The AustralianSuper Model

Hello, and welcome to another episode of Peer Connections by Global Peer Financing Association, GPFA. My name is Shireen Silver. I work in the business management team for FIC and Capital Market at Australian Super. Today, I'm joined by Joris Hillman, Head of Capital Market, and Mike Fitzsimmons, Manager of Securities Lending. Welcome, Joris and Mike. Maybe you can start by giving our listeners a bit of background on yourselves. Thanks, Shireen. My name is Joris Hilman. As Shireen said, I'm head of capital markets. I've been three years with Australian Super. And before that, I worked for ING Asset Management and Macquarie Asset Management globally in the Netherlands, the UK and in Australia. And my name is Mike Fitzsimmons. I'm the manager of securities lending within the capital markets team at Australian Super. I've been at Aussie Super for eight years and have worked in a variety of roles through investment operations to fixed income and currency management and prior to my role at Aussie Super I worked at the Future Fund which is Australia's sovereign wealth fund. Mike perhaps you can provide some background on Australian Super that might set the scene before we get into more detail about securities financing. Sure thing. So Australian Super is a superannuation fund which is the equivalent of a pension fund or super funds as they're called in Australia. It's a defined contribution fund and employers are mandated to contribute on behalf of employees around 10% of employee salaries. Australian super has 2.4 million members or one in 10 Australians and around 200 billion Australian dollars in assets under management or around US 150 billion. And the fund has grown in size by between 10 and 20% AUM each year for the past 10 to 12 years. So very strong inflows and a fairly young member base. So that means that we have a large proportion of growth assets. As an investor, we're an active investor. We're active in ESG as well. So we commit to carbon neutral. We have some restrictions on things like tobacco and just an active portfolio management policy as well. The other big thing that's worth mentioning is that before 2013, we were entirely externally managed from a portfolio management perspective. We did have some asset allocation in-house, but from that point in time, we've been gradually internalising management of assets and we're around 40% to 50% internally managed now. And one of the recent teams assembled within that internal management is Capital Markets, which Yoris could probably talk a little bit about. Yaris, just leading on to that. So one of the more recently created internal capabilities is the capital markets team. Can you tell me how this originated and what the role of the capital markets function is? Sure. So about three years ago, we were thinking about how to optimize our internal structure and to maybe centralize all our implementation and exposure management. With this, we constructed the capital markets function. where we combine all our trading activities, which trade for all our internal portfolios and also all our overlay portfolios. Secondly, our exposure management team, they basically manage all our exposures. They implement all our asset allocation, do all the rebalancing that comes from member flow. They also do all our currency hedging and also our internal transition management. And thirdly, our balance sheet management team. The balance sheet management team looks at our liquidity, also initial margining, and stock lending is a big part of that. So we combine these to basically centralise our operational risk to be much quicker in the market and to really have the assets in one hand where we can implement when we want and how we want and really have that centralised function. Mike, that leads into the securities lending program. Can you discuss how that program has developed over time? Sure. The origins of the program are probably similar to many programs where securities lending was originally with a single agent lender and had some oversight from investment operations, but it largely ran its course as a ring fence program and wasn't really integrated in the investment decision making, even though it had a small incremental alpha budget. We still maintain a single agent lender, but we have added some direct lending arrangements over time where it's made sense and this is where we expect will be an area of growth for the program in coming years. It was only around five years ago that we segregated activities appropriately between the investment and operations teams or front and back office and since then the program has added more in the way of dedicated resourcing to support the function. So that's really evidenced in legal, in operations where we have a dedicated cash and collateral operations team but we have engaged with tax services. We have a counterparty management group that's been fleshed out and provides some oversight to some of our counterparties and the exposures and qualities that we have within our counterparty set. So it is a more integrated function. Now our budget and strategy is endorsed by the investment committee and our total portfolio management team. So similar to our other internal investment mandates, securities lending has, I guess, a similar front to back of the investment process. And probably the other changes that have occurred over the last four or five years have been in relation to data, which historically was very immature, risk management and program governance. And technology is something that we're on the way with now, where we're looking at a vendor solution for balance sheet management in general. Securities lending is integrated as an internal investment process. It's still considered as small contributor to incremental income. And the program risk appetite for loss, either via counterparty default or cash reinvestment, is fairly low. And therefore, the rules that we have on the program are also reflective of that. On the lending side, we're able to lend all publicly listed assets are lendable and unrestricted. So that includes debt and equity instruments. We have a split of decision-making. So we have the agency program that typically lends on an overnight basis, and I guess is responsible for a lot of the lending churn. And really the internal team is responsible for some of the things that are a little bit more nuanced. So it might be...