Mine Super targets operational alpha

Mine Super investment chief Seamus Collins says boosting returns by generating operational alpha has become critical for funds seeking a competitive advantage.

Before being tapped for the top investment job at Mine Super three years ago, Collins worked on the investment operations side of the business.

While funds often focus on investment alpha - the value-added that comes from investment decisions - operational alpha comes from everything else.

Everything else includes adopting new processes and procedures that permanently reduce costs and increase efficiency.

Collins believes that by improving implementation outcomes in operational cash management, agent lending, and transaction costs, even a medium-sized fund can save tens of millions annually.

To some extent, he is preaching to the choir as the top funds have upped their game considerably in operations.

"They optimise every point along the investment value chain, especially in a low-return environment,"

But there is always more to be done.

"While always important, operations is now recognised as a critical piece of the investment management puzzle because while you do everything possible to make the right investment decision, you can't always guarantee that the timing will be right," he explains.

Collins says the operations team can identify secondary additive activities that support the investment decision.

"At the pointy end of the investment process is a strategy, a decision, a conviction," he says. But there is a huge ecosystem surrounding that, and funds need the best infrastructure and ecosystem possible to give themselves the best opportunity to deliver on their objectives."

While funds need investment skills and experience, they also need a solid risk framework with data and reporting analytics. "One set of skills without the other is inevitably going to be less optimal," he warns.

Skills shortage acute

The trouble with forging an optimal investment chain is the paucity of skilled staff.

Despite the best efforts to strengthen its infrastructure, the talent shortage is acute.

"Recruiting people who have a deep knowledge of how investments work - all the way through from investment decision through to implementation and reporting is very hard to source," he says.

Even if you can recruit people with quantitative and data skills, Collins says they need to work with people who understand the end-to-end investment structure to be valuable.

What is worse, the source of operations talent has dried up.

Operations typically hired from the big custody banks - the best possible training ground for people coming into the industry.

However, given most of their operations have gone offshore, there is a much smaller pool of available people.

The big asset management houses were another source of talent, but again, there are fewer roles for local talent.

"The production line is changing in Australia," adds Collins.

"Fund managers and funds are competing for the same people, so it has become increasingly challenging to recruit and retain those key people.

"Once they know your business, they are virtually irreplaceable."

Engaging with graduate programs is an option. But despite his enthusiasm, Collins concedes that means committing to a long-term, ground-up education on investment to overlay those raw quantitative, technical, and coding skills.

"That's hard for everyone."

A different approach

Collins explains how his investment approach differs from his peers with an asset management background.

For a start, he does not lead from the front preferring to take on the role of mentor and coach.

He insists that Mine Super's investment team has more autonomy than a team run by a more traditional CIO.

"I'm loath to overrule specialists when they have high convictions as long as they can show me they have arrived at that decision through an informed process."

"While I will test the conviction of my asset class heads and my strategy lead, I see it myself as a coach who empowers the decision-makers."

The decision to take on the role of CIO prompted a rare moment of self-doubt about his operations background.

"People looked at the CIO as a magician who knew where the market was going and what strategies would succeed."

Now with three years under his belt, he has leaned into the job.

"Talking to all the CIOs in the market makes you realise that they all bring different qualities.

"You can't try emulating a CIO that you admire tremendously. When you don't have their background or skillsets, you need to lead in a way that works for you and your fund."

Because Collins does not have an asset management background, he is not married to any particular investment style.

He has a strong generalist view with no bias to any particular investment strategy or style.

However, he does set guardrails against costly investment structures to ensure that Mine Super is efficiently and cost-effectively achieving its risk-adjusted return goals.

Avoiding hedge funds

Because of his background, Collins remains skeptical of active risk in international developed markets because it is hard to deliver consistent alpha over the long term.

No surprise there, given the performance of this asset class.

It is notable though that he has cut the allocation to hedge funds to zero because of their high cost and carry structures.

"You have to buy in with a very high conviction that they will achieve a very consistent outperformance to cover the fee load over the distance."

The big question for the investment chief is what equity risk threshold limits a fund, where are interest rates going, what level of currency exposure should be adopted, and how much illiquidity does the fund accept?

Unlike some other funds, Collins is not actively tilting away from equities despite being nervous about a volatile market.

He remains cautious about Mine Super's liquidity position so will not aggressively lean into illiquid assets like some other funds with different demographics.

Being benchmark conscious - because of heat maps and Your Future, Your Super - Collins has slightly more interest rate risk exposure than some other funds.

Collins notes that the US inflation rate has just hit an eye-watering 7 percent. And, that the US Federal Reserve is looking to tighten policy.

"We haven't seen those inflationary pressures in Australia yet, and we are hopeful that they won't play out here to the same extent although we are seeing concerning signals."