“Fate paves the roads we ultimately travel”: Rob Prugue on life after Lazard November 2018

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Rob Prugue was CEO, Asia Pacific of Lazard Asset Management for 15 years until February this year, when he left the firm. He speaks to Industry Moves about how he has been occupying himself since, including pastimes such as glass blowing and choir singing and spiritual revelations on the Camino de Santiago pilgrims’ walk in Europe. He’s not finished with funds management or superannuation just yet though, and shares with us his plans for the future.

You've worked in the funds management industry - in both research and management - for over three decades. How have you observed the industry change in that time?

Once funds allowed new members into their fund from outside their own industry, competition to grow and attract new members mushroomed. Since then, and following smaller funds being swallowed up by larger ones, it appears as though we’ve morphed from an industry to a business, where competitive pressure to grow forced many funds to change their business models.

In an effort to push towards growth, two observations can be made. The first is an adversarial divide between for-profit and for member profit, or industry funds. Even though actuarial goals are identical for a retiree, this division has grown to levels where all investors lose, as each side seems too busy to blame the other for issues that the whole industry is beholden to.

The second observation relates to how the regulatory environment appears to be encroaching into how a fund is managed; inasmuch as their preferred mantra of “bigger is better”. While economies of scale advantages are clear, what’s less discussed are capacity constraints often faced by the mega funds.

One of the flow-on consequences from regulators encouraging funds to merge, so as to capture economies of scale, was the formation of internal investment teams. Having worked at NSW State Super as head of international equities, I was the poster child of the benefits from internally managed funds. Following the collapse of Barings Bank in the 1990s, however, Michael Egan (then Treasurer of NSW) came to the stark realisation that the taxpayer, in owning NSW State Super, was both the principal AND the agent. However one calculates the cost saving’s from internalisation, therefore, any savings would be an accounting equivalent to self-insurance were the manager to be behind any operational or compliance failure.

"While economies of scale advantages are clear, what’s less discussed are capacity constraints often faced by the mega funds."

You have previously spoken about the 'three epochs' of funds management, can you explain the difficulties you believe we are about to face in the third epoch?

The major difficulty will be generating liquid uncorrelated returns that yield CPI-plus in an economic environment where the cost of capital is CPI-minus.

Moving 10% plus into uncorrelated illiquid assets fails to recognise how an increasing number of members are in a de-cumulating mode. Furthermore, holding highly liquid government bonds as the “Defensive Asset” pushes the fund further away from its strategic target of CPI plus.

How do funds managers, and superannuation funds for that matter, need to change to deal with these developments?

I believe the rating agencies are doing it back to front. They are waiting to see what the returns are, then rank them from highest to lowest. While clearly no one wishes to hold a poorly returning fund, I have yet to read ANY academic book which emphasises the best way to immunise pension liability is through peer rankings. Benchmarking, dare I say, is the Achilles’ heel of our industry.

While we may claim to be an industry, too many of us play the agent’s game of marketing our peer rankings. Here too, however, I have yet to read a fund prospectus which defines their balanced objective as being top quartile.

Perhaps rating agencies should consider assessing how well the funds performed relative to their stated balanced objectives: targeting returns of CPI plus 2 or 3 per cent; a one in seven to nine-year negative return; maximum draw down of 5 to 7 per cent, etc. We need to shift our focus away from performance to portfolio security. Superannuation is not about wealth management, superannuation is about immunising towards retirement income.

On leaving Lazard Asset Management earlier this year, you set out to "find your north" through a series of adventures. Can you name some highlights?

I’m a believer that we may plan things, but fate paves the roads we ultimately travel. When I went to South America, this allowed me to spend time with my older sister and my 92-year-old mother. While in Peru, I was present for my sister’s successful cancer operation, while being able to connect with my dementia suffering mum.

Following time with my family, I travelled to Europe, so I could walk the 800 kilometres of the Camino de Santiago over a five-week period. On my third week, I noticed a centuries-old stone chapel about 150 metres to my left. Bear in mind that you see around a dozen of these chapels a day, but something compelled me away from my walk towards this chapel. The gardener, who reluctantly let me in, told me how this chapel was dedicated to St. Michael the Archangel, who coincidentally was my mother’s favourite angel. After some time, I continued on with my hike towards my destination 20 kilometres ahead. About two hours later, I received a call from my brother in law informing me that my mother had passed away peacefully in Peru two hours previously.

"I’m a believer that we may plan things, but fate paves the roads we ultimately travel."

How have these experiences changed you and your view of the world?

I got to say goodbye to my mother, not only when I was in Peru, but also when I was on my walk. This just reinforces what I said before, that at the end of the day we may set our paths but our paths are paved by fate.

Can you tell us a little about your work with suicide awareness organisation, People Reaching out to People (PROP), and how others can get involved?

PROP is a result of my losing five friends to suicide back in 2015; different ages, genders, and locations. It really forced me to introspectively ask myself if I could have done something to prevent any. It resulted in personal research to try and be more aware of suicide. And then I came across multiple findings that if you know someone who has depression, it’s perfectly good and reasonable to ask that friend suffering from depression if they’re having any suicidal thoughts. Survivors, therapists and psychologists all seem to agree that is a very reasonable question because it brings out in the open what they are trying to hide.

Partnering with SuperFriend, LifeLine, and TAL, we’ve created a four-part education program directed at the four in five who are NOT suffering from mental health issues. The idea here is to use education to unlearn the stigma around mental health. We’d encourage people to register for this simple four-part course by visiting our web page, www.prop.org.au, and logging in to our tutorials.

"If you know someone who has depression, it’s perfectly good and reasonable to ask that friend suffering from depression if they’re having any suicidal thoughts."

What have been some other highlights of your gap year?

Expanding my horizons outside of economics. I’ve taken glass-blowing classes, auditioned and been accepted to the Sydney Male Choir (est 1913), as well as having volunteered at an elephant sanctuary in Thailand.

Where will you go from here?

I have been blessed to have worked in pretty much all aspects of financial services; market regulator, share and quant analyst, portfolio manager, asset allocator, business manager, asset consultant, and manufacturer of new investment ideas and products. Looking forward, assuming of course others find this of use, I would like to bring this all together to assist; either through an advisory capacity or something more permanent.

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