First State Super has grown rapidly in a short space of time. Only a few years ago it was less than $20 billion and now is well over $50 billion as a function of a significant merger with Health Super. Richard Brandweiner, chief investment officer, says the competitive advantages, the capabilities and the challenges are very different at $50 billion than at $20 billion.
Brandweiner was brought in at a time when the fund was going through a “generational point of evolution” to develop a new operating model and investment approach.
“The fund was the lowest cost fund in the country, as I understand it, and it had a very good but traditional portfolio of listed equities, bonds and cash. That meant we had a very effective and largely blank canvas on which to build an operating model and investment approach – a luxury in many respects.”
Brandweiner looked at what was going on in Australia and the world to design a model that would be suitable for the next phase of First State’s growth. From this he identified three fundamental challenges.
- Scale benefits no longer accrue back to members, but accrue to agents within the system.
- There is huge information asymmetry. The asset owner is so far removed from the end user of capital that a wealth of knowledge, information, insight and intelligence is not available to the asset owner, “which is a real limitation and source of leakage”.
- Agency risk, which is the leakages through specialisations, becomes pronounced. As soon as a fund starts to appoint agents who then appoint agents the bigger picture can be lost.
The model Brandweiner has developed is targeted at these particular challenges and how to create capability to give optionality. He explains that it’s not about insourcing or outsourcing, but it is about having the capability to execute on an investment idea in the most effective way. This means the development of internal capability, but also the significant use of trusted fund managers and other research organisations.
“We are trying hard to keep a single profile approach, this is similar to the way the Future Fund operates, which is to look at each and every investment, not as part of a sector but look at its contribution to the total risk and return of the portfolio. This is very different to the way things have been done historically.”
For example, the traditional approach has been to have 30 or 40 hedge funds in fund of hedge funds portfolio. The reason for this is because the portfolio manager is seeking to diversify away risk and mitigating their own business and career risk, but it doesn’t necessarily mean it has been thought through how each one of those parts contribute to the total investment outcome for the member.
Changing the system away from this type of approach is easier said than done, as investors are creatures of habit and have been brought up in a siloed system, says Brandweiner.
To overcome this Brandweiner has structured the team to have generalists, specialists, and then generalists again. The leadership group in the investment teams are all generalist and could all be chief investment officers – indeed many of them were. It’s also very deliberate there are no heads of assets, like infrastructure or property, sitting at the table. This is because there might be times when a sector is overvalued and thinking required that requires pushing allocations away from sectors entirely, which would be problematic to achieve if that relates to someone’s positon.
“Beneath them of course we need deep specialist expertise in certain areas and that’s the capability we have been building up, and will continue to build up over the next few years. At the analyst we are looking for a range of generalists that we can deploy in the areas that make the most sense for our members at any particular point in time. Hopefully that gives them a lot of good learning and opportunity, but also enables us to have a flexible workforce.”
He is proud his team has developed a very systemic and disciplined approach to active asset allocation with the board and committee supporting the approach. This is critically important for Brandweiner as in his view long-term fixed strategic allocations frequently don’t help a portfolio meet its real return objectives, because it is usually a function of price risk and markets being prone to overvaluation.
For this reason Brandweiner put a priority on embedding in the investment approach a way of managing price risk in the portfolio and to be able to take advantage of opportunities when they present themselves.
“Doing asset allocation well is notoriously difficult. Through my experience I’ve always found doing it in a very systematic, a largely quantitative way, is one of the best ways to ensure a disciplined repeatable approach to what is inherently a difficult task.”
Brandweiner, coming from Perpetual Investments where this had been done successfully for 20 years, leveraged a lot of those learnings to develop a tailored approach to managing risks in First State’s portfolio.
“It’s one of those things that’s very difficult to outsource because there might be occasions where it makes sense to do nothing, to sit at your strategic benchmark or have only a very modest position. Once you introduce agency risk and start appointing fund managers, for example, it’s very difficult for them to spend long periods of time doing nothing, which might in fact be the right thing to do.”
First State is now able to take a different perspective, a holistic view of risk in the portfolio, and is prepared for long periods to not take a position at all, “which is a very challenging thing to do”. It manages that across Australian equities, global equities and domestic duration, which are three of the largest contributors to risk and return across the board. There are also plans to expand the model and approach across other asset classes over time.
“It’s a test match, not a one day-er. We are still building and I suspect we will always be building. What I’m happy about is that we have a leadership team in place on the investment side that are highly credible, very experienced and capable of executing on this one portfolio approach.”
“We have a lot of work to do improving our operational framework, we need more analysts, we need more people on the ground and we will continue to build that out over the next few years.”
He adds that they are relatively underinvested in alternatives, like infrastructure and property, that demonstrate demanding valuations, but they are embracing complexity and looking harder for value opportunities in that space though it’s not something that can be done quickly.
One of the strengths of the portfolio, according to Brandweiner, is the amount of dry powder that they have in terms of strong inflows and cash. The challenge is how to identify good value opportunities when there is a wall of capital from all around the world looking for the same thing.
Chief Investment Officer, First State Super – 2 years
President, CFA Society of Sydney – 3 years
Director, Australian Advisory Board on Impact Investing
Perpetual Investments, group executive of Income and Multi-sector – 13 years
CFA Charter, CFA Institute
Bachelor of Economics, University of NSW
Chief investment officer of the year finalist, Conexus Financial Superannuation Awards 2015