“If the (A$) keeps going up, you’ve got serious problems in other asset classes, like equities, (and in) import and export industries, and tourism.”  IOOF is not currently invested in emerging markets, but the team is researching managers so that it is ready to invest when valuations drop, echoing the tilt made during by Telstra Super during his time there.  “Emerging markets are quite cyclical over time.”  Many of these calls are based on mean reversion, which Merlicek acknowledges as a “fairly powerful” force in markets.  To execute tilts, Merlicek is assisted by internal strategy and implementation specialist Stanley Yeo (who worked in a similar role at Russell Investments before joining IOOF), and input from specialist portfolio managers across asset classes.  Before making each bet, the objectives of the tilt must be set, as well as exit mechanisms if the call doesn’t turn in IOOF’s favour.

Tilting involves considerable reputation risk – for those making the call, and the institution they work for – if it brings investment losses. But this fear of failure should not defeat any well-grounded conviction that a tilt will pay off.  “People can get it wrong. But if we have the requisite skills and experience, we should try and do it.”  At Telstra Super, Merlicek executed small tilts as he attempted to garner support from the fund’s board before he was given enough rein to make bigger calls.  “We built up a track record; we built up political capital.”  This was done without the support of the broad domestic asset consulting sector. Today however, and particularly since 2009, consultants have legitimised tilting as a strategy.  “Now all of the asset consultant are on board, when (before) they weren’t. Now a lot of asset consultants do it in various guises.”