Insourcing of Investment Management
Peter Curtis – Head of Investment Operations April 2013
Foundation for Success of Internal Management
2
Sourced from Global Projects Centre Clarke & Monk 2012
Networks
3
Sourcing deal flow
§ Pro-active announcements regarding strategy
§ Development of relationships with key managers
§ Exploiting size and brand
§ Development of relationships with intermediaries
Communication
The case for change
§ ~$100bn funds under management by 2016
§ ~$500m fees paid to external managers by 2016 AustralianSuper is seeking top decile
performance measured over a 10 year timeframe
Achieving the primary performance goal
necessitates a higher level of outperformance than has been achieved since the merge
While the current outperformance from asset allocation and sector tilt remains scalable and will contribute to the 2016 performance targets the remaining targeted increase to performance
returns must come from improved external manager selection or internal management
§ Capacity constraints exist with external managers
§ New managers will drag fund performance
§ Analysis indicates it is not possible to reduce external management costs to a level that will deliver the outcomes needed by AustralianSuper
Capacity
Costs
Growth
4
Goals Challenges
Delegations and segregation
5
Review and revise delegation framework
Governance • Compliance with prudential requirements and best practice • Clearly defined roles that ensure appropriately skilled & trained
staff can operate within documented policies & procedures
Decision Making • Transparent processes separating recommendations and approvals of decisions outside of delegated authorities
• All decisions will be evidenced by a clear audit trail
Implementation • The implementation of decisions will be undertaken with appropriate segregation of duties – evidenced by a clear audit trail
• All securities will be held by the approved Master Custodian
Monitoring & Reporting • Appropriate monitoring mechanisms will be in place to assess the effectiveness of the decision making process
• Independent reporting of performance, risk and compliance activities
Mandates
6
Clearly articulate the objective of the internal team
§ Internal teams treated same as external managers
§ Capital allocated to internal team follows same process as external managers
§ Formal mandate documented including return expectations, constraints and
guidelines
§ Performance will be monitored in same way as external managers
§ Under performance will be managed as with an external manager
§ Formal approval required to move outside of mandate
§ Critical to capture the insights from the internal team to deliver benefits of “one
portfolio”
Asset selection
7
Principles for selecting where to start
§ Capacity constraints
§ Cost pressure
§ Long term investing / alignment
§ Control / Influence / ESG
§ Insight
§ Ease of Implementation
Risk Taking Culture
8
Identify the culture that will align the investment team
§ Performance focussed and constructive
§ Member first
§ One organisation focussed on “one portfolio”
§ Clearly articulated investment philosophy
§ Constructive challenge
§ Encourage new ideas and provide a safety net
§ Experience is the sum of our mistakes
Risk Management
9
Improved operational risk management processes
Second Line of Defence Third Line of Defence
Investment Committee
Head of Equities Head of Fixed Interest Head of PropertyHead of
Infrastructure
Chief Operating Officer
Investments
Head Macro & Portfolio
Construction
Internal Audit
ACRMC or Risk Committee
Legal & C
ompliance
Finance & R
isk
Operational Risk Group
Asset Allocation Group
Chief Investment Officer
Internal Investment Committee
Chief Risk Officer
Investment Risk Operational Risk
Trustee Board
Investment Committee
Head of Equities Head of Fixed Interest Head of PropertyHead of
Infrastructure
Chief Operating Officer
Investments
Head Macro & Portfolio
Construction
Internal Audit
ACRMC or Risk Committee
Legal & C
ompliance
Finance & R
isk
Operational Risk Group
Asset Allocation Group
Chief Investment Officer
Internal Investment Committee
Chief Risk Officer
Investment Risk Operational Risk
Trustee Board
Third Line of Defence
Independent assurance of the Risk Management Controls / ReporEng will be performed by
Internal Audit
Second Line of Defence
Risk Management oversight and support by the Chief Risk Officer
First Line of Defence
First Line of Defence
Investment Management Risk and Investment OperaEons Risk Management capability will be embedded within the Investment Department.
Investment Committee
Head of Equities Head of Fixed Interest Head of PropertyHead of
Infrastructure
Chief Operating Officer
Investments
Head Macro & Portfolio
Construction
Internal Audit
ACRMC or Risk Committee
Legal & C
ompliance
Finance & R
isk
Operational Risk Group
Asset Allocation Group
Chief Investment Officer
Internal Investment Committee
Chief Risk Officer
Investment Risk Operational Risk
Trustee Board
Organisational Capabilities
10
Target Operating Model – AustralianSuper Investment Management Department
6.0Corporate
7.0Planning
&Operational Management
1.0 Governance
6.1 Finance
6.3Information Technology
6.4People & Culture
6.5Legal & Compliance
6.2Enterprise Risk Management
6.1.1Financial
Management
6.1.3Reporting (Cost
Allocation)
6.1.2Fees &
invoicing
7.2Data Quality & Management
7.3Operational Risk
Management
7.4Vendor Management
7.1Internal Fund Management
Risk Officer
Modification to Existing Function New FunctionExisting Function
2.2 Investment Option Management
2.2.1 Investment Options 2.2.2 Trading & Execution
Recruitment
Premises Infrastructure
SuperPartnersAdministration
Brokers
5.0 Third Party Providers
2.0 Front Office
2.3 Internal Management 2.4 External Managers
4.0 Back Office
4.3 Member Administration4.2 Settlement & Safe Keeping (JP Morgan)
3.0 Middle Office
2.1 Macro & Portfolio Construction
Investment & Commercial
Banks
2.3.2 Unlisted2.3.2.1 Portfolio Management
2.3.2.1.3Detailed Due
Diligence Approval
2.3.2.2 Execution (Acquisitions / Divestures)
2.4.1 External Manager Selection & Management2.3.1 Australian Equities2.3.1.2 Trading & Execution
4.1 Master Custody (JP Morgan Middle Office)4.1.1
Portfolio Accounting
4.1.2Portfolio Valuation
4.1.5Crediting Rates
4.1.6Tax Reporting
6.1.4Statutory
Accounting
4.1.3 Reconciliation
3.1 Trade Management (JP Morgan Middle Office) 3.2 Operations (AustralianSuper)
2.2.1.2Investment Research
(Asset Class)
2.2.1.3Investment
Selection (Tilts)
2.2.1.4Order Initiation & Instructions
2.2.1.1 Portfolio
Construction
2.2.2.2Trade
Allocation
2.2.2.3Counterparty Relationships
2.2.2.1Trade
Execution & Fulfilment
2.2.3.3Portfolio /
Investment Management
2.2.3.1Cash Flow Allocation
2.2.3.5Performance
vs. Benchmark
2.4.1.5Funding
2.4.1.6Manager
Monitoring
2.4.1.1Portfolio
Construction
2.4.1.2Manager Research
2.4.1.3Manager Analysis Approval
2.4.1.4Commercial
Documentation
IT Services Application Services
IT Infrastructure
SuperPartners ITIT Other
Document Management
FACTSET
Management Services Professional Services Support Services Counter Parties M/Office & B/Office Services
EZE Castle Market Data Providers
External Fund Managers
PropertyManagers
Infrastructure Co-Investment
Managers
Property Agents
Warakirri ValuersConsultants
Legal ServicesInsurance Tax ServicesFinance Services
Audit Services
External AuditInternal AuditJP Morgan(Middle Office)
JP Morgan(Back Office)
2.3.1.1 Portfolio Management
2.3.1.1.2Investment
Analysis
2.3.1.1.3Investment Selection (Stocks)
2.3.1.1.4Portfolio
Construction
2.3.1.1.1Investment Research
2.2.3.2Portfolio
Oversight
2.3.1.2.3Dealing Team Performance
Reporting
2.3.1.2.2Fulfilment Execution
2.3.1.2.1Trade &
Allocation
4.1.4Performance
Reporting
3.1.10Positions Reporting
3.1.9Cash
Forecasting & Reporting
3.1.13Broker
Performance Reporting
3.1.11Unmatched & Failed Trade
Reporting
3.1.14Post-Trade Compliance Reporting
3.1.15Daily
Performance Reporting
3.1.12Unmatched & Failed Cash Reporting
3.1.1 Counterparty
Set Up & Static Data
3.1.2 Investment &
Security Set up and Static data
3.1.5OTC Lifecycle Management
3.1.7Front Office to Middle Office Reconciliation
3.1.8Middle Office to
Custodian Reconciliation
3.1.4Income, Margin
& Corporate Actions
3.1.3Trade Matching
& Routing
3.1.6Investment Valuation & Accounting
4.2.2Settlement
Account Setup
4.2.3Trade
Settlement
4.2.4Income
Processing
4.2.1Portfolio &
Security Setup
4.2.6Custody to
Registry Reconciliation
4.2.5Corporate
Actions
4.2.7Unit Registry Processing
4.2.8Directions
Letter
4.2.9Title
Safekeeping
4.2.10Expense
Processing
4.2.11Unlisted
Settlement
4.2.12Custody/Unlisted
Asset Mgt Reconciliation
4.3.3 UBS Member Direct
4.3.3.1Cash Flow Reporting
4.3.3.2Member
Processing
4.3.2 Mercer
4.3.2.1Cash Flow Reporting
4.3.2.2Member
Processing
4.3.1 SuperPartners
4.3.1.1 Cash Flow Reporting
4.3.1.2Member
Processing
2.3.2.2.6Documentation
2.3.2.2.7Settlement
2.3.2.2.8Post-
Completion Settlement
2.3.2.2.4Detailed
Analysis & Approval
2.3.2.2.3Valuation
2.3.2.2.2Due Diligence
2.3.2.2.5Financing
2.3.2.1.2Investment Research
2.3.2.1.1Portfolio
Construction
3.2.13Crediting Rates
Review
3.2.14Middle Office Management
3.2.15SPV
Management
3.2.16Tax
Management
3.2.17Tax Reporting
3.2.11Performance Reporting & Attribution
3.2.12Valuation
Management
3.2.10Data Analytics &
Management
3.2.5Financial Reporting
(SPV)
3.2.6Portfolio &
Security Setup
3.2.1SPV Setup
3.2.2Income & Expense
Processing
3.2.3Cash
Forecasting / Reporting
3.2.4Commercial
Documentation Management
3.2.7Counterparty
Setup
3.2.9Liquidity
Implementation
3.2.8Compliance Reporting & Escalation
2.3.1.1.6Broker
Relationships
2.3.1.1.5Order Initiation
File Name & Version: AustralianSuper IIMP Target Operating Model v0.15 Draft 07 11 2012.vsd Date & Time Printed: 30/07/2012 6:22:26 PM
2.2.3 Investment Management2.2.3.4
Review & Monitor Investment /
Position
2.3.2.2.1Direct
Investment Platform
InvestmentCommittee
Board
Internal Investment Committee
Audit Risk & Compliance
1.2 Investment Governance
1.2.2Strategy
1.2.3Investment
Option Management
1.2.1Policy
1.1 Governance Structure
1.2.4Asset Class Allocation
1.2.4Investment
Management Agreement
1.2.4Monitoring and
Reporting
Organisational Capability
11
Internal Management Roadmap
A structured, low risk approach is being taken to allow AustralianSuper to deliver a fully functional internal management capability
12
§ Australian Equities § Infrastructure and Property
1. Develop Foundation 2. Establish and Enable Frameworks 3. Operate and Industrialise for Australian Equities,
Infrastructure and Property
Phase 1
§ Emerging Markets
§ Currency Overlays
1. Build-out Asia Strategy 2. Create internal capability in capital market activities
§ Fixed Interest and Cash § Developed Market
Equities § Private Equity
Build scale…
Phases 3-4 Internal
Management Capability
July 2013 July 2014
1. Continue to migrate to a hybrid model 2. Create benefits in areas where management fees
are highest and potential savings are greatest
Phase 2
July 2015
Establish capability…
Prove the model…
July 2016
Project Governance
13
Investment Committee
Steering Committee
Project Director
Benefits & KPI’sGovernance
& Structure
Equities Unlisted Assets Technology Infrastructure Middle Office Risk Management Organisational
Impact
Various Workstream Activity
Internal Audit Quality Assurance
Investment Management Technical Expertise
Project ManagementAssurance
Operational Governance &
Risk Control Oversight
Internal AuditIndependent Program Assurance
Quality Assurance
Industry ExpertiseDelivery Expertise
PMO Expertise
PMO Team
-‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐
Operational Risk Expertise
Investment Governance Expertise
Middle Office Expertise
PMOIndependent PMO Support
AustralianSuperInternal Audit Team
The delivery management of the Internal Management function is managed through a multi level governance structure