The seventh annual Institutional Excellence Awards encompassed one of the most challenging periods for investment in living memory.
Standout asset owners during this period have had to be nimble and responsive as conditions sharply deteriorated in late February and March, only to offer investment opportunities in fits and starts from April even as the global economic environment continued to struggle and a US presidential election reached its crescendo.
When choosing the winners of these awards, AsianInvestor and our select panel of expert industry judges took into account the ability of the region's institutional investors to adapt themselves to these unique challenges, in addition to their ability to maintain superior levels of strategic investment planning, maintaining and improving internal resources and personnel and preparing for the obstacles of the future. The winners were the institutions that could best demonstrate how they met these needs.
We open our final category of awards, for proficiency in certain areas, with our ESG Engagement and our Investing Innovation and Progress awards*. Below we detail how Commonwealth Superannuation Corporation impressed in the former, while Korea's National Pension Services takes home its second award for its impressive commitment to expanding its investment portfolio.
Commonwealth Superannuation Corporation (Australia)
As the organisation that invests the money of both soldiers and bureaucrats, the Commonwealth Superannuation Corporation (CSC) particularly feels the need to be above reproach and responsible to its members. This is evident from its own website, where members can delve in great depth into the nuances of how their retirement money is being invested, and the processes by which it conducts its decision making.
CSC takes this sentiment to its investing too. It takes pride in voting in all shareholder resolutions in companies that it owns. Plus, it discloses the carbon footprint of its public equities portfolio, as per its signatory status to the Montreal Carbon pledge to publicly disclose the carbon footprint of investment portfolios. As of June 30, this amount was 12% lower than its benchmark.
The pension fund already adopts ESG in its selection criteria for active managers, using qualitative and quantitative screens to assess their approaches to ESG in proxy voting, stock selection and engagement. It continues to add new investment tools too, and in 2020 it introduced a new index that tracks international equity portfolios optimised to reduce carbon exposure, rather than the more common market-capitalisation weighted index. It estimates the tailored index reduces its carbon footprint by approximately 50% relative to benchmark.
In addition, CSC added a resource efficient mandate that optimises exposure to companies that efficiently consume water, energy and waste reduction.
The superannuation fund also improved its internal analysis in 2020, expanding built out investment analysis tools to measure future climate related impacts to the valuation of companies under different scenarios, such as levels of global temperature increase or major policy enactments, while adding non-financial risk factors (such as carbon emissions, tobacco and child labour) to the dataset it maintains.
CSC continues to extol international efforts to expand ESG investing principles. It is a signatory to the United Nations Principles for Responsible Investing, which awarded it A+ ratings for Strategy and Governance and Manager Selection in 2020. Plus, CSC publicly supports the Taskforce for Climate-related Financial Disclosures (TCFD), which commit to raise transparency and disclosure of climate related financial risks.
In addition, CSC became a signatory to the Partnership for Sustainable Capital Markets in July, an organisation that focuses on ESG in long-term investing and warns that companies note taking it seriously damage their investing appeal.
CSC has also turned its analytical perspective onto its own operations. Its latest steps include reviewing the processes and procedures of all its suppliers, encouraging green practices in its own offices, and examining its operational exposure to climate change, including its own carbon footprint. CSC aims to practice what it preaches.
INVESTMENT PROGRESS AND INNOVATION
National Pension Service (Korea)
Korea’s largest investor has not been merely vocal about its desire to shift its massive investment portfolio. Instead, over the past few years it has assiduously done so – and has big plans to make further major changes in the years to come.
This should not be sniffed at, given that National Pension Service now has $750 billion to manage, and is predicted to continue rising to hit close to $1 trillion by 2024. Moving around such large sums is no easy task.
To manage this inflow of assets and still reach decent returns, NPS has already been making some changes, for example raising its exposure to global equities from 17.7% in December 2018 to over 23% in August. At the same time, the pension fund has deliberately reduced its exposure to low yielding domestic fixed income, down from 48.7% of AUM to 41.2% over the same period.
It has next set itself the goals of raising equity allocations to 50% and to alternatives to 15% by 2025. The pension fund has carefully planned how best to shift these assets; NPS’s fund management committee approved a road map to improve an alternative investment executing in May 2019 by the Fund Management Committee.
Ironically for a fund seeking to increase alternative investing, NPS’s allocation fell from 11.6% of its portfolio to 11% as of June. However, in raw numbers its allocations to real estate, private equity, infrastructure and other areas continues to rise.
As of the end of the third quarter it had 35.8% of its alternatives exposure in real estate, another 35.1% in private equity (which included hedge funds), and 29.1% in infrastructure. They have performed decently too; its property assets returned 8.59% domestically and 10.36% globally in 2018, the most recent year it broke down alternatives figures. In addition, private equity offered 6.67% and 12.27%, respectively, and infrastructure offered 6.15% and 11.12%.
To further bolster its alternatives investing, NPS has decided to team up with asset owners and specialists. In June it formed a $2.3 billion JV with Germany’s Allianz to invest in property. Then it agreed to conduct offshore alternatives investing with APG Asset Management of the Netherlands, in a demonstration of both its increased desire and willingness to cooperate in its plans.
The two pension funds co-invested into an Australian student accommodation provider in August 2020 and a Portuguese toll road operation in October, taking equal 50% stakes in both.
And in December NPS allied with property specialist Hines over a $1.5 billion JV that focuses on a build-to-core US portfolio. Don’t be surprised to see it continue to make similar alliances as it aims to hit the aggressive 15% alternatives allocation target it has set itself for 2025.
* The ESG Engagement award and Investment Innovation & Progress awards are newly created for 2020. They update and replace the previous Governance, Innovation and Investment Capabilities awards.
These award write-ups originally featured in the Winter 2020 edition of AsianInvestor magazine.