# The Australiansuper Model

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Language: `en`

[00:00:00.000] Hello, and welcome to another episode of Peer Connections by Global Peer Financing Association,
[00:00:06.520] GPFA. My name is Shireen Silver. I work in the business management team for FIC and Capital
[00:00:13.020] Market at Australian Super. Today, I'm joined by Joris Hillman, Head of Capital Market,
[00:00:19.670] and Mike Fitzsimmons, Manager of Securities Lending. Welcome, Joris and Mike. Maybe you
[00:00:25.350] can start by giving our listeners a bit of background on yourselves.
[00:00:29.270] Thanks, Shireen.
[00:00:30.130] My name is Joris Hilman.
[00:00:31.530] As Shireen said, I'm head of capital markets.
[00:00:34.050] I've been three years with Australian Super.
[00:00:36.470] And before that, I worked for ING Asset Management and Macquarie Asset Management globally in
[00:00:42.470] the Netherlands, the UK and in Australia.
[00:00:45.170] And my name is Mike Fitzsimmons.
[00:00:46.770] I'm the manager of securities lending within the capital markets team at Australian Super.
[00:00:52.030] I've been at Aussie Super for eight years and have worked in a variety of roles through
[00:00:56.990] investment operations to fixed income and currency management and prior to my role at Aussie Super I
[00:01:04.070] worked at the Future Fund which is Australia's sovereign wealth fund. Mike perhaps you can
[00:01:09.630] provide some background on Australian Super that might set the scene before we get into more detail
[00:01:15.450] about securities financing. Sure thing. So Australian Super is a superannuation fund which
[00:01:22.490] is the equivalent of a pension fund or super funds as they're called in Australia. It's a
[00:01:27.590] defined contribution fund and employers are mandated to contribute on behalf of employees
[00:01:34.370] around 10% of employee salaries. Australian super has 2.4 million members or one in 10 Australians
[00:01:42.110] and around 200 billion Australian dollars in assets under management or around US 150 billion.
[00:01:48.910] And the fund has grown in size by between 10 and 20% AUM each year for the past 10 to
[00:01:55.690] 12 years.
[00:01:57.030] So very strong inflows and a fairly young member base.
[00:02:00.910] So that means that we have a large proportion of growth assets.
[00:02:05.570] As an investor, we're an active investor.
[00:02:08.190] We're active in ESG as well.
[00:02:10.350] So we commit to carbon neutral.
[00:02:12.530] We have some restrictions on things like tobacco and just an active portfolio management policy
[00:02:17.730] as well.
[00:02:18.940] The other big thing that's worth mentioning is that before 2013, we were entirely externally
[00:02:25.760] managed from a portfolio management perspective. We did have some asset allocation in-house,
[00:02:30.760] but from that point in time, we've been gradually internalising management of assets and
[00:02:35.340] we're around 40% to 50% internally managed now. And one of the recent teams assembled within that
[00:02:42.060] internal management is Capital Markets, which Yoris could probably talk a little bit about.
[00:02:48.190] Yaris, just leading on to that.
[00:02:50.030] So one of the more recently created internal capabilities is the capital markets team.
[00:02:55.870] Can you tell me how this originated and what the role of the capital markets function is?
[00:03:02.100] Sure.
[00:03:02.460] So about three years ago, we were thinking about how to optimize our internal structure
[00:03:09.260] and to maybe centralize all our implementation and exposure management.
[00:03:14.320] With this, we constructed the capital markets function.
[00:03:17.400] where we combine all our trading activities, which trade for all our internal portfolios and also all our overlay portfolios.
[00:03:26.000] Secondly, our exposure management team, they basically manage all our exposures.
[00:03:30.580] They implement all our asset allocation, do all the rebalancing that comes from member flow.
[00:03:37.160] They also do all our currency hedging and also our internal transition management.
[00:03:41.780] And thirdly, our balance sheet management team.
[00:03:43.960] The balance sheet management team looks at our liquidity, also initial margining, and
[00:03:49.400] stock lending is a big part of that.
[00:03:51.620] So we combine these to basically centralise our operational risk to be much quicker in
[00:03:57.140] the market and to really have the assets in one hand where we can implement when we want
[00:04:03.000] and how we want and really have that centralised function.
[00:04:06.770] Mike, that leads into the securities lending program.
[00:04:09.950] Can you discuss how that program has developed over time?
[00:04:14.110] Sure.
[00:04:14.830] The origins of the program are probably similar to many programs where securities lending
[00:04:19.070] was originally with a single agent lender and had some oversight from investment operations,
[00:04:24.670] but it largely ran its course as a ring fence program and wasn't really integrated in the
[00:04:31.590] investment decision making, even though it had a small incremental alpha budget.
[00:04:36.250] We still maintain a single agent lender, but we have added some direct lending arrangements
[00:04:41.930] over time where it's made sense and this is where we expect will be an area of growth for the
[00:04:47.750] program in coming years. It was only around five years ago that we segregated activities appropriately
[00:04:53.030] between the investment and operations teams or front and back office and since then the program
[00:04:58.770] has added more in the way of dedicated resourcing to support the function. So that's really evidenced
[00:05:04.830] in legal, in operations where we have a dedicated cash and collateral operations team but we have
[00:05:10.930] engaged with tax services. We have a counterparty management group that's been fleshed out and
[00:05:16.410] provides some oversight to some of our counterparties and the exposures and qualities
[00:05:22.010] that we have within our counterparty set. So it is a more integrated function. Now our budget
[00:05:28.150] and strategy is endorsed by the investment committee and our total portfolio management
[00:05:33.690] team. So similar to our other internal investment mandates, securities lending has, I guess, a
[00:05:39.810] similar front to back of the investment process. And probably the other changes that have occurred
[00:05:46.090] over the last four or five years have been in relation to data, which historically was very
[00:05:52.830] immature, risk management and program governance. And technology is something that we're on the way
[00:05:58.650] with now, where we're looking at a vendor solution for balance sheet management in general.
[00:06:04.320] Securities lending is integrated as an internal investment process. It's still considered as
[00:06:09.220] small contributor to incremental income. And the program risk appetite for loss, either via
[00:06:15.580] counterparty default or cash reinvestment, is fairly low. And therefore, the rules that we
[00:06:20.840] have on the program are also reflective of that. On the lending side, we're able to lend all
[00:06:27.480] publicly listed assets are lendable and unrestricted. So that includes debt and equity
[00:06:32.800] instruments. We have a split of decision-making. So we have the agency program that typically
[00:06:39.920] lends on an overnight basis, and I guess is responsible for a lot of the lending churn.
[00:06:46.060] And really the internal team is responsible for some of the things that are a little bit
[00:06:52.100] more nuanced. So it might be...