A greater focus on risk and responsibility has Cbus’ investment team engaging more deeply in the asset allocation process as part of a wider risk strategy.

“In the past, it used to be a reasonable excuse to say we have no control over the underlying investments, it’s our fund managers that do [the allocation]. I think those days are now well and truly gone. I think our constituents, irrespective of whether we outsource our investment decisions, will hold us accountable to the actions of those who we outsource to,” said Kristian Fok, executive manager of investment strategy.

Gaining greater control

While the superannuation fund is not planning to bring its investment in house, Fok says certain skill sets are needed internally in order to have greater control in the funds’ investment processes.

“When you’re smaller, you’re not a big target in terms of your impact in the broader market. So you can get away with changing your mind on decisions and going under the radar. As you get bigger, people are looking at that and thinking about what impact it has,” he said.

“Not only thinking about what impact we may have, but you have to work on the basis that people are trying to make money out of our decisions as well.”

In particular, Fok said a growing fund has to “think smarter” in relation to portfolio implementation.

“I would imagine that we would still predominantly use managers because it gives us the capacity to identify the best in breed and put together portfolios and skills you just couldn’t replicate internally.”

Cbus’ investment team has expanded by seven members this year, and Fok says the fund is likely to hire more people next year.

“I think there are good reasons why [funds go in house], and I’m not saying that’s a flawed model. I wouldn’t rule it out completely, but there is no point in replicating something that works outside unless you can really articulate what benefits there are,” he said.

Fok said it’s difficult to make inhouse investment work for every single asset class, adding that fee savings, while a consideration, aren’t a primary driver because a fund requires net-of-fee outcomes.

“And the reality is that, within funds management, there’s not that many really talented people and things can change,” he said.

The transition process

Cbus’ work on its risk systems will result in the team playing a role in the transition process: rather than handing it over entirely to a transition manager to do the analysis, Cbus will conduct it internally.

We currently rely on them in the planning process, before any trades have even gone through, to actually do some analysis. You’re providing them with commercial information before the fact.”

“So we need to be smarter around that, and we need to have a feel for whether there are less liquid stocks that, actually, it just doesn’t make sense to give to a transition manager. We need to have ways of potentially changing the timing of when we execute those stocks. So, making it less predictable.”

Implementing a risk system is the first part of wider change in the investment approach for the $22-billion fund, Fok said, and it will allow Cbus to run trial cases to see where things can be done differently using the new infrastructure.

“We have discretion around some of these things, so we don’t use transition managers for everything. Smaller cap stocks we treat differently; we don’t just put them out to a transition manager.”

“We’ve had conversations with the incoming manager, where we cross with the manager and extract stocks out of the transition process. So we’ve already done elements of that to try and be a bit smarter. Really what I’m talking about is just taking it to another level.”

Fok said Cbus isn’t modeling its longer term, less peer-focused investment approach off any particular funds, but it has talked to investors such as the Future Fund, which operates in a slightly different environment.

They don’t necessarily have as many peers to focus on, but they also operate within a very public environment as well. Their considerations are slightly different, but I think their investment approach is quite appealing,” Fok said.

“There are some other funds out there trying to do different things for their members. QSuper is one that is doing some interesting things around its target retirement approach. They have slightly different circumstances though.

“QSuper has certainly access to far more individual member information with its defined benefit heritage which helps.”

Getting more out of relationships
Kristian Fok said having more staff is important to extracting the most from Cbus’ Australian private equity program. He says that on pure investment reasons, there’s not a lot of reason for the superannuation fund to be involved in that market, but believes a lot can be achieved.

“On the surface, does it make sense to have private equity for our sort of fund? We grow so fast that our Australian market doesn’t have the capacity to really grow at the pace that we do. The fees are high and you get the J curve and issues, and therefore you get issues around equity between members over time,” he said.

“But my view is that we can get a lot more out of that relationship. So we can actually talk to, not only underlying managers to see where opportunities are and what’s going on in the market, but hopefully even talk to some of the management of the bigger companies that are unlisted.”

Fok said a benefit of private equity investment is the absence of continuous disclosure requirements.

“We could try to engage with a listed company and find out what’s going on, but they’re very limited in what they can tell us. A private equity company does not have those same constraints. So for me, there is strategic value in that, provided we can actually work with the managers in accessing underlying companies to achieve that outcome.”

The fund has an ongoing Australian private equity mandate – committing $150 million per annum – and a program with Macquarie in its third year. Fok says it doesn’t use fund of funds in Australia, however it does use a manager because “it’s a lot of effort for a small allocation”.

“We’re happy to outsource that part of it to a specialist, and we’ve got a different fee arrangement than you’d normally get from a fund-of-fund manager. It’s effectively like a cap on the dollar flat fee, so it’s not just an infinity-based fee that expands by commitments. That’s a better structure in our view,” he said.

“But most importantly, it’s a more focused portfolio, so we don’t have lots and lots of underlying managers, we just have the highest conviction managers.”

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