The $520 million Combined Fund is re-examining its strategic asset allocation to gain greater exposure to the market, the fund’s investment committee chairman, Brett Lazarides, says. SAM RILEY reports.

Combined Fund, which has 10,700 members primarily from the private education sector, made the decision to appoint Mercer as its asset consultant in December 2010, which then commenced to review its asset allocation and outsourced investment managers. As a result of an extensive review by Mercer the fund replaced four of its five international equities managers.

It also replaced two of the fund’s Australian equity managers and appointed JCP Investment Partners, cutting the total number of domestic equity managers to four. The fund is using State Street Global Markets as its transition manager to maintain market exposures as it moves funds to the new managers.

Brett Lazarides, the sole independent director on the board and chair of the investment committee, is a key figure in advising the board on investment decisions. Since the Combined Fund decided to replace its previous asset consultant, CPG Research and Advisory, the fund has taken a long-term view to look for greater market exposure despite the current short-term volatility.

“With a change of asset consultant we have moved to have a less defensive strategic asset allocation,” Lazarides says. Figures released by the fund show that the balanced option has returned minus 4.21 per cent for the calendar year to September 30. The balanced option has returned, on average, 4.05 per cent each year over a rolling 10-year period.

Lazarides says the Melbourne-based industry fund is looking to rectify its “structural conservatism” in both its asset allocation and manager selection. “In simple terms, this means exposing the portfolio more to market risk by increasing the beta of the total portfolio in the balanced fund and [in] other investment options with allocations to listed equities, but not to do anything overly aggressive,” he says.

“If you are equal to the market you have a beta of one. We were sub-one and we wanted to go to one or a bit over.” Mercer has also looked to improve the balance of strategies adopted by the various managers to ensure there are no concentrations of risk or doubling up in investment approaches.

“Post-GFC [the fund] did want to protect capital and the asset consultant implemented certain decisions to change managers and put in place certain structures that would achieve that, and it did perform to the model,” Lazarides says. “But over time, when there is a focus on total performance and, in particular, relative performance, there was a concern that it was time to adjust that.

You are essentially turning up the dial a bit on risk.” In international equities the fund has retained the use of MFS Global, a subsidiary of BNP Paribas Investment Partners. MFS uses a bottom-up fundamental style of stock investing that focuses on core and growth stocks.

The fund also uses Schroder Investment Management’s QEP Global Value Fund that targets developed market value equities and small- and mid-cap stocks. Its other international equity managers include Dimensional Fund Advisors, who use quantitative research and analysis to invest in value stocks and make tilts to small-cap stocks.

Leave a comment