MLC MySuper investment budget was tight-fisted: Royal Commission

NULIS Nominees resisted increasing its spend on investment management, despite opinions from its super fund portfolio manager and asset consultant that its current investment fee budget wasn't adequate to boost the performance of its lagging MLC MySuper product, the Royal Commission heard.

Resuming former NULIS chair Nicole Smith's questioning on day three, senior counsel assisting Michael Hodge attempted to highlight conflicts of interest in MLC's MySuper product.

The fund was performing in the bottom quarter of peer MySuper products, returning about 1.9% in 2016. Yet the management and the board had been failing to work together to set aside a budget for the investment team to invest in unlisted growth assets, which during the low-interest environment were driving up gains for other super funds.

However, had the trustee pushed for an increase in the investment budget, it would have tightened the belt on the profit that goes back to NAB Group, senior counsel assisting Michael Hodge said.

"Does it strike you, looking at this that again there's a conflict here which is that somebody from the NAB Wealth Group needs to come to you and say we want to give up the profit in order to improve the performance of the member's investments," he said.

In another conflict of interest highlighted by Hodge, prior to July 2016, MLC Life Insurance's policy limited exposure to illiquid assets, the Commission heard.

"The problem effectively went away because the insurance company was sold," Hodge said.

JANA's view

The inadequacy of MLC MySuper investment budget to lift its performance was brought up by a quarterly report submitted from its asset consultant JANA and received by Smith as a member of the investment committee.

JANA termed the performance at the time "in-line with the expectations" given the initial product design, however it also said:

"JANA believes that the initial fee budget (including the indirect cost ratio) put a significant limitation on the level of the illiquids in the portfolio.

"In addition, the operational requirement for the creation of zero dollars day one and no legacy options suggests that even if the fee budget had been larger, the MySuper option was always going to have lower allocation to illiquids than peers and there was nothing that JCIS [NAB committee that chooses investment managers] could have done to change this outcome," it said.

JANA was wholly-owned by NAB Group until a management buyout about two years ago, Hodge laid out earlier in the line of the questioning.

Delay in ADA transfer

The transition from accrued default amounts (ADAs) to MySuper meant a large group was not transitioned until March 2017, and Hodge suggested this as one of the reasons of its underperformance.

JANA's report also addressed the ADA transition.

"The delay in transferring the ADAs over to the MySuper product was one part of the explanation of the lack of exposure for MySuper products from the unlisted assets," Hodge said.

Smith conceded, saying the words on the paper did read like that.

Trustee sets goals for MLC MySuper

The trustees set a goal of getting the MLC MySuper product to exceed the 60th percentile in the SuperRatings Survey in five years.

At the time, the fund's portfolio manager "voiced a strong opinion" against the possibility of achieving it on the current fee schedule.

"[The] portfolio manager has voiced a strong opinion that this objective will be very hard to meet at the current fee budget and JANA shares a similar view," Hodge said citing a report presented in evidence.

Smith said the fund did not bump up the budget and the current portfolio manager is of the view that the goal is achievable.

Read more: JANAMLC MySuperRoyal CommissionMichael HodgeNULIS NomineesJCIS NABMLC Life InsuranceNAB Wealth GroupNicole Smith
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