Frontier: The high-stakes business of managing offshore staff
Under intense pressure to deploy their fast-growing asset base, the nation's top super funds are building up their internal teams in New York and London and scouring markets for private market deals.
Polson says finding more ways to deploy capital by moving offshore brings more operational complexity and cultural stretch.
While developing offshore teams makes sense, he warns that competition in private markets is extremely tough, and teams must be capable.
By his lights, local funds are not at the world's best practice on cost or capability.
"It's not that many funds haven't grown very good internal teams - it's just that best practice is not sustainable in every asset class," he says.
The Frontier chief thinks the large offshore pensions have seen internalisation strategies lead to the development of lots of silos and a focus on creating excellence in those silos "which is fine until it all kind of got a bit disconnected from the underlying portfolio strategy"
Polson sees an opportunity for the big Australian asset owners to learn from the trillion-dollar-plus megafunds.
He argues that the largest off-shore pension funds have unwound internalised strategies that were not demonstrably best practice and not well aligned with the fund's overall portfolio strategy and culture.
"Ultimately, you got to be convinced that what you're doing with your internal team is as good if not better than what you can get from the market," he states.
Whatever they do, Polson goes on to say, large and mega local funds need to have a developed operating model that can continue to cope with deploying significant cash.
For example, Australian Super reckons around 70 per cent of newly deployed assets will be managed offshore.
Polson believes that the task is to figure out ways to keep people deeply connected to the investment culture and the overall portfolio."
He says it is critical that any individual sleeve or capability is intrinsically linked to the total portfolio and that senior people in each team understand and are happy with that link since it relates to their exposure and reward.
This is especially the case for those investment professionals with no background in super, joining from funds management.
So how do funds juggle the need for excellence in specific areas like private markets but connect back to the whole portfolio when there is an inherent desire to keep pace with that growth?
The collegiate approach
Polson concedes that there is a natural motivation to grow one's piece of the pie.
But he thinks this natural human inclination should be actively leaned against to find the right balance.
"The overall portfolio strategy must be the foundation stone that defines culture and required capability that can be housed within a fund. Remuneration and reward structures must re-enforce that foundation. This approach will identify what can be developed and sustained within a fund and what should not," he adds.
"For example, if an internal private equity team is shooting the lights out, and they are running an independent sleeve, they will want you to allocate every dollar to private equity.
"But you're only going to allocate a certain percentage to them in your fund. If this is incongruent with their capacity and desire to be rewarded, you risk ending up with a fundamental disconnect with those people culturally. They will be extremely hard to manage; it's very hard to hold them back."
Polson says it's important that as these funds grow, they step back and check that their activity fits with what they're trying to achieve.
"If they don't, things won't always work out as well as they would like.
The asset consultant says it's easier to just grow teams; it's very hard to grow in a coordinated way.
Polson argues that if funds cannot balance the growth of internal strategies with a whole portfolio approach, they should not manage those strategies in-house.
On the positive side, Polson expects that as super funds get bigger and bigger, their capacity to negotiate better deals from external vendors will continue to improve.
The asset consultant notes that Aware Super, Australian Super and Australian Retirement Trust have all reshaped their investment teams as they expand.
Polson expects to see many more such overhauls, given the speed with which super funds have expanded their internal teams.
From where he sits, it just means there are times when the old super fund model has stopped working.
"Funds are undergoing substantial changes. As they grow, the type of personal funds needed to run a particular area will change because the challenge becomes different," he adds.
"I'd be worried if they weren't adapting their investment teams."
Outlook
How the funds handle the break-neck speed of growth is particularly tough in an environment characterised by central banks unwinding extraordinary amounts of monetary policy that would cause problems.
The bigger issue is that we're now unwinding it when inflation has got a bit out of hand."
"With central banks having already raised rates very quickly and still having to focus on persistent inflation, things will likely go bump in the night. And to be honest, some of that excess needs clearing."
On top of that, Polson notes, the recent US bank failures have revealed an extreme mismatch of assets and liabilities in their business models and a persistent challenge in banks managing their profitability as rates adjust, particularly in parts of the US banking sector.
Subsequently, if inflation stays persistently high, he says, you have this mismatch of short-term and longer-term rates that will challenge profitability and restrict credit but will likely play a positive role in moderating demand and bringing down inflation.
"But, that's a fundamental profitability problem for banks, particularly in the US," he warns.
He can see a potentially bumpier environment and some credit events.
For all investors, there will be an adjustment phase.
"We've kicked the can down the road for a long time. I don't see that we can easily kick the can again."
