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  ManagementOrganisational  

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