Poor Investment governance costly for asset owners

Poor investment governance could cost asset owners, and in turn their customers, significant sums – in the case of a super fund member as much as $500,000 over their working lives, a new report by KPMG Australia and Frontier Advisors finds.

A survey of institutional asset owners completed as part of this research, found that two-thirds believed the penalty of poor investment governance, in terms of increased costs for a portfolio, could reach 1%  or more, p.a., over time. 82% said the negative impact could be -0.75% p.a. or worse.

For a 25-year old super fund member, the impact of a 1% reduction over the course of a working life could be up to 40%, or half a million dollars, less in a retirement payout than if they had been in a fund with better investment governance.

More positively, 62% of survey respondents said the dividend or benefit of good investment governance could amount to 0.5% p.a. or more of additional investment return over time.

The report sees KPMG and Frontier pooling their expertise in a first-of-its-kind analysis on an area fast emerging as one of the most important challenges for large investors to address.

Platon Chris, KPMG Consulting Partner, said: “The Frontier survey demonstrates a very clear recognition of the potential value derived from, or potential capital eroded by, the gap between well-governed  and poorly governed funds. This comes from the coalface – the funds themselves.  The importance of the implementation of robust investment governance frameworks by asset owners cannot be overstated.”

Sarah Cornelius, Head of Investment Governance at Frontier Advisors, said: “Good investment governance is paramount as it safeguards stakeholder interests, promotes market stability, ensures long-term sustainability, enhances performance and facilitates regulatory compliance. By adhering to principles of transparency, accountability and integrity, asset owners can build trust, attract capital (or new members in the case of super funds) and also attract top talent and foster innovation. All of which creates long-term value for stakeholders.”

• 37% of surveyed asset owners say they need to examine their investment portfolios through too many lenses – return, risk, peers, regulatory benchmarks, ESG among others.
• 33% of surveyed asset owners feel there is too much focus on the short term – and the long-term maximum benefit may not be the sum of a series of short-term time periods.
• 68% of respondents said the current investment governance landscape was better than ten years ago, with only 3% disagreeing, but 92% said it has become increasingly complex over the past decade.
• The complexity of investment governance extends beyond large asset owners, with more than 94% of respondents acknowledging the heightened intricacies faced by smaller asset owners.

The top two challenges nominated by Australian asset owners were: establishing a clear mission plan for investments; and having a plan that everyone understands and buys into.

Mr Chris said: “Governance practices which have served us well in the past may not be as suitable for the future environment - the evolving landscape of technology, ESG, climate factors, a dynamic regulatory environment, coupled with the increasing globalisation of markets, is putting pressure on investment governance models and capabilities to adapt and innovate. Cyber security breaches and the ever-increasing threat of cyber-attacks also pose real challenges.

He added: “Traditionally, investment governance structures have been rigid and hierarchical. With the current, and likely future, environment being more volatile, investment governance models will need to exhibit the ability to be nimble and adapt, and avoid group-think through recognising the need for diversity in decision-making.”

In regard to these key areas, Ms Cornelius said “Organisations need to assess what they need to focus on and where shortfalls exist. This then enables the efficient deployment of skills, resources and time to focus on those areas of highest importance. Internal asset management requires robust oversight, review and challenge. Proper oversight is a crucial component, and the focus of the oversight should not only be on the investment teams themselves, but also on the investment models they use to drive their investment decisions”.

Some of the key challenges for the governance of large super funds included:  

• organisational culture – with an increasing number of staff, often across different office locations and increasingly in different geographies, it can become more challenging to maintain or evolve organisational culture
• proper oversight of internal asset management – as large institutional asset owners grow, so too does the incentive for internal asset management, as the potential for lower fees and greater control over investments (amongst other benefits) can drive its appeal. But there are also potential investment governance risks, with robust oversight and review required.
• focus on a collective outcome – as institutional asset owners grow, teams can become more fragmented and risk operating in silos. For large asset owners, a common goal and alignment of mission is critical for success.
• unlisted asset valuations – Unlisted assets have become a growing focus for both institutional asset owners and regulators as changing market conditions have amplified risks. Unlisted investments can add to investment management complexity and create unique valuation challenges for institutional asset owners, both under business-as-usual conditions and (particularly) through periods of market volatility
• accountability for outcomes – poorly designed remuneration structures and accountability mechanisms can reinforce a poor risk culture and negatively impact the organisation and its stakeholders.

Mr Chris said: “We believe this report offers a glimpse into the intricate dynamics facing asset owners both in Australia and internationally. The survey underscores the sobering reality that asset owners face penalties for poor investment governance practices. Combined with the notion of forsaken investment performance, this amplifies the urgency for institutional asset owners to adopt robust investment governance frameworks that not only mitigate risks, but also foster sustainable growth”.

Ian Welch
KPMG Communications
0400 818 891
iwelch@kpmg.com.au

Wayne Sullivan
Director of Marketing and Business Development, Frontier Advisors
0410 078 611
wsullivan@frontieradvisors.com.au