To understand how SSFS invests its $14 billion fund you need to know that advice is at the core of its offering.
Damian Graham, chief investment officer at the fund, sees accumulation as a collective outcome but retirement as one requiring individual input. “Once you hit retirement it’s a much more bespoke outcome looking at your needs, your time frame, your income requirements and your ability to support that with other assets becomes much more relevant,” he says.
The advice comes with a high awareness of sequencing risk and volatility.
“We know from a simple money weighting process if you lose less you have to recover less to get back to a starting point,” says Graham. “Also from a money weighting returns perspective, if you are drawing money out of the portfolio at a low point you don’t have as much capital with which to recover, so the total amount of money will shrink fastest if you draw out at low points.”
SSFS concentrates on smoothing the ride of members by taking out some of the volatility through reducing the size and duration of the capital draw down.
For this reason Graham thinks that advice and bespoke outcomes for its members, the average age of which is 66, are key.
“Our investment framework is meant to go hand in glove with our advice framework, whereby, from an investment perspective, we are looking to deliver return solution and income provision which maximises the likelihood that the advice outcomes will be delivered through investment returns.
“If we are saying through a planning framework, here’s the assets that you have today, here’s the income you need, and here’s how it’s likely to last you, and then we deliver a return outcome that is totally different, then clearly the likelihood of success for that client is a lot lower. So we want deliver as much as possible in alignment with the expectations.”
Structuring portfolio towards low volatility
The process of being client led, as opposed to theoretically led, is the starting point of discussions around SSFS’ portfolio construction. Key requirements are defined annually. For example, three years ago it was decided there was too much equity risk in the portfolio, so the question was asked, ‘Based on that view how should we cost effectively adjust for that?’ A number of strategies, including low volatility equities were put in place to address that.
“We also identified that fixed markets weren’t likely to generate real returns. Now whilst they have surprised in the last 12 months, we have largely been right that in general terms they haven’t delivered. Moving forward we don’t expect them to deliver good solid real returns, so for lower risk products we needed to seek alternative ways to get there.”
Graham generally doesn’t rely on one approach for the delivery of these style of outcomes, and as such has a reasonably diversified approach to generating returns.
His team look at the major factors in the market that they think deliver lower volatility using a quantitative volatility approach and a quality bias as “historically that has provided returns with lower volatility”.
“We’ve also used a yield bias or tilt because again it’s offered returns in a lower-risk lower-volatility fashion. So we can combine a number of different strategies. We can employ derivative overlays as well if we want, though we haven’t found the need to do this to date.”
To deliver the objective of a smoother ride from equities, Graham typically targets 85 per cent of the market risk, with a modestly preferential yield. Domestically he targets a higher grossed out yield and internationally he targets a modest yield benefit.
There is no default fund for SSFS, the performance is not peer relative and it is not heavily benchmarked. The core deliverable is a CPI+ return focus for members, which is achieved as all clients are advised.
“It’s a different game and it allows us to invest differently and hence take active risk away from the benchmark where we think it delivers to the core part of the CPI+ outcome,” says Graham. “We have a lot of people talking to us about alpha. It’s not an irrelevant to us, but it’s less relevant than it is to most. Where I’m much keener to take active risk is where it delivers to the CPI+ outcome, not where it gets me performance over a benchmark.”
SSFS generally is a strong advocate for their way of investing and believe that others in the industry should run their retirement portfolios this way too.
“You need to move away from benchmarks you need to take the focus on what the absolute return is and how do you generate that, and use your risk budget in a different way than just risk budget versus benchmark.”
The anomaly of high volatility
Graham believes that due to the quality, yield and low volatility bias taken by the assets under management for SSFS, its outcomes will be the same as the market over a market cycle, even though SSFS is taking less risk than the market.
Over the course of his investment experience there have been many companies that have promised high earnings growth and not delivered them, he says.
These tend to be slightly more speculative and more volatile in their share prices. By tilting away from those speculative higher growth companies that tend to disappoint, a smoother ride can be achieved with regard to total returns.
“It’s not really a low volatility anomaly it’s much more a higher volatility anomaly that the stocks are disappointing. And that’s been the experience I’ve had,” says Graham. “Certainly since we’ve put it in place here it’s been a positive outcome delivering returns substantially above the market and with a lower risk, although we don’t expect that to be the case in the more medium term because we think we can still deliver market style returns, but the risk focus is in the forefront, not the returns focus.”
A focus away from the US to Europe
Another market bias Graham’s investment team has been following is technology and its potential to impact on risk and return, including the earnings predictability of certain industries.
“The whole change to sources of energy, and the flow on to what that means for non-conventional energy sources, like green energy, could be extremely disruptive. We’ve seen this in the oil process already,” Graham says.
“As investors we regularly go through thematic discussion in an attempt to define what we view as likely to be key drivers and key changes to risk and return across assets, industries, sectors, regions. We certainly draw out what’s happening around energy, what’s happening around technology, what’s happening around capital markets. And there is a lot of interconnectedness.”
The ability for disruptors to generate long term income for members is the primary point of reference in the team’s discussion.
“We’ve certainly seen this with our allocation to the US, where technology in energy has driven strong returns. When you think about technology driving better earnings, you have increased currency and all of a sudden the economy starts to struggle because of the high currency, and you get competitiveness flying to another region like Europe. Our focus is to look at the flow on impact through that mechanism to a new region that may benefit.”
This is not a theoretical example. Like a lot of investors SSFS has turned its focus away from the US in the last six months and become much more exposed to Europe because they feel that competitiveness has changed materially through the currency impact and what they see in the labour markets and cost of production.