(January 14, 2014) – Papua New Guinea could hardly be farther away from the global centers of institutional investing, geographically or in the peculiar set of challenges and opportunities faced by its primary retirement fund.
Case in point: the US$2.5 billion fund’s CIO Michael Block provided two phone numbers when arranging an interview with aiCIO, because his landline “only works about half the time.” Before anyone feels too sorry for him, Block’s allocations to long-term government bonds earn an 11% interest rate.
“The portfolio doesn’t look anything like the portfolios that I am used to,” he says. “Absolutely none of the typical rules apply in Papua New Guinea (PNG), from asset allocation to tracking error and manager selection.”
Nambawan Super, a defined contribution scheme, serves roughly 130,000 members from the public and private sector out of its Port Moresby offices. (For those needing to brush up on their geography, Port Moresby is Papua New Guinea’s capital and largest city with about 300,000 inhabitants. By air, its closest neighbors are Brisbane—three hours south—and Manila, which sits five hours to the west.)
Block, an Australian, joined the fund in July of last year as its first-ever chief investment officer. His hiring reflected one of the many ways Nambawan Super is moving against the grain of global institutional investing. Indeed, Block was brought in to end a practice that is fast gaining momentum in the US and Europe: the outsourced CIO.
The founding legislation, which created Nambawan Super in 2000, stipulated that licensed external providers handle the day-to-day administration and asset management. But as the fund matures, so too has its governance.
Kina Funds Management—a local firm that has run Nambawan’s portfolio for a decade—will transition from being the fund’s only licensed outsourced CIO/asset consultant to a regular external provider. Block is now in the process of hiring three internal colleagues—a general manager for property and two analysts—which will bring the fund’s investment staff to four, including himself.
The extra help won’t go amiss, as operating a retirement fund without first-world technological and back office capabilities can be labor-intensive. Cutting checks to their rightful owners, for example, can involve finding neighbors to vouch for their identity.
“We don’t have fantastic information about inflows and outflows, because we don’t yet have comprehensive data on our members,” Block says. “Since our members may not own traditional ID like a driver’s license, birth certificate, or passport, we may have to resort to using personal references for identification.”
Block was by no means an emerging market specialist when he accepted the top investment role in Papua New Guinea last April. Indeed, his resume prior to Nambawan Super includes only positions that doubtlessly came with working phones.
After Block secured a total of seven degrees and professional designations—diploma in law, master’s of commerce, philosophy degree—he spent nearly eight years as director of his alma mater’s endowment, the University of New South Wales in Sydney. Block went on to CIO positions at several superannuation funds in the city, and made a splash in a staid industry with bold portfolio shake-ups. Following a turn-around job with the underperforming Energy Industries Super Scheme, he struck out on his own as an independent fund adviser for the Australia and Pacific region.
The independence—and perhaps stubbornness—that made Block stand out in Australia’s highly conventional asset management landscape was just the thing for a highly unconventional fund in the midst of a regulatory revamp. Or so thought Nambawan Super’s investment chair Bruce Scott, who brought Block aboard on a three-year contract.
The job has been an excellent fit. “I absolutely love it,” Block says. “The only single downside is that my family isn’t with me at this point.”
Although the Australian was brought in to implement the changes dictated by a new regulatory regime and shake things up, he has discovered the limitations to his particular position.
“There are parts of the portfolio that I’ll never really be able to touch,” Block says. “We own big chunks of local companies, and there’s a shortage of quality domestic equities. Furthermore, few organizations in PNG could buy the on the scale of what we own: You can’t just ring up your stockbroker and get rid of it here.”
Fortunately for Nambawan Super’s members, PNG’s economy has been booming and those local assets have well outperformed almost anything available in developed markets.
Still, Block is acutely aware of the risks in operating a fund with 80% of its assets belonging to a single, tiny, developing economy. “Serial auto correlation: those are the three words PNG investors do not want to hear,” he says. “The good news is that assets heavily concentrated in PNG have done extraordinarily well. And that’s the bad news, as well, because PNG assets will likely fall together also. Hedging domestic exposure and making the portfolio more secure is a very, very hard sell. People say to me, ‘PNG was almost totally unaffected by 2008, so why don’t we keep 80% in growth assets and go for broke?’”
Of course, few retirees really want their fiduciary following an investment strategy of "going for broke." But in Block’s opinion, he’s lucky enough to have the kind of insight into a hot developing market that most CIOs can only dream about.
“The prospects for the PNG economy are absolutely sensational,” he says.