Greg Bright* profiles Paul Costello, the New Zealander who led the way for sovereign wealth funds on both sides of the Tasman
The founding chief executive of the Future Fund, the founding chief executive of New Zealand Superannuation Fund and a chief executive of the Superannuation Trust of Australia – a precursor to AustralianSuper – and, more recently, a member of various important boards, has faced many business challenges. Now he is facing a much tougher one: battling cancer.
True to his unassuming fashion, Paul Costello, husband and father of two, is reluctant to talk too much about his remarkable career. He’d rather talk about his journey with cancer – lung, brain and, now, liver cancer – which is, perhaps, even more remarkable. He should have died this March, but didn’t.
He is now trying to raise money and awareness for the Peter MacCallum Cancer Centre in Melbourne and the work of one of its senior oncologists, Professor Ben Solomon, who has given him something of a reprieve.
Costello, 61, is a measured man. His career tells you that. The current chief executive of the Future Fund, David Neal, speaking to a Women in Super industry lunch last year, referred to the popular business book ‘Leaders Eat Last’. It’s the notion that successful leaders put their colleagues and staff before themselves and focus on helping those around them to do their jobs as best and enjoyably as they can. Paul Costello is a natural at that style of management.
Neal was recruited by Costello at the Future Fund, a decision which surprised the industry and shocked the asset consulting firm which Neal headed up at the time, the investment arm of what is now Willis Towers Watson. Costello hired him as the inaugural CIO, leaving the then Towers Watson, which Neal had built up over a long period, to fend for themselves. That’s another attribute of a leader: be bold and brave.
Here is a potted history of Costello’s career, which tends to mirror the evolution of the three largest fiduciary funds in Australasia, and his incredible journey with cancer.
Thanks to PeterMac
Paul Costello, with help from his friends and family, including the Future Fund’s David Neal, has organised a fund-raising effort for the Peter MacCallum Cancer Centre in Victoria.
Originally from New Zealand, Costello and his fellow-kiwi wife, Denise, a journalist and university lecturer, moved to Australia in 1989. It was not a good time for either country, following the 1987 stock market crash and a lead-up to the 1990 recession that Paul Keating said “we had to have”. He joined National Australia Bank as a superannuation specialist and subsequently became a financial planner. He soon felt he needed more from this industry.
“There were a lot of issues in financial planning then, too,” he says. “I was more attracted to the institutional side and joined Sedgwick Noble Lowndes [a UK-based firm that had a small asset consulting presence in Australia and was acquired by Mercer in the late 1990s].”
Award Super, the original 3 per cent compulsory contribution under industrial awards which followed the “Accord” between the Hawke-Keating Government and the ACTU, had been introduced in 1986. The industry fund movement had sprung up off the back of that and the Labor Government was preparing to introduce the Superannuation Guarantee, which was finally legislated in 1993.
Costello was attracted by what was going on in the burgeoning not-for-profit super space. “My hunch always was, with industry funds, that this would be their game,” he says. And he was correct, at least up until now.
Superannuation Trust of Australia
In 1995 he applied for and got a job at STA, then a $500 million-odd industry fund, whose chief executive, Ann Byrne, had joined two years earlier. She remembers the interviews with Paul and how impressed she was with him. But she couldn’t remember, when spoken to recently, what the position was. “It was something like ‘administration manager’,” she says. “We had a very small team.”
Paul remembers: his first job title at STA was “executive assistant”. It was clear, though, that he was the de facto deputy and became Byrne’s replacement when she moved on to run UniSuper in 2000 and, later on, ACSI (the Australian Council of Superannuation Investors). These days, Byrne is a trustee of LUCRF and on a couple of international aid boards.
Costello says he was a strong supporter of STA’s merger with the Australian Retirement Fund when it was first discussed after he had become chief executive in 2000. Not long after that, in early 2003, he was given the opportunity to start a big new fund of his own, the New Zealand Superannuation Fund. He helped appoint a successor at STA, Mark Delaney, who became its chief executive prior to the merger with ARF, and he and Denise headed back to Auckland.
STA and ARF eventually merged in 2006, with Mark Delaney taking on his still-current role of CIO, and the former CEO of ARF, Ian Silk, taking on his still-current role of CEO of the new AustralianSuper. The fund now has about $140 billion under management and 2.1 million members.
While there had been smaller mergers before that, the formation of AustralianSuper was to represent a watershed in the development of the not-for-profit super sector, setting a benchmark for others to follow. In recent years, APRA has taken mergers on board with a passion, it seems, and is actively pursuing a policy of encouraging them. Not everyone in the industry agrees that this is the right path for members.
The main problem is that administration charges, which can benefit significantly from scale, are a very small part of the overall costs of a fund. It’s the investment fees that cost the most and scale with investments is a much-more complex story. In the major, listed, asset classes, big is bad for returns. In unlisted asset classes, scale can open important new doors. And insourcing of investments has undoubtedly reduced those fees for the bigger funds, such as AustralianSuper, that have been able to do that so far.
But this is a marathon, not a sprint. Whether funds have the discipline to deal with poorly performing internal teams as they have done with their external managers remains to be seen.
And costs aren’t the whole story. Member engagement is increasingly important for both the funds and the members in a world where retirees are growing in number. Members will inevitably question their fund’s commitment to them in a merger in which they didn’t even get a say.
New Zealand Superannuation Fund
“New Zealand Super was a terrific job,” Costello says. “I really enjoyed it.” There is something about building a business, any sort of business, from scratch. It’s like a blank sheet of paper, a blank open page of a computer screen. Anything is possible.
He was the first employee at the fund, then often referred to as the “Cullen Fund”, after Michael, now Sir Michael, Cullen who was the Treasurer of NZ when it was announced in 2002. He left STA and started the new job in March 2003. The NZ$38.9 billion fund, as at May 31, is generally considered one of the best sovereign wealth funds in the world on various metrics, including governance, transparency and investment performance. Thanks largely to Costello, it was an early adopter of best practice in the application of ESG principles.
One of the early employees, Paul Dyer, now investment advisor to the (estimated) NZ$40 billion Accident Compensation Commission fund, recalls first meeting Costello: “He was establishing NZSF literally from scratch. Our first meeting was at the brand new office – an empty shell. He walked me around describing how he was going to get the walls painted and buy some furniture. He had to cut the meeting short because he had to do the payroll. There really was nothing there.”
Dyer says: “Things of course changed rapidly… Paul had particular skill as a relationship builder – particularly good at dealing fairly but firmly with all the parties who wanted to do business. He demonstrated to us the advantages of being liked and respected by the whole range of organisations with whom you do business. He was always very smooth. At the same time he gave the staff latitude and wasn’t afraid to take risks. It was a sad day a few years later when he decided to return to Melbourne.”
NZ Super started investing its initial NZ$2.4 billion in September 2003 and continued to be topped up by government money for several years to aid its growth. The Government had intended to allocate an average of NZ$2.2 billion a year over 20 years and for the fund to grow to NZ$100 billion by 2023 to contribute to annual cost of government pensions. But politicians are politicians. Contributions were suspended between 2009 and 2017. The Government re-started the program this year with a NZ$500 million contribution, which it intends to gradually increase to the original target of $2.2 billion in 2021. It seems unlikely the fund will reach that NZ$100 billion figure by 2023 figure now, despite an average annual return rate of 10.4 per cent since inception.
Stewart Brooks, NZ Super’s general manager, finance and risk, says he was “lucky enough” to be the fund’s third employee.
“Paul was the first employee… He did a great job for our organisation, and therefore for all New Zealanders, in kicking things off. Paul established the foundations of our organisation and brand, focused on quality and integrity, and these have endured,” he says. “Paul has high level of intellect, is very considered and professional in everything he does, and has excellent personal integrity. And a real gentleman.”
In the early days NZ Super was a very small shop and the chief executive had to oversee many things, Brooks says, while the team was built up.
“He did a great job in building the confidence of the board as a safe pair of hands, and helped them with our longer term vision. Paul was also responsible for developing our financing model with Treasury and was an early visionary in ESG. Global leadership in this space has continued.
“Paul had spent a lot of time working in Australia and I think it was tough for Paul to uproot his family and move back to NZ after so long over there. But his passion for the New Zealand Superannuation Fund CEO role and what we were doing was paramount. When the Future Fund was formed and were looking for a CEO I was not surprised that he got the job and moved back to Australia. Our loss was Australia’s gain.”
Brian Gaynor, one of the foundation members of the NZ Super board of guardians, recalls Costello as the stand-out candidate from a high-quality field of six up for the inaugural CEO role.
Gaynor, who since founded one of NZ’s most successful boutique funds management firms, Milford Asset Management, says Costello was very convincing in the interview process and more than lived up to his interview-room promise.
Most importantly, he says Costello convinced Treasury to pay for NZ Super operations out of the fund itself rather than the original $1.8 million budget on offer.
“That’s the one thing that Paul did which really changed NZ Super,” Gaynor says. “It wouldn’t be where it is today on an annual budget of $1.8 million.”
Prior to hiring Costello, the NZ Super guardians were a very hands-on board, taking on all of the executive functions in addition to governance. At inception, in 2002, the guardians included David May as chair, Sir Douglas Graham as deputy chair, and Michaela Anderson, Ira Bing, Bridget Liddell and Gaynor.
“The board did everything,” Gaynor says. “Looking for an office, writing the SIPO, working on investment strategies, interviewing fund managers – we did it all… Paul took a great burden off us.
“He knew what he had to do to build the super fund as a long-term business. Paul did an absolutely fantastic job, I give him 10 out 10 – and everybody who worked with him would say the same.”
Future Fund and beyond
When the opportunity presented itself to return to Australia for an even bigger fiduciary role, and for Denise to be able to resume her journalistic career in Melbourne, with ‘The Age’ and subsequently in academia, the Costellos went for it.
Paul was appointed the inaugural general manager of the ‘Future Fund Management Agency’ – effectively CEO of the fund – in November 2006. The fund had already adopted New Zealand’s term for their directors – “guardians” – so maybe that was an omen that he would be allowed to repeat his previous success. And it was, for a time.
He says, it was clear to him, given the scope and targets of the new fund, that a lot of infrastructure needed to be put in place. “To be in a position to start investing, I wanted find the best people I could,” he says. “So, the first ones I hired were the CFO, Paul Mann, a head of operations, Gordon McKellar, and so on, before I filled the crucial role of the CIO.”
He realised that David Neal, who he knew and with whom he had worked during his first few months at the Future Fund, as his asset consultant, was not an obvious choice. But he wanted someone who would be agnostic to where the fund’s returns came from – who had a broader view of the investment universe than most funds managers would – and did not have the silo-type investment background of, perhaps, more-obvious candidates.
“I also wanted someone who could attract and retain good people and also who would be comfortable with the governance required. Dave is one of the rare people who could tick all the boxes,” Costello says.
Neal, who started in June 2007 as the last of the senior hires, says that there was already an operations team, custodian, a finance team and general counsel in place, “so we could make stuff happen as soon as I came in”.
The fund’s board had already defined strategy and intended to go from its cash position, including Telstra shares, which could not be sold initially, to fully invested by June 2008, with about 60-65 per cent in equities. The first equities mandates were indexed. In those first few months, prior to the early signs of a global financial crisis, the fund’s management was writing “big cheques” to Vanguard and State Street twice a week.
But, in an important move for the guardians and for the management, the fund stopped the equitisation process in October 2007, at which time it was about 25 per cent invested. “We looked at the sub-prime crisis and thought ‘this doesn’t look right’,” Neal says. “It was a brave call from the board, and pretty brave from management to recommend it too.”
He observes that it is a lot easier to stop an investing process than to reverse one that is already in place. If the fund was fully invested in October 2007 it would probably not have sold down almost all of its holdings.
“The key thing is how Paul went about building an organisation,” Neal says. “We both trusted each other’s styles. We didn’t like the traditional individual-centred approach in some fund management firms with superstars running portfolios.”
This led to the fund’s early mantra of “one team, one portfolio”, which was subsequently refined, for clarity reasons, as “one team, one purpose”. As nit-pickers pointed out: the fund actually had more than one portfolio. Back to his reference of “Leaders Eat Last”, Neal says Costello is a leader who is not only unassuming, but who always wants others to shine.
But he agrees that his style tended to clash with that of David Murray, the inaugural chair and a former chief executive of the Commonwealth Bank. “That was a pity but despite that Paul built up a great organisation.”
On the subject of David Murray, Costello is reluctant to say anything much. He did say that, sometimes in business, you come up against a situation which you cannot resolve effectively and the only option is to leave.
“I left the fund a little ahead of when I had planned to but I felt good about what I had achieved… I had always been keen for Dave to take over from me and am glad that eventually transpired,” he says.
Costello resigned in September 2010, “one or two years” earlier than intended, and was replaced by Mark Burgess, who Murray appointed, but who lasted just over two years, by which time David Gonski had become chair. Neal became the third CEO in 2014 and Raphael Arndt the second CIO.
Costello quickly developed an impressive portfolio of non-executive roles, the highest-profile of which was probably chair of the Blackstone Group in Australia and New Zealand. He was a member of the Payments System Board of the Reserve Bank, a member of the international advisory committee of the China Investment Corporation – one of the world’s largest sovereign wealth funds – and two positions that he has retained despite his recent illness: trustee and chair of the investment committee at Qantas Super and chair of the global infrastructure committee at QIC.
Living with cancer
After putting up with an annoying cough which started around the end of 2016 and, having never smoked, he finally saw a doctor, underwent tests, and was diagnosed, in February 2017, with stage-four lung cancer. It was the day before his 60th birthday.
“I had a deep-seated confidence that I would somehow beat it,” he says. “Through some fortunate circumstances I was recommended to an oncologist who specialised in lung cancers, Professor Ben Solomon, of the Peter MacCallum Cancer Centre.”
Professor Solomon, of what is generally called ‘Peter Mac’, turned out to be at the cutting edge and recommended a mix of “immunotherapy”, which, with the help of the drug Keytruda, uses the patient’s own immune system to help fight the illness, and traditional chemotherapy. The drug costs $6,000 a dose, administered every three weeks, and capped by the drug company at about $60,000.
Financially, Costello is what you’d call “comfortable” rather than “wealthy”. Nevertheless, these payments, non-deductible from anything, were not insignificant. Professor Solomon said to him, though, that the median life expectancy of those diagnosed with late-stage lung cancer was about one year. What is the value you can put on extending that?
“The lung cancer seemed to respond well,” Costello says. “But then they detected 25 tumours in my brain and the only choice for that was radiotherapy. And that seemed to be successful too. Radiotherapy is what’s mostly used for brain cancer.”
By September last year, he had been knocked around by all the treatment but was still engaged in everyday working life with board meetings, involving travelling from Melbourne to Sydney, and family life. But he then started to develop a pain around his back and abdomen and, by December, it became obvious that the cancer had spread further, and was affecting his liver. He was told that there was no drug available likely to work with his liver, given his other cancers.
His condition deteriorated and by late January this year he was placed into palliative care, whereby pain management is the main consideration, until the inevitable happened. “I was starting to get a lot more pain,” he says, “and by Australia Day this year we were advised that I had only weeks to live.” By that stage he was in a wheel chair and had to spend a lot of time resting.
True to form, he decided to use whatever time was available to the most advantage, for his family first, as always, and himself. He and Denise “threw open” their home to the extended family back in New Zealand, and then to friends, so anyone who was able to could visit. And by then their two children, Harry and Caitlin, both in their 20s, had moved back home to be with their dad for what everyone expected to be his last few weeks or days.
Meanwhile, Professor Solomon and his colleagues had been talking with a company based in Connecticut, in the US, called LOXO Oncology, which had addressed a particular gene, known as RET, and developed a treatment for its link with cancer. Only about one per cent of lung cancer patients have that gene. Costello was one of them.
Solomon says that when you do genetic testing on tumours in patients you’ll find different mutations. Not all lung cancers are the same. There are about 10,000 people diagnosed with lung cancer in Australia each year. “The average age of someone diagnosed with lung cancer is over 70 but we are getting more and more patients, like Paul, who are younger and who have never smoked,” Solomon says.
He likens the mutations to a “switch”, whereby in some cases this gets locked in the “on” position. Some drugs will work with specific switches, such as the most common ones for which there are readily available drugs that are on the pharmaceutical benefits scheme. But other mutations are very rare, such as the one linked to the RET gene.
LOXO developed a specific inhibitor to RET and, with Professor Solomon’s involvement, Costello was preparing to join a phase-one global trial, which is the first time the drug would be tested on humans.
“We were hoping he could join that early this year,” Solomon says, “but then he got very sick and was too unwell to meet the criteria to get on the trial. But we managed to get access to the drug for him.”
Even that was touch and go. Granted the drug on compassionate grounds outside the trial system, with his liver starting to fail and in a lot of pain, the drug was to be shipped immediately via Los Angeles, but got tied up in a maze of paperwork due to Australia’s customs and quarantine restrictions and took a nail-biting nine days to be delivered to the Peter Mac centre in Melbourne.
At that stage Costello was only days away from the end. With Denise and Harry and Caitlin at home all the time, (they had all stopped working) he was mostly bedridden. They took it in turns to sleep in the bed beside him in the spare room. On reflection, with the family united in his crisis, he describes it as “a special time”.
When the drug finally arrived, within 48 hours of it first being administered – just a pill – he could feel the change, he says. Within a week most of the pain had gone. The tumour in the liver had started to shrink and within four weeks his whole body started to change back towards normal.
“It’s actually extraordinary because people don’t normally come back from that. Normally they die and then there’s a period of grieving and the family then tries to get on with their lives. In my case I didn’t die.”
That was in March. Since then he has been weaned off the powerful painkillers prescribed for his palliative care and is walking again without assistance. While he and his family are now thinking about their lives again, he says he is “realistic” about his longer-term chances.
“Cancer tries to defeat everything you throw at it,” he says. “I have always acknowledged it will return, but I don’t know when. It gives you a very different perspective on life. Every moment is precious.”
Greg Bright is publisher of Investor Strategy News (Australia)
*With additional reporting by David Chaplin, editor of Investment News NZ.