Telstra Super, a $17 billion corporate super fund, has tailored funds for niches within the various investment strategies that it runs. It also has had a strategy to increase the level of internal management which has been effective in delivering targeted outcomes and helping to manage fees.
Jim Christensen, Chief Investment Officer and finalist in the Conexus Financial Superannuation Awards 2015, says this has allowed them to spend fees in areas they think make sense, such as alternatives.
Christensen started at Telstra Super at the beginning of 2010 and was a natural choice as he’d previously worked in asset allocation, active management, and had experience in internally managing funds from his time at the Queensland Investment Corporation (QIC), as well as a background as an economist.
One thing that differentiates Telstra Super from other funds is that they have internally managed funds from close to their onset, 25 years ago.
“The culture was already established for internal management which fitted with my mindset,” Christensen says.
He had spent time in the mid-90s at QIC where all the money, apart from international equities, was managed internally.
One of the first things he gave consideration to when he arrived at Telstra Super was the level of internally managed funds, which stood at only six or seven per cent of the actual fund, about $700 million dollars.
A possibility was to take it back to zero because the team was thinly staffed at the time and it wasn’t a particularly meaningful chunk of the overall fund. And, of course, to manage funds internally the systems needed to be robust, the right people brought on-board, backups needed to be planned and the right compliance systems were required along with a whole mix of things that come with the territory, making the option challenging.
But Christensen strategically decided that Telstra Super would keep managing funds internally, and even grow the allocation, because of the benefits of reducing the cost. This decision was informed from QIC culture where he saw internal management work and add value to the bottom-line of the fund.
Based on the scale of Telstra Super a plan was put in place to systematically increase the level of the funds managed internally. Today the fund has roughly 30 per cent, or $5 billion, out of $17 billion managed internally.
The logic was to work on areas where the fund had scale like Aussie equities, property, fixed income and cash following the model Christensen was comfortable with at QIC, which involved building things that complimented external mangers – a blend of internal and external.
“It’s not to try and duplicate what external managers are doing because they’ve done a very good job, but it was to find niches that make sense for us to run such as lower risk and enhanced beta strategies,” he says.
For example, in Australian equities Telstra Super runs a number of strategies. One of them is running several funds targeting income. These are basically mandates in Aussie equities that are reasonably concentrated holding in the order of 30 or so stocks.
Favoured companies were those with quality, strong management and paying a higher than average dividend. Essentially this strategy is to deliver income on a sustainable basis, rather than try to add active return to a benchmark.
“For funds running something like that, if you’ve got capable people then they can run some screens and they can run a reasonably straightforward investment strategy that does save some fees and you can harness income over the longer term in a safe and effective way.”
Also with Aussie equites Christensen runs a buy write fund, again seeking to provide income from options. When the market is flat it does well on a relative return basis, but when the market is running it underperforms, though it will gross up the return through income.
That kind of strategy is suitable for funds where the objective is not necessarily chasing a lot of return through capital gains, but predominately through income.
Christensen says with Aussie equities it is hard to generate a lot of tracking error or active risk with a multi-manager approach, because with eight to 10 managers, even if they are quite good and have diversification, tracking error falls away and there’s a lot of redundancy there, which makes getting active risk up a challenge.
He has also recognised that all managers will own the top 20 stock regardless of what they are doing, so he runs a top 20 fund internally and tries to get managers to focus on areas where he thinks there are inefficiencies and where they can generate alpha, typically pushing them down the small cap and mid cap market area in the Australian market, a strategy he says has worked quite well.
“We are looking for strategies that compliment what we can get across the overall portfolio rather than try and replicate or duplicate we what can buy that is readily available out there in the marketplace, as there are very competent managers doing that,” Christensen says.
This approach has been used across fixed income as well, though there is more of an absolute return/total return focus in these strategies with a strong emphasis on capital preservation.
He adds that it can be a bit tricky communicating the objectives to a manager and often it’s a small amount of money for a manager, but it’s a large amount of money for someone running it internally.
Chief investment officer at TelstraSuper – 5 years
Managing director, active management division at Queensland Investment Corporation – 12 years
Bachelor of Science BSc, Bachelor of Economics BEc, Master of Economics MEc, Queensland University
Chief investment officer of the year, Conexus Financial Superannuation Awards 2015
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