Latitude Financial a victim of strategy shift as industry superannuation funds dominate

A shift to long-term investment strategies is long overdue. Picture: Adam Yip

The failure of the $1bn plus Latitude float the first clear example of the fundamental changes that are taking place in the way the Australian equity capital market operates.

Every major Australian company needs to understand that these changes in the way equities are assessed will be fundamental to future strategies. Latitude’s advisers did not fully appreciate the implications of the new game.

Half a decade ago, Sydney’s AMP, MLC, Colonial and Perpetual dominated the Australian equity capital market. They outsourced management of a large portion of their portfolios.

Read more: No option for savers as banks cut deposit interest rates | Tax-ignorant super funds ‘losing billions of dollars’

Industry funds were important, but they too outsourced management to similar groups to those the retail majors were using. It was a long-established mate’s game and it was easy get things organised “on the nod” at casual meetings in the harbour city.

Fast forward to October 2019. AMP, Perpetual and the other giants are in decline or struggling. They are fearful that a major error will accelerate the exodus from their funds.

Their dominance has been replaced by the industry funds that are mostly based in Melbourne. They have very different agendas and investment criteria to the Sydney-based giants.

Latitude Financial Group CEO Ahmed Fahour. Picture: Stuart McEvoy.

The largest is the gorilla – AustralianSuper – which in 2018 was managing around $140bn. It’s now headed towards $250bn and in five years looks like managing $300bn – more than double level of last year.

Strategy shift

Simply coping with such an enormous influx of money is a big challenge. But it also provides a unique opportunity to set new strategies. AustralianSuper is assembling a management team to do most of its investment management in-house, including the management of overseas shares. The other industry funds are smaller but are also growing.

Some are still outsourcing investment management but there is a clear swing away from that strategy as the funds get larger. While the new money totals are spectacular, the bigger story is the change in direction.

For the last few decades institutional analysts have concentrated on mindless games to try and predict next year’s profit. It was all about the short term.

While that’s still going to be part of the game, AustralianSuper and many of the major industry funds see their obligation as a long-term one and want to talk directly with management about their long-term plans. They will assess what is happening in the short term against those long-term plans. The industry funds are investing for long-term retirement obligations.

Given their connections with the trade union movement, high executive and director rewards will be frowned on unless there has there been a sustained, top-class performance over the longer term.

Latitude failed to jump that hurdle and probably stumbled on others. But the on the surface the shares did not look expensive. But once AustralianSuper said no, there was a good chance other industry funds would follow.

In the current environment, once that happens it’s hard to muster sufficient support among the retail funds, and self-managed funds are hard to access.

At the ADC Leadership retreat on the Gold Coast earlier this year, AustralianSuper’s chief investment officer and deputy CEO Mark Delaney detailed the strategy.

AustralianSuper chief investment officer Mark Delaney. Picture: Eugene Hyland

Funds to grow

These strategies are now being implemented. Recently a larger Australian company in which AustralianSuper has a major stake went to the fund and set out plans to expand overseas. It was expecting to be rejected, because the extra funds and the long term nature of the overseas investment would cause the share price to fall in the short term. AustralianSuper loved the long-term strategy and agreed. The company was stunned.

In another area the industry superannuation funds, led by AustralianSuper have reversed their long-established investment policies to avoid backing developing Australian technology and decided to invest a small part of their funds in global groundbreaking Australian stem cell technology via Mesoblast. The shares have fallen below the placement price but Mesoblast, like CSL in the early days, has the chance to be a world leader in developing medicines from human cells.

Basis for comparison

Unfortunately, given the size of AustralianSuper and the industry funds, there are not enough opportunities in Australia and large portion of the funds will be invested offshore. That gives the opportunity for fund managers to compare Australian strategies with those of similar companies overseas.

Accordingly, Australian banks will have to tell the truth and confess that their old computer systems will not enable them to prosper in the next decade and leave them vulnerable to cyber-attacks. I pointed out the implications of this to profits and dividends last week.

This change in direction in equity strategies is long overdue. For too long we have played the mindless short-term games and it is reducing the nation’s productivity and performance. Lower interest rates have masked the underlying trend in too many Australian companies.