The Scottish economist and intellectual father of capitalism Adam Smith (no relation that I know of) once said that “all money is a matter of belief”. Beliefs are important in life.
They are also important for investors. They govern investor behaviour and set the direction for decision-making.
For example, an investor who believes that markets are efficient will prefer simple and cheap index funds to freewheeling, expensive hedge funds.
At TWUSUPER, we have developed a new set of ‘Investment Beliefs’ which form the bedrock from which we make decisions for the $6 billion that we hold in trust for people in transport.
They guide the development of the investment strategy, from the setting of objectives, designing products, building portfolios and choosing investment managers.
These ten beliefs are a fundamental part of our Investment Governance Framework. They provide a valuable insight into the character of the Fund, and how investment decisions are made.
In developing these beliefs, we have given a lot of thought to the areas in which TWUSUPER has a comparative advantage. This boils down to the following.
The Fund, firstly, is large enough to have the economies of scale required to run an efficient operation but is not so large that its investment positions will drive market pricing or impair trading activities. This is true even for niche areas that are too small for large investors.
Secondly, members of the Fund generally have a long investment horizon and will take time to draw down their savings.
This implies that the Fund can invest into real assets such as property and infrastructure.
These investments make a big difference to future outcomes, providing good returns, spreading and reducing risk and helping protect from unexpected inflation.
Thirdly, TWUSUPER is an attractive partner for expert fund managers, meaning we have access to the world’s best investment skills.
So here they are:
1. Strong governance supports good decision-making and leads to optimal investment performance;
2. Member outcomes are principally measured through returns after fees and taxes relative to prevailing inflation;
3. Net investment performance and fees should be competitive relative to peer funds;
4. Strategic asset allocation is the dominant factor that determines investment returns and risks;
5. TWUSUPER gains a comparative advantage through its long-term investment horizon and by seeking out niche opportunities that are suited to smaller investors;
6. Appropriate diversification is critical to maintaining an effective and efficient investment strategy;
7. Appropriate management of environmental, social and governance (ESG) factors contributes to higher long-term investment returns, mitigates risk, and supports the Fund’s role as a responsible member of the Australian investment community;
8. The optimal model to implement investment strategies is to outsource asset management to appropriately qualified and experienced investment managers that are fit for purpose;
9. Active management can add value in markets that are relatively less efficient and where there are highly skilled managers that can take advantage of mispricing opportunities to enhance returns;
10. Effective management of investment fees, costs and taxes can materially improve net returns.
Where we do not have a comparative advantage, it makes sense to buy market exposure for minimum cost. This brings down costs overall, thereby improving net returns.
We reflect the new beliefs in our investment strategy.
For example, we recently adjusted our asset allocation in favour of international assets, increased our allocation to small cap Australian shares by appointing a specialist manager, recruited a specialist in Responsible Investment and have taken a razor to investment fees.
TWUSUPER is also acutely aware of the impact our investment behaviour has on the world around us.
We want to play our part in helping make a world that is prosperous, healthy, and fair.
Our existing focus on making sure our investments are socially and environmentally sustainable will shift up a gear this year.
After all, if the past year has taught us anything, it is that our collective wellbeing directly influences our individual prosperity.
Having a set of guiding principles is useful in life as it is for investing.
Think of the people you admire most, and on top of whatever talents they may have, it is probably the inner beliefs they hold and apply consistently that make them successful.
The same is true of institutions, including banks, builders, transport companies and superannuation funds.
The last year has been incredibly challenging.
But with the challenges posed by coronavirus and the virtual rewriting of the investment landscape comes opportunity — the opportunity to get set for the future and adapt to a rapidly evolving environment.
For the balance of 2021, we will be implementing our investment beliefs to deliver a modern, robust fund for people in transport.
It is an exciting time; hang on for the ride.
(Image Edward Smith, TWUSUPER Chief Investment Officer).
About the author
With over 30 years of experience within financial services, Edward Smith BSC, MBA, Chief Investment Officer at TWUSUPER, has a deep understanding of superannuation, markets, and investing. Roles include actuarial, funds management, asset consulting, superannuation and teaching.