They enable QSuper to respond more opportunistically to changes in markets and ensure minimal or no ambiguity about who is accountable for each decision. To date, the team has not been second-guessed by the board. The delegations allow the investment committee, in each of its 11 five-hour meetings each year, to focus on strategy and not be distracted by monthly returns or the relative performance of managers. Instead, other questions are discussed: “How different are we going to be, and why? What are we going to look like at $40-$60-$90 billion?” Holzberger says. The investment team debates this with the investment committee. “How much of an idiosyncratic nature are we prepared to tolerate?” he asks, as the fund pulls away from the herd.
“We’ve got loyal members. But how far can you stretch them? If we’re going to take different approaches they are going to be stressed at times. What is the real [strategic] tolerance of the fund measured against our fiduciary obligations?”
Many funds aspire to ‘best-practice governance’. But it is an elusive goal and difficult to define. QSuper may not have this Holy Grail in its grasp but is confident its members have been put first. “We are certainly very fit-for-purpose,” Holzberger says.
QSuper’s new investment strategy is most evident in the way it manages its $6 billion in fixed-income assets.
The fund has dispelled home-country bias by not running separate Australian and global fixed-income portfolios, and has discarded aggregate global bond indexes as suitable benchmarks. Its focus on risk factors in fixed-income markets means that splintering its portfolio along sector lines – domestic, sovereign, high yield, emerging markets, global debt and so on – is a meaningless endeavour. Instead, Lillicrap adjusts the fund’s exposures to three risk factors – interest rates, inflation and credit – and relays instructions to an external manager, appointed by Woodhouse, for execution.
By investing in beta risks, rather than benchmark weightings, QSuper can exert more control over the outcomes it seeks from fixed income. It is not, for example, obliged to keep allocating more money to the biggest debt issuers in the world, such as the US and Japan.
The job of investing in risk factors without a benchmark has been offered to specialist fixed-income managers. But there were no takers. “We’ve tried, but managers available in the market don’t understand that mandate,” Holzberger says. They want to compete against a global aggregate bond index and attempt to beat it. “They say: ‘We need an investable benchmark so we can be measured fairly.’ And we say: ‘We’re worried about the money going into members’ accounts, not your pockets.’”