, more pension funds are developing a partnership model as part of their investment strategy, but Sawtell-Rickson said HESTA had already been leveraging its fund manager relationships and so this was not a key area of focus for the review.
“Partnerships are not new. We’ve got managers that have been with HESTA for 20 years and they’ve always contributed to our thinking and our processes,” she said. “Where there was value, we collaborated with other funds to form collectives, which have always had a strong partnership focus”
From time to time, Sawtell-Rickson does get approached by fund managers wanting to partner with the fund; however, she emphasised that partnerships will have to successfully earn a mandate to run money for the fund first before it will be considered for closer cooperation.
“My first response is always: ‘You first need to make it through the door based on your investment capability’. So we need managers who are strong, quality investors and then we want to build partnerships and leverage that relationship more broadly and amplify those insights across our investment process,” she said.
For a general guide on pension fund issues in Australia, please see here.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.