The $6 billion NSW Local Government Super (LGS) plans to manage an international equities portfolio internally from next month, using a systematic enhanced indexing methodology that may eventually allow it to replace active managers.
The process, to be run by LGS chief investment officer Craig Turnbull and analyst Ken Pholsena, will buy futures contracts over each of the 12 largest international equity markets. It will use a series of proprietary signals to determine when each of those markets is due for a correction, and will seek to retreat to cash in time to avoid a downturn.
The LGS investment team has been working on its model for over a year, and has received verification from a third party, Mercer Sentinel, that it has the systems in place to run the strategy. The LGS board recently gave its sign-off, and Turnbull hopes the internal funds management process can go live with a “small” international equities allocation next month.
“We’ve still got some legal agreements to sign with brokers. They’re not used to working directly with super funds, so they want some controls over our money that we can’t give them. But we’re sorting it out,” Turnbull said.
International equities was chosen as the asset class with which to debut the internal strategy because it had the most liquid markets for futures contracts, Turnbull said. The process will be trialled for 12 months once it begins operating, and if the board deems performance satisafactory, it will be allocated more money and potentially more asset classes.
Turnbull hoped the strategy could outperform the fund’s existing passive managers for international equities, on an absolute and risk-adjusted basis.
He saw its greatest potential to add efficiency was not as a replacement for index managers – “which don’t cost much anyway” – but as an alternative to more expensive active managers.
LGS presently indexes 50 per cent of its Australian equities portfolio and 40 per cent of its international equities portfolio. A sizeable portion of the bond portfolio is also indexed. The fund holds passive mandates with the three major indexing houses – Vanguard, State Street Global Advisors and BlackRock.