First State Super will increase the use of multi-asset managers to 10 per cent of its $50 billion fund for reasons of liquidity, low fees and the high prices of alternative assets.
In a case study at the AIST’s ASI conference, Dr Zoe McHugh, investment strategist at First State Super, told delegates of the soon to be announced appointment of a fourth multi-manager (three external managers and one internal).
The fund has negotiated fees for these mandates below the 50-80 bps charged for entrants into the managers’ pooled funds.
Tactically, the allocation has grown due to the high prices of long term alternative assets – the fund sees multi-asset funds as liquid investments that it can hold while prices for other assets remain high. It reasons they are also a smarter investment than holding cash.
Strategically, First State Super is using multi-asset funds to protect the portfolio when equities under-perform while recognising that during a bull run, these funds will under-perform. It also sees the funds as a source of investment ideas and of processes which can be adopted in-house.
In the future, McHugh saw such managers as potentially providing a stable income stream for retirees.
She listed the desirable features of a multi-asset fund as having no performance fees, half the volatility of hedged global equities, expertise on currency modelling, a track record of making bold moves within the portfolio, the ability to go long and short, plus low turnover of senior staff at the managers.
This view was endorsed by Jeffrey Chee, head of investment strategy, Australia and Asia Pacific, Towers Watson, who was on the same panel discussion as McHugh.
Chee said he would be happy to see clients invest up to 10-15 per cent of their portfolios in such funds. He saw them as giving funds access to a broader opportunity set, as such he described them as an “extension of funds governance”, while their CPI plus objectives were more aligned to members objectives than a specific asset class, he said.
Ken Marshman, chair of REST Industry Super, questioned Chee on the downsides to such funds, stating: “Anything as good as this, cannot be as good as this.”
Chee replied that the risk of these funds lay largely in the individual skills of each manager to get their asset allocation calls correct.
David Wanis, senior analyst and portfolio manager, Schroder Investment Management, who runs an $8 billion multi-asset fund for Australian investors, illustrated the way such funds are run by revealing that his fund held 38 per cent in cash at the end of July, a figure that fell to 30 per cent in cash at the end of August.
His sense of how clients were using the fund was that less and less were seeing it as an alternative asset and more of a growth asset given that it contained traditional betas.