A move to low volatility and quality equity strategies has seen State Super Financial Services (SSFS) reduce volatility by up to 30 per cent in more than half of its equity allocation.
The $15.3 billion fund, which runs pension portfolios for retirees from State Super across nine different investment options, took the decision three years ago to allocate around half of its equity holdings to smart beta and active strategies that avoided volatile stocks.
The managed volatility equities component strips out companies with volatile valuations with an added overlay to avoid expensive companies and high sector concentrations.
The quality equity portfolios focus on companies with strong balance sheets and strong stable cash flows – food and drinks company Nestle being a prime example.
Richard Dinham, head of research at SSFS, said that as well as reduced volatility there was generally far less drawdown from these strategies. “Drawdown is expected to be much less than the general market. This gives you a compounding effect through time which is much more beneficial for our members. So if you do not drop by as much in a downturn then you have less to make up when the market turns around.”
He added that some previous managers had too much exposure to stocks such as those in mining and energy sectors which can be volatile.
The new approaches, which are run by Acadian Asset Management for the managed volatility strategies and Walter Scott and Epoch Investment Partners for the quality strategies, make up around 20 per cent of assets and over half of all equities in the SSFS balanced fund, which is the most popular of its nine funds.
SSFS uses eight different international equity managers in total with strategies including passive, low volatility, quality-focused and lower risk portfolios in emerging markets. Equities in total make up around 25 per cent of SSFS assets.
Richard Dinham is speaking at the Post Retirement Conference on the role of equities in retirement portfolios, held at the Ivy Ballroom, Sydney on March 10.
Speaking alongside him will be Roy Maslen, chief investment officer—Australian equities at AllianceBernstein. Maslen said there was more to low-volatility investing than simply buying shares that do not fluctuate significantly in price.
He favours a total return approach that ignores benchmarks and that is alert to the potential of franking credits to produce after-tax returns. He also uses quantitative research to identify stocks that work well in down markets, and fundamental research to identify stock-specific risks.
To find out more about the conference visit https://www.etouches.com/ehome/index.php?eventid=110520