Much is made in Australia – and by Australians – about the virtuous circle of asset recycling.
On the face of it, there’s much to like. After all, you have essential assets being sold into long-term, often local, institutional ownership. Ultimately owned by many of the people that use them, they are generating a return that will, one day, help to pay their pensions and life insurance policies.
But what if the people at the bedrock of this virtuous circle started to feel like the assets were being taken advantage of?
That, in a nutshell, is what First Super chief executive Bill Watson is cautioning against in a recent interview with Investment Magazine. In it, he argues that infrastructure investors have enjoyed outsized returns for the last decade partly at the expense of offering a substandard service to the users of those assets.
“The question is, could a superannuation fund look a member in the eye and say that they have been treated fairly with the charges that they experience for parking their car at Melbourne Airport?”
You can probably tell that Watson, whose A$3 billion ($2.18 billion €1.9 billion) First Super indirectly owns a chunk of Melbourne Airport, doesn’t think he could. But here’s the kicker: what many of those users have yet to realise is that they own the assets that are providing them such a poor service.
“Members haven’t joined the dots yet, but [they will]. It’s only a matter of time before members start to hold funds to account for the investments they’ve made in the things that they consume every day of the week,” Watson warns.
That is an astute observation from a man who spends much of the interview fretting about populism’s impact on regulation and the latter’s impact on returns.
After the global financial crisis impoverished the majority of the developed world’s citizens, the backlash has been steadily growing. Given the chance, angry citizens have shown they are willing to give their governments seriously disruptive instructions (think Brexit).
In addition to putting pressure on their elected representatives, Watson is warning the populace has another powerful way to make their discontent heard: they can call people like him and put pressure on how their infrastructure assets are managed.
Once they ‘join the dots’, it’s not hard to figure out managers are going to be on the receiving end of most of this pressure. When that happens, good luck trying to explain to someone feeling overcharged that the status quo must continue because GPs need an adequate return on equity. Or that charging a certain amount today – no matter how high it seems – is vital to ensuring their pensions tomorrow.
The reality is that pension fund members are blissfully unaware of how much cheaper their water bill would be if, say, they could pay much lower fees to asset managers. Paradoxically, the more the industry gets what it wants and private infrastructure ownership becomes mainstream, the more it will raise this awareness. Even if we are not close to seeing manager fees go the way of mobile roaming charges across the EU, consumer activism – with all its contradictions – is here to stay.
Which is why Watson is urging asset owners to swallow the bitter pill of providing better services while earning lower returns sooner rather than later: “If we continue to expect these excess returns, the pendulum is going to swing back far harder and we will get significantly lower returns.”
That swing is worth keeping in mind.
It often seems to us that some of the risks facing the asset class can appear deceptively dormant when, in fact, they might just be accumulating pent-up tension.
If that’s the case, a ‘cake-and-eat-it’ approach could prove a costly mistake indeed.