legalsuper: Bucking the trend

By Elizabeth Fry

Right now, it's business as usual for legalsuper no matter how discouraging the prudential regulator's performance test might be for other superannuation funds.

That's because the $5 billion industry fund dedicated to the legal community consistently delivers above-average returns and has a high level of member engagement.

Legalsuper's resilience means it has a sizeable buffer between itself and APRA's benchmark.

And, based on the release of performance test results in December 2021, legalsuper's MySuper option had outperformed the APRA benchmark, and with outperformance this financial year, the buffer is expected to increase.

"We are in a fortunate position," said the fund's chief executive Andrew Proebstl. "If you were closer to failing the performance test, you might be a bit concerned but we are comfortable because of the buffer we have.

Proebstl says while the performance test is one consideration in the fund's decision-making, it's not blocking or changing its investment strategy.

Worrying about the risk of going against the performance test forces some funds to gravitate towards a constrained asset allocation approach.

"There has been a lot of talk about funds moving to passive investing for fear of failing the test," he adds.

And, Proebstl is aware some funds may feel the performance benchmark constrains innovation and creativity.

"However, we won't be going passive to mitigate the risk of underperforming; we will continue to have conviction in active management."

Especially, since legalsuper's active approach to asset allocation has boosted returns.

Finding alpha

Simply put, the fund is smashing it.

Its MySuper product delivered returns of 2.6 percent for the financial year to 30 May 2022. This is three percent above the SuperRatings median of -0.4 percent.

"Getting alpha is key," he argues." We will remain a high conviction investor and achieve a different outcome by capitalising on price mismatching and innovation.

The fund might tweak dynamic asset allocation given the market turbulence, and the prospect of aggressive central bank tightening and recession. But, at present, the focus is on actively monitoring developments and being prepared to make changes that add value.

Commenting on the latest market rout, Proebstl says it's more about the shock factor of inflation numbers and the pace of rate rises that worry us from an equity investor standpoint.

"Gradually increasing inflation and rates is something markets have historically weathered well, and equities performed reasonably in that market because they typically occur during periods of healthy economic growth.

What is worrying today, he goes on to say, is the sharp acceleration of interest rates.

"This may have an immediate and sizeable effect on consumer confidence and companies' ability to service debt. Unless managed well, this could spark a debt crisis that will be unfavourable for equities."

Proebstl says there is no silver bullet that guarantees overall success. He puts culture, teamwork, and the scale and expertise of its external partners at the core of the fund's success.

But, it's not just about appointing a manager and giving them a mandate but having a proper cultural fit and a no-limits partnership.

legalsuper has a culture founded on conviction in the fund's overall purpose which is to deliver outstanding retirement outcomes for a smart, financially literate, and highly engaged member base.

"Members like to discuss returns through innovation or a price mismatch -our investment strategy is also an engagement tool as members are very interested in why particular investments sit in the portfolio," he says.

Because of its style, Proebstl fervently believes legalsuper has a better shot at making its team really hum.

"The energy vibe doesn't come automatically; it takes a lot of hard work, focus, and sincerity," he explains.

The super fund argues that its culture is a point of difference - especially critical when hiring.

Scale is not everything

Demotivated by bureaucracy and having little influence over decision-making, many investment professionals want to work in smaller funds where they can make more of a difference.

"A fund like ours is getting an opportunity to be a fund of choice because we are doing things differently from the big funds," he says.

While every super fund wants more resources, Proebstl remains convinced that legalsuper's scale comes with operational efficiency advantages.

"We have a line of sight through the organisation since it is less complex than a monolithic fund. In managing risk, if something happens, we jump on it immediately - we can adjust portfolios quickly since we don't have high levels of bureaucracy to navigate."

Still, there are roadblocks.

For example, high levels of member expectation around engagement and presentation of information  - plus the highly discerning nature of legalsuper's members and employers - mean engagement and communication must be top-notch.

The 'scale is everything' rhetoric  is viewed differently by legalsuper.

Incidentally, even funds that aced the regulator's performance test are under pressure to merge with similar funds to improve member outcomes.

But Proebstl argues that there is no one single solution that can be unilaterally applied across the industry.

He firmly maintains that super funds should be judged on the net outcome and experience for the members. Plus, he insists that the fund has sufficient scale to meet its strategic goals. "Different funds are doing things differently."

Proebstl is often asked if legalsuper will merge with a bigger fund.

"There is no natural partner; no compelling business reason to merge," he explains, conceding that the fund's high balance members make it very attractive.

A couple of thousand members hold a quarter of its assets.

Proebstl refutes claims smaller funds struggle to absorb costs and can't offer competitive fees, stating that legalsuper's costs are in line with the industry.

Importantly, he says, the pressure on fund managers is building as asset owners bring more assets in-house - a trend that profoundly reshapes the relationship between the two.

The chief executive notes that life has become incredibly challenging for the typical investment manager as the pool of prospective clients reduces with increasing internalisation.

"Fund managers have a hole in their business that they need to plug, so smaller and medium-size funds are becoming more important," he says.

Not surprisingly, legalsuper has been able to negotiate lower fees. "Some people think you need to be a big fund to get fees down, but you really don't," he says. "If managers can develop a true partnership with smaller asset owners, they will win long-term clients."

Because of its scale, legalsuper can capture opportunities denied to big funds.

"Certainly, with small-cap stocks, we can make a meaningful placement of capital that they can comfortably accommodate where bigger funds cannot," he says. That goes with venture capital deals which come to a small fund given the small amount of money involved.

And initial investments made in 2021 are starting to bear fruit.

Recent examples include Josh - India's version of tik tok - which has returned 20 percent, an Australian-focused private growth fund that sits alongside the Clean Energy Finance Corporation.

Last year, legalsuper invested in Artesian Female Leaders VC Fund alongside Hostplus.

"The fund helps address the imbalance between male and female entrepreneurs as most venture capital the money goes to men," he notes.

"While investment fundamental is top of mind, 70 percent of our members are female, and we think they will see it as a clever and innovative way for our fund to boost returns."

That brings him back to his membership and the fund's purpose.

"I know how impactful it can be to have clarity of purpose to buck the trend and do things differently.

"For us, challenging conventional wisdom continues to unify and energise our team who thrive on demonstrating the benefits of our differentiation to our members," he concludes.