Industry Moves Hot Topics Panel - Is a Chief Investment Officer necessary?
Superannuation funds have experienced rapid growth in funds under management over the last few decades, but many in the industry are still split on the issue of whether or not a fund needs a chief investment officer (CIO). This week we ask our panel, which includes former Media Super CIO Jon Glass, for their views.
CEO, Fund Executives Association Limited
Do you think the role of CIO is necessary for a super fund? Yes I do. Small funds may not [need one] but I think once you get to $1 billion in funds under management you definitely do.
Why? Because there is so much to do and you need someone with the expertise. You don't want CEOs, or COOs for that matter, distracted from the other important issues. Long gone are the days when you had fund secretaries that did everything, funds are just too big now. There is also the question of insourcing versus outsourcing. When a CIO moves from being a manager of managers to a manager of assets, the role changes fundamentally and I think you need a different skill set for that - your attitude to risk changes.
The other big difference is the regulatory changes over the past 10 years. What the CIO and CEO have to put into preparation for board meetings now has fundamentally changed. There is a different breadth and depth of expertise that is required from the whole investment team.
Investment Consultant , University of Sydney, Investment Capital and Management
Do you think the role of CIO is necessary for a super fund? I would give four reasons for why a CIO is necessary for a super fund, leaving aside the separate argument of how big the fund needs to be in order to support that role.
Firstly the corporate culture needs the CIO as the best-placed person to take care of investment communications with stakeholders, employees and external parties Secondly the CIO is the person who can liaise with trustees on investment issues and act as the point of contact for investment issues and questions. Thirdly the CIO role is the natural point of engagement for the fund to have with service providers, such as investment managers. Finally, we are discussing an investment business, and an investment business requires attention on a daily basis, and the CIO is the natural person for that role.
Former CIO, Catholic Super
Do you think the role of CIO is necessary for a super fund? Australian funds have been lucky to date in that we have a culture of both employing asset consultants and listening to them. As such, a fund can get away with not having a CIO. However, in doing so, the research suggests that it very significantly reduces the probability of having superior long-term investment returns. One implication of this is that a fund that cannot afford a best practice investment governance framework, including a strong CIO, should very seriously consider merging to get to a scale where the merged entity can afford such a framework.
Why? By far the best work on the importance of investment governance was done by Roger Urwin and Gordon Clark back in 2007. They effectively argued that pension and superannuation funds generally substantially underinvest in good investment governance. They also found that best practice governance can add around 2% per annum to returns. In the Australian context I believe that there are three elements of best practice investment governance: a great investment committee, a deep internal investment team led by a strong CIO, and a very open and robust relationship with a properly resourced asset consultant. The two key people in this are the CIO and the chair of the investment committee. That said, it is the total investment governance package that really matters.
Chief executive officer, Frontier Advisors Pty Ltd
Do you think the role of CIO is necessary for a super fund? The organisational structure of any superannuation fund ought to reflect its business model and what it aims to achieve for its members. For some, this is a fully staffed internal investment team with significant delegations led by a CIO, for others, it is a lean executive team and a greater reliance on external parties and outsourced providers. Somewhere in the middle is the most common model in Australia at this time, although increasing compliance, platform, product and liquidity requirements are necessarily providing impetus for increased internal staff complements.
Interestingly, at the recent Frontier Annual Conference and the Frontier Manager Briefing from earlier this year, we surveyed some common questions across the two audiences (which comprised a cross section of superannuation fund trustees, fund executives and fund managers). One question we explored was (164 responses): Who is the most influential decision maker(s) at funds? Some 31.1% indicated the CIO, and a further 29.9% indicated internal teams (which of course report to a CIO). These were the largest two response categories so the market is pretty clear on the importance of a CIO.
Why? Any superannuation fund ought to have the goal of having access to the best people, no matter where they work, either in their internal team or via access to an external specialist. Having no CIO and making use of external experts may be a better option than feeling one has to have a CIO but not having a good one.
Managing Director, King Irving Consulting Group
Do you think the role of CIO is necessary for a super fund? Yes I do, either as a standalone role or by a senior executive of the fund having that responsibility.
Why? Legally, I see it as part of the trustee's obligation of properly oversighting the investment management function as delegated to independent investment managers, as well as for managing in-house investment teams where in place.
For the components of the portfolio that are outsourced, a CIO/investment specialist will ensure that the most appropriate manager is appointed, as they will have a skilled and practiced understanding of portfolio management and construction. There is no substitute for experience and specialist skill in this area.
The expertise of investment consultants can then be very effectively harnessed through informed conversations between the two sets of investment professionals; the fund representative and the independent advisor for the optimal outcome for fund members.
