QSuper will start managing default members’ investments through, instead of to retirement within the next few years.
Speaking at an IMCA seminar in Sydney, Brad Holzberger, chief investment officer of QSuper, revealed it had always been the fund’s intention to do this, but its first goal had been to launch its accumulation cohort strategy in 2013.
“To move to a full asset liability model from cradle to grave would have been too much for the governance and management bandwidth of the fund then, we had to carve off what we could,” he said.
The fund will bolt on the decumulation phase for default members in the “next year or so” said Holzberger, where the fund will offer members the ability to transition capital into income and to factor in “uncertain” longevity.
As part of the move the fund may explore, among many other strategies, whether the contributions of younger members could be used to buy the assets of members in retirement, as a way of trading risks between the two groups in such an arrangement.
Holzberger revealed the plan at a seminar on the subject of risk within bond portfolios.
He told how QSuper had started moving away from peer benchmarks in 2009/10, by raising the allocation to its bond portfolio and the levels of risk within it.
“We use lots of bonds varied by types of duration – none of them represent risk free outcomes,” he said. “They are either return seeking or a diversifier; in some cases they are the riskiest assets in our portfolio by a long way.”
The bond portfolio is now mostly made up of sovereign bonds; some opportunistic credit may be used, when such credit offers “one way bets”, such positions are managed on a dynamic asset allocation basis. The portfolio is also brought up to equity risk levels with futures contracts.
The bond portfolio has higher volatility, but has combined with the fund’s equity portfolio in quite a “beautiful way”, said Holzberger, by producing similar returns to its old asset allocation, but with half the volatility. He added that in the period from November 2011 to May 2015 these correlations had particularly worked in QSuper’s favour.
As part of the change in thinking, Holzberger said that his team would never have to explain to the QSuper board how the bond portfolio or a single asset class had performed in isolation, rather how both had worked together to meet the fund’s investment objective.
In one of a string of revelations that challenged industry norms, Holzberger told delegates QSuper would see rising interest rates as a good thing for its members.
“Our members who are at or in retirement are not going to fund their liabilities unless interest rates go up, so they better go up,” he said, adding that the market value of portfolios of its members under the age of 45 would suffer in the short term, but it would enable them to then buy assets at a cheaper price.
“We will say to them, you are about to buy all your assets; interest rates rising will be the best news you have got because your future assets are going to get cheaper,” he said.