It has only around 10-15 per cent invested in Australian equities and manages equities in-house based on the research services of its parent Morningstar, and its range of multi-asset portfolios cover $4 billion in investments. Investment Magazine talks to Andrew Lill, chief investment officer of Ibbotson.
Ibbotson runs $4 billion of assets invested on behalf of superannuation members, including two My Super products, and financial advisers. That real estate super fund REI Super reappointed Ibbotson as implemented consultant earlier this year suggests its approach to investing is paying off. Notably since 2012 Andrew Lill has run a remarkably low Australian equity allocation.
Ibbotson carried out deep fundamental analysis three years ago into the historical pattern of overinvestment in commodity cycles that led to concern for the relative valuation of the Australian dollar, and for the key domestic industries. This work meant that, relative to other equity markets, Australian equities was made a lower priority equity market.
“We were very concerned at that point that the Australian economy’s fortunes and future terms of trade were not quite as rosy as the mining companies at that time were predicting,” says Lill. “We have also had a low allocation to Australian banks relative to other Aussie listed companies since 2012. Our work comes from long-term fundamental analysis andrelative valuation.”
The counter balance to this position has been to be overweight other currencies relative to the Australian dollar, and to have a high weight to specific Japanese equities which in 2012 were attractively valued, compared to long-term norms, when Prime Minister Shinzo Abe started to introduce tax and company reforms to a moribund economy. Since that time Ibbotson’s flagship multiasset portfolio has returned 14 per cent per annum.
Being contrarian is something Lill takes in his stride. It’s one of the purposes of the fund. “It is only uncomfortable if your client is worried by quarter-by-quarter peer relative performance,” he says, and states his clients are more focused on meeting risk adjusted return objectives over a 5-7 year period. The peculiarity of the position is down to lessons learnt in 2008.
He points out that the number one feedback from the public after the crash was ‘I thought you were managing my money to avoid the scenarios that happened’. The logic is firstly redefining risk around a goal of preserving capital in all environments, rather than “riding the ups and downs of markets”. The key to this is employing a valuation-driven dynamic asset allocation approach.
“It seems to ring a lot of bells for independent financial advisers and superannuation trustees who wish to structure their portfolios appropriately for their clients,” he says. “Where we are seeing a lot of traction is in particular financial dealer groups which do not have to manage their money in the same way as everyone else in Australia.”
Ibbotson clients, he says, love the objective-based approach.
And for super funds he says: “If there is one learning for the super fund industry, it is why is it that we all look so similar?”
Members first, league second
For Lill, it is being true to an objective for the members first, and league tables second.
“The primary objective of most of the products that super fund trustees offer to members has on the label ‘CPI plus returns with a low level of risk’. We consider that if you focus directly on this objective and stay the course through the cycle you will indirectly be competitive relative to peers.”
Lill takes issue with a report earlier this year by Deloitte that came to the conclusion most implemented consultants derived an extra bit of return for their clients above a passive portfolio, but that the total cost of the fees above a passive portfolio did not make it worthwhile. He makes the point that all surveys take a particular point in time to draw conclusions, which can skew their findings.
“Index weighted portfolios tend to be long duration and concentrated to US equities, because benchmarks are long duration and US equity dominated, so when bond yields fall and US equities perform strongly, a passive portfolio will be a strong performer,” he says. “When things turn as they have done in the first six months of 2015, where you have Australian currency falling rapidly, US equities moving sideways and bond yields rising, you are in a completely different domain.”
Global reach A key source of strength for Ibbotson is its global reach. Despite the relatively modest $6 billion under management in Asia-Pacific and Australia – $2 billion of this is run for advisers and high net worth individuals in Hong Kong and Japan – Ibbotson and its parent Morningstar have global offices covering the management of $179 billion in assets utilising its strong manager and stock research.
“We have internal analysts we can call up and say ‘what is the deal on Apple, BP or PIMCO?’” he says.
This resource fuels its internal management of equities and bonds, of which 40 per cent is run on what Lill calls a fundamental or strategic beta approach. This uses a number of qualitative research inputs and quantitative screens to help the fund take a step away from market cap indices.
“We want to create simple but better exposures than a market cap passive approach would give us,” he says.
Using the help of an implementation service from Omega Global Investors, this fundamental beta approach is rebalanced twice a year to keep turnover costs low, but also to have an explicit consideration of risks.
The fund then uses a multi-manager approach for the majority of assets (50-60 per cent of all assets) using high conviction active managers. ETFs and currency forwards are also employed to assist in specialist exposures.
The 16-person local investment team is currently structured with Peter Bull running in-house portfolio construction, Craig Stanford looking after multi-strategy alternatives, the newly appointed Bryce Anderson looking after external domestic equity mandates and Bianca Rose the external global equity managers. Brad Bugg manages fixed income portfolios.
Looking to the future, Lill says that Ibbotson’s parent, Morningstar, is increasing the integration of its global investment teams under the leadership of Daniel Needham, and that he is focused on building out the firm’s investment staffing and capabilities in the wider Asia-Pacific region reflecting ongoing assets growth.