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Does Private Equity have a role in Superannuation Portfolios? Kar Mei Tang AVCAL 18 th Melbourne Money & Finance Co

Does Private Equity have a role in Superannuation Portfolios? Kar Mei Tang AVCAL 18 th Melbourne Money & Finance Conference 1 & 2 July 2013. Why do pension funds currently invest in PE?. Ave. PE allocation (% of assets) of pension plans, by country/region. Target superior LT returns

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Does Private Equity have a role in Superannuation Portfolios? Kar Mei Tang AVCAL 18 th Melbourne Money & Finance Co

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  1. Does Private Equity have a role in Superannuation Portfolios? KarMei Tang AVCAL 18th Melbourne Money & Finance Conference 1 & 2 July 2013

  2. Why do pension funds currently invest in PE? Ave. PE allocation (% of assets) of pension plans, by country/region • Target superior LT returns • Diversification • Future Fund:- PE fulfils 2 functions in the portfolio: high alpha, and exposure to investment themes not available through liquid assets Sources: Bain Global Private Equity Report 2013, Mercer European Asset Allocation Survey 2012, Preqin, AVCAL analysis.

  3. Meeting the returns challenge Australian PE vs ASX 300 returns (31 Dec 2012) Source: Cambridge Associates, returns as of 31 Dec 2012. C|A Australian PE Index returns are net of management fees, expenses, and carried interest. Source: Commonwealth Superannuation Corporation

  4. Manager selection is important too Australian PE vs super returns Australian Top 2-quartile PE vs Top 2-quartile super returns 1-yr 3-yr 5-yr 10-yr returns returnsreturnsreturns 1-yr 3-yr 5-yr 10-yr returns returnsreturnsreturns Sources: Cambridge Associates, Chant West, AVCAL analysis. Returns as of 31 Dec 2012. Super funds data for Growth options only. All returns are net of investment fees and tax.

  5. Come for the returns, stay for the diversification Australian PE vs ASX 300: Quarterly returns Australian PE vs ASX 300: Annual returns Volatility of quarterly returns: PE & VC Index stdev: 4.9% S&P/ASX 300 Index stdev: 8.1% Freq. of positive returns: PE & VC Index: 71% S&P/ASX 300 Index: 58%   Volatility of annual returns: PE & VC Index stdev: 14.4% S&P/ASX 300 Index stdev: 17.9% Freq. of positive returns: PE & VC Index: 75% S&P/ASX 300 Index: 67% Sources: Cambridge Associates, S&P, AVCAL analysis

  6. But… • Liquidity • Fees

  7. Liquidity Illiquid asset allocations linked to higher  • Managing liquidity risk: • APRA guidance • ASFA, FSC guidance • Stronger Super reforms • Internal controls • An allocation to illiquid assets does have a risk-adjusted return payoff • Cummings & Ellis (2011) looks at Australian DC investments in illiquid assets • Funds with moderate (below 30%) allocations to illiquid investments have higher risk-adjusted returns Source: Cummings and Ellis (2011)

  8. Fees • MySuper trustees have “a specific duty to deliver value for money as measured by long-term net returns, and to actively consider whether the fund has sufficient scale” • Delivering better LT net returns through • Asset allocation decisions • Cost reductions • Defined Contribution Inst. Investment Association (2013): • Asset allocation, not fees, is the key reason behind the DB/DC returns differential • Productive vs unproductive fee components? • PE investment managers generally earn their fees through higher returns • Robinson and Sensoy (2012), Cummings and Ellis (2011), Higsonand Stucke (2012), Harris et al (2012), Acharya et al (2013) • Costs can be reduced through fee negotiations and economies of scale • Dyck and Pomorski (2012) • Cummings (2012)

  9. Are policy levers moving default super funds away from optimal asset allocations? Dollar cost driving asset allocation decisions At some point: tradeoffbetween low cost and returns/diversification MynersReview (2001) Broadbent, Palumbo and Woodman (2006) What are the choices available to members seeking more returns/diversification through super investment options? Fund performance tends to converge in narrow range in LT. Unintended consequences

  10. Spread of premixed super fund returns Best performing fund: 7.6% ann. Worst performing fund: 5% ann. Sources: Chant West, AVCAL analysis. For the Growth options of 59 superannuation funds as of 31 Dec 2012.

  11. Summary • Retirement savings adequacy  a looming problem • PE has historically delivered, but good manager selection and a LT focus needed • Room for more diversity in: • asset allocations • options available to members wanting access to high-performing asset classes through super • Further work: • getting members more engaged • policy levers with unintended LT consequences • look at global best practice: how mature pension PE programmes approach the asset class to deliver value

  12. Thank you

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