Refugees and Investment: Creating Connections

On Tuesday 19th August, Australia for UNHCR hosted its first Melbourne fundraising luncheon. Representatives from the finance sector including many superannuation funds raised funds to respond to key humanitarian crises in Syria, South Sudan and the Central African Republic.

One of the highlights of the luncheon was the chance to hear the story of Garang M. Dut, a Sudanese refugee who was born in Southern Sudan in 1987. Garang ultimately spent most of his childhood in refugee camps including the Kakuma Refugee camp in remote Kenya.

Garang learnt to write in dirt in an open field in 40°C temperatures. His intellectual capacity shone through even in this harsh environment as he topped his classes, being rewarded with additional pencils and writing materials. In 2005, Garang arrived in Australia and went to school at Sunshine Secondary College where he finished second in Year 12, narrowly missing out on his ambition to study medicine. Not to be daunted, Garang studied Biomedical Science at Monash University, recently transferring to Melbourne University where he will soon graduate as a doctor of medicine.

Garang’s story is one that has been repeated by migrants to Australia, who through competence and persistence have achieved incredible outcomes against incredible odds. One of the questions from talking to Garang is what role the finance sector can play supporting refugees?

One of the things that we know is that when refugees leave their home country they do not extinguish their links. We also know that countries that are impacted by conflict can achieve peace.

A great case study is Rwanda, a country that was racked by genocide exactly 20 years ago. Today the country is climbing up indexes that measure development and social progress. Yes, the country undoubtedly still has problems, but it is developing economically, including an emerging finance sector. An example is that this week Rwanda raised a 5 year local currency bond worth $21.87 million that will help to build the nation’s infrastructure.

The interesting thing is how Rwanda’s Diaspora is supporting the economic development of the country. The year before the Rwandan genocide remittances to the country amounted to around $12M. The country is now receiving on an annual basis around $76M a year. The flow of capital is consistent and likely to continue to grow over time.

The question is what can be done to support the remittances for refugees? There are a couple of things that can be done.

The first is to make refugee remittances tax effective by allowing tax deductions. This seems an obvious thing to do. The sacrifice that refugees make to send home is significant and should be recognised as part of a nation’s aid budget.

The second thing that can be done is to make remittances efficient by supporting the development of financial institutions that operate on a not for profit basis. There are financial institutions that do a good job of getting money to people in remote areas but their fees are expensive, and this is ultimately a transaction cost that is an impediment to economic development. The World Bank has established an international database of remittance prices that is aiming to provide disclosure of remittance fees. This is a good initiative but it does seem that the finance sector could intervene through its community investment programs to establish an impact investment that cut the cost of transacting. There are a number of exciting initiatives developing including using Facebook to facilitate transfers. With US $414 billion of remittances to developing countries on an annual basis, reducing transaction costs can make a material impact on economic development.

A third area where the finance sector can make a material contribution is by supporting greater linkages between Less Developed Countries (LDC) and the finance sector. Academic research has demonstrated that there is a clear link between the development of a nation’s finance sector and poverty alleviation. And yet little is done from an aid perspective to support the development of finance skills in LDCs.

A lot of work has been done in LDCs to develop market structures including stock exchanges. There are for instance around 34 separate stock exchanges in Africa. One thing that the finance sector could do is to support the development of finance sector skills by providing education for market regulators. This in turn would build confidence of investors to enter LDC capital markets.

The Australian Government is currently seeking to establish a new Colombo Plan that would provide education as a way of contributing to aid. It would make sense if the revised Colombo Plan had a focus on building finance skills to enable nations to develop their own capital markets.

Superannuation is a long term investment and therefore thinking long term should be something we are comfortable doing. Just as Rwanda is emerging from chaos, so ultimately with the right support could Sudan. In another twenty years it could well be that Australian superannuation funds are investing in Sudan, developing the country’s rich environmental and mineral resources.

But to make that happen, we need to be prepared to broaden our horizon today.

To donate to UNHCR go to: http://www.unrefugees.org.au/

Pension and Superannuation Fund Investment in Innovation

Superannuation Fund Investment in Innovation

Melbourne Financial Services Symposium

Thursday 7 March 2013

Today I wanted to talk about why it is important that the superannuation industry work collaboratively to address the challenges that we currently have investing in what may be called innovation assets.

In my presentation I will be specifically focusing on the role that the ASX plays in providing opportunities for superannuation funds to invest in innovation companies. Young, start-up companies in areas such as Biotech, Clean Technology and Technology already look to the ASX as a means to raise capital.

To start let’s have a look at where the superannuation system is currently at.
According to the APRA December Quarter statistics the system has $1.51 trillion.

What is of particular interest is the rate growth. Over the last twelve months the value of superannuation investments has increased by $192.2 billion. In the last quarter alone we have seen we have seen $21.9 billion contributed to APRA regulated funds. Total contributions in 2012 were $92.2 billion up from $83.8 billion in 2011.

We can expect that the system will continue to grow. Deloitte estimates that by 2028 the system will have $7 trillion in assets.

I want to look at what this may mean for future asset allocation by superannuation funds.
In particular I want to look at the ASX where super funds invest a significant portion of new monies. The market cap of the ASX is around $1.38 trillion.

There are 2,183 companies in the ASX but 95% of the value of the market is in the ASX 200.
Superannuation funds roughly allocate 95% of their investments in ASX to the ASX 200.
The 5% that super funds do invest outside the ASX 200 is still significant, making up over $21 billion.

But here is the problem. The superannuation industry is rapidly outgrowing the ASX 200.
The continued strong cash flows each month into superannuation mean that funds must invest.
If we assume around $80-90 billion of annual contributions on a typical asset allocation we could expect that funds will invest up to an additional $20 billion into the ASX each year.

This equates to 20 $1 billion companies. Given that 92% of the market is made up of companies with a market cap less than $1 billion this indicates the size of the challenge.

There are already a number of implications of our growing size. Super funds for instance are increasingly drawn to dark pools because the size of some of the larger funds in particular means that it can be hard to execute in the lit market without moving the market.

But the more significant question is where does the super industry turn to for future investment?
The challenge that we have is that outside of the ASX 200 the market is illiquid and concentrated.
While liquidity is largely a function of size there are very good reasons why outside the ASX 200 more than half the market is mining and resources related.

We may think this is due to the all the ore that we have in the ground but in reality it is due to the regulation of the market, in particular the Joint Ore Reserves Committee that has meant that Australia has become an attractive place to list for international mining and resources companies.
There are over 200 ASX companies that solely work in Africa. We also have 15 mining companies based in Mongolia. One of the reasons we have such presence is that ASX has actively sought listings by putting people on the ground in Mongolia to recruit companies.

One option of course is for superannuation funds to seek investments outside of the ASX – and this is happening already. However it makes sense for the superannuation industry to consider how the whole of the ASX could be made a better place for future investments.

There are a number of ways the superannuation industry can work together to create more opportunities in the ASX.

The first thing is to understand that markets are a regulatory construct. The codes that have been developed for the mining industry have supported the development of mining and resources companies. The question is can we use similar codes in other areas to support the development of other sectors. One example is the Code of Best Practice For Reporting by Life Science Companies which is currently being reviewed. We know that there are US biotech companies that are now attracted to list on the ASX because of this Code. Are there ways that this could be further supported?
The second area we can concentrate is for the superannuation industry to collaborate to explore how we can support the development of the ASX. This could take a number of forms including establishing a working group that explicitly focus on this end of the market.

The size – and continued growth – of the superannuation system means that it is in our best interests to address the challenges in the ASX.

To finish it is worth asking the question does this is all matter. Is it a problem if super funds simply increase their allocations to global markets and diversify away from ASX?

It is worth delving for a moment into the economic history of one of the great economic empires of the modern era – the Netherlands. Kevin Phillips in his polemic book Wealth and Democracy examined the decline of the Netherlands which had been a significant merchant power in the 1600’s but by the 1740’s consisted of a divided society with a wealthy Dutch upper class and growing unemployment in towns that had once been thriving places for industrial production. Phillips attributes the decline of the Dutch empire in part to the fact that the Dutch upper class preferred to invest in economies other than their own, a fact that was not seen to be a significant issue at the time. In fact there were elements of Dutch society that advocated that the increased size of the finance sector that grew to service the Dutch upper class would more than compensate for the loss of domestic industries. This did not prove to be the case and the Dutch empire gradually faded, its demise accelerated by numerous wars.

Whilst things may have moved on over the last three hundred years the reality is that the superannuation industry and the economy are interlinked. Our contributions come from millions of Australians who rely on a strong economy for their future work. For that reason alone we have a responsibility to do what we can to make the ASX are better place for future investment.