UniSuper runs $300 million in-house to beat competitors

UniSuper will launch an internal core Australian equities fund with $200 million in seed money this month. John Pearce, the fund’s chief investment officer, says the aim of the venture is to outperform competing external managers. SIMON MUMME reports. One of the reasons why John Pearce was keen to become CIO of UniSuper was the fund’s resolve to start running money internally. “I made it very clear that I wanted the mandate to do this,” he says, and in January, about six months after joining the fund, UniSuper began running $100 million in an internal, quantitative strategy dubbed ‘manager conviction’ overseen by senior investment analyst John Hood.

The strategy uses an algorithm developed by Pearce’s team to draw proprietary information from UniSuper’s custodian about the aggregate bets being taken by underlying Australian equity managers. The fund is also developing domestic fixed-income and listed property capabilities, under public markets head Dennis Sams and property manager Kent Robbins. But the centrepiece of the internal program, a “low-alpha, low-volatility” core Australian equities fund run by Simon Hudson (formerly head of domestic equities at Queensland Investment Corporation), will be launched this month with about $200 million in seed capital. Of the $8.5 billion that UniSuper runs in domestic equities, “a large rump will always be in a core strategy, and with Simon Hudson on board we could do at least as good a job as the core managers out there,” Pearce says.

Hudson will be supported by Hood and two more analysts, Thomas Tam and Danny Suchowiecki. Pearce says the primary motivation for running money internally was not to reduce costs, but to own investment capabilities that could consistently deliver strong performance and beat external managers. “Once you get to $100 million, you break even in terms of systematic expenses,” he says, adding that “there’s no point in looking at cost savings if you’re going to compromise performance”. He also believes that running an internal program will inform the investment team and trustee of the “drivers of performance” within a funds management operation, and make UniSuper “a better manager of managers”. The performance of the internal equity strategies will be measured against ASX benchmarks over three-year periods, but the fixedincome strategy will be managed in a somewhat absolute-return style, and initially focus on issuance from domestic banks.

While the portfolio managers will be empowered to make investment calls and be responsible for the results, Pearce is ultimately accountable for the program’s outcomes – “the buck stops with me,” he says. Despite the rapid development of internal strategies, UniSuper will continue to outsource the “vast bulk” of its assets to external managers because it is unwilling to take the risk of running specialised strategies, such as high conviction, small-cap or emerging markets equities. “External managers give you a lot of optionality: if they’re not performing, you’ve got a lot of flexibility.