A limited range of asset classes held for the long term with little change in managers has generated 10-year average returns of between 7 and 9 per cent per annum for Commonwealth Bank Group Super’s investment options. Its returns and fees have won a steady trickle of awards, but the fund has not sought the limelight or spoken about its philosophy in public, until now. Even then, chief investment officer Gerard Parlevliet is measured and cautious in his remarks, in the same spirit as his fund’s highly considered strategy.

“We don’t want to do things we do not understand, so we have kept our investment strategy uncomplicated,” is the plain explanation of why the fund was wise enough to avert the worst of the two biggest asset bubbles in its lifespan (the tech bubble and the credit crunch).

“There is the risk that the people who believe that they can create value through complexity will not be able to fully understand it, and there is a risk that people who are buying into it will be able to understand it too,” he says of those times.

Such complexity, he believes, can often hide solutions which benefit the seller more than the buyer.

Parlevliet, who has worked steadily at Commonwealth since 1979, rising to become Group Super chief investment officer in 2010, gauges buying decisions on how they would be explained to members.

“If a member comes up and asks why we made an investment, I need to be able to provide an answer. If it is too complex and we turn around and say everyone else was doing it, or they say ‘did you think this could go wrong’. It helps focus you.”

Returns, far from the madding crowd

So the fund does not invest in hedge funds or even private equity.

“Often the time that everyone is interested in it is the wrong time to be allocating capital. So you end up with a weight of money going in and the value that you are trying to extract on a forwardlooking basis disappears.”

He does not rule out investing in private equity in the future, but the irony of this apparently simple-is-best approach is that the fund has a large pool of financially sharp candidates to draw on for its trustee board, who are more likely to understand such alternative investments. So where does Group Super make its returns?

Much of it is from its fixed interest and direct property holdings and some smart choices in active equity investment.

“We have a track record to show that active management has added value to our members after fees. Direct property and fixed interest have also assisted in providing excellent long-term returns to members.”

But if its options of equities, bonds, property and infrastructure seem overly vanilla, then its early allocation to emerging market debt (EMD) and high yield debt in 2004 is pure pistachio. At that time, the common perception of emerging market economies was highly prejudiced by the crisis of 1997-98 which saw many Asian currencies collapse over concern at local banking systems that had expanded too quickly. The fund’s reward for this calculated bet has been average returns of 11 per cent per annum. But there is no triumphalism, just an explanation of why the move was common sense.

“It was based on a secular view that EMD economies were strengthening and getting better as debtors.” Parlevliet adds, “it is a reasonably intelligent way of accessing a good credit premium that was not necessarily being widely used at the time. Again you were avoiding the crowds and it made sense in terms of the fundamentals.”

Managers and privilege

The good timing is not the only remarkable factor here. Pimco has remained the manager of this allocation for an admirable nine years – long-term commitments to fund managers is the norm. It is not just about relationship building, but the risk of changing a manager at the wrong time.

“We change managers reluctantly, because we are trying to do something over the medium and long term. And if we just rush in and change on a short-term performance, we may be cutting off the returns that those managers were trying to generate because the timing of the returns does not necessarily fit.

“So we tend to only do this when we have a change of strategy or there has been a lot of change at the managers themselves, which gives us less confidence, or we might have just made a mistake.”

It is also designed to reflect the journey being taken by the end consumer, the members of the fund.

“We are looking for managers that have an investment culture and that understand they have a big responsibility to invest on behalf of other people. It’s a focus on managing someone else’s money, rather than a culture that says there is lots of money out there and it is a good opportunity to sell something.”

The fund has a habit of reinforcing this relationship in a way that has surprised a few fund managers.

It is in the habit of sending its best performing fund managers (on a longterm basis) a thank-you letter on behalf of the members.

“Investment managers have said to me they have never received a letter like that before. I’d say to them ‘Thanks for giving that feedback, but we want you to understand that what you are doing is valued and creates a valuable benefit for our members’, because regardless of whether someone is on the trustee board, in management or working for the partners that we use to do the implementation, they have to realise that there is a real-life person at the end of this dollar and they have a privileged place.”

Furthermore, the continuity in managers matches the continuity in the fund’s management team. Parlevliet has been on the senior management team since 1994. “We have had stability across the management team, so it is easier to understand the journey you have been on, rather than other people coming in and saying I could not quite understand where you have got to,” he says.

Commonwealth Bank Group Super’s investment philosophy matches these words of Warren Buffett
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
“Wide diversification is only required when investors do not understand what they are doing.”
“Risk comes from not knowing what you are doing.”

Commonwealth Bank Group Super is not a giant-sized fund, but it has managed to be recognised as a value-for-money fund without a cheap-is-best philosophy.

“If we feel that the managers can’t deliver the value for the fee they are charging, then they will not get the job – we are not focused on getting the cheapest fee. We also hope that by taking a longer term approach with our key investment managers we become a preferred partner, which in turn leads to reasonable investment costs.”

Group advantage

The simplicity of operating as a single employer-sponsored fund caps costs too.

“We do not have large distribution costs. If a person joins the group they can default into our fund and stay after they leave the group, but we are not marketing to the general public and saying ‘Please come and join Group Super’. We are also very mindful that every dollar we spend comes from the member, so we do not try and overbuild things. So we have eight investment options, because every time you add to that it becomes more expensive.”

The fund is able to gain access to inhouse capabilities such as the administration platform of Colonial First State, which assists in providing an end-to-end investment and member administration solution.

The property management expertise within CFS Global Asset Management also assists by looking after its $700- million property holdings.

Positive momentum

The fund is also taking a step into smart beta, an investment approach widely hoped to maximise returns while minimising fees. Its consultant, Towers Watson, is helping review the suitability of listed equities and alternatives for this approach, while RealIndex manages part of its international equities portfolio in this way.

“The concept of finding structural return streams that can be split out from active management and accessed cost-effectively obviously has appeal,” he says. “I expect that we will look closely at other smart beta solutions as we undertake future reviews.”

The fund’s current size is also seen as a competitive advantage. “We have scale in terms of membership numbers and assets. We are not too big that we have to take market returns, so we can add some value in active management and we are big enough to do what we want to do, rather than go into collective vehicles.”

The search for savings is set to continue too. Parlevliet sees it as part of his responsibility to offset the rising costs of governance in response to the Stronger Super reforms by adding value on investments. One might consider the fund is a living embodiment of the prudence and accountability the regulator is looking to enforce and that the extra rules might just detract from the job it is doing. Indeed, Parlevliet’s face betrays a hint of exasperation at the rules when asked about this, but he has resolved to see it as a healthy challenge.

“We have a strong investment governance framework, but to sit here and say we cannot do it better would be fooling ourselves, so when I see these things, I see it as an opportunity to reflect, and say what can we do better than we are doing today and using it as a positive momentum for doing things better or continually improving.”

Leave a comment