VicSuper is introducing a stress-testing system for its assets that will help manage risk on idiosyncratic allocations, such as its recent tailored fixed-income portfolio.
Last year the fund moved from a passive index allocation to a tailored, global fixed income index, created with index provider, Barclays, and its principal fixed income manager, BlackRock, to reflect its own risk appetites and to take into account an ongoing outlook of low yields, high volatility and high sovereign risk.
At the Australian Institute of Superannuation Trustees Australian Superannuation Investment conference on the Gold Coast, Ronan Walsh, fixed interest portfolio manager at VicSuper, revealed how the index now caps its exposure to US treasury bonds at 10 per cent, to Europe at 30 per cent, and a cap on Japanese government debt. The reduced weights for these countries has brought a higher exposure to emerging markets, which now rise from around 4 per cent of its portfolio with BlackRock to 16 per cent. The high debt-to-GDP ratios that have been built up by developed nations are behind the limits, along with low yields for the risk provided.
“The biggest risk is not making the returns we can for our members,” Walsh told delegates. “The pure fixed income markets [the basic index] are not going to meet the aspirations of anyone in retirement.”
Fixed income currently makes up 17.5 per cent of VicSuper’s MySuper fund and within this sits its core allocation to BlackRock, as well as two new satellite mandates to active managers that have the freedom to invest in a range of bank loans, high yield debt and emerging market debt.
Walsh said that so far he had been very happy with the returns produced from this strategy.
The new index being run by BlackRock was introduced to mitigate risk, but the new satellite managers had introduced greater risk and, with this in mind, VicSuper is currently in the process of implementing a risk system that involves scenario and stress testing.
One of the functions of this system will be to test risks the funds might face from a big draw down in liquidity.
Greg Liddell, managing director of investment consulting at Russell Investments, who spoke at the same session with Walsh, said that any shift away from cash and government bonds would bring greater liquidity concerns.
“Investments tend to become less liquid just at the time you need it most,” he said. “If you make this less liquid, you have to make something else more liquid.”
