In his first media interview since being appointed general manager, investments at New South Wales Treasury Corporation (TCorp), Mark O’Brien speaks to Investment Magazine about how liability management is a key influence on investment strategy for many of the funds at TCorp.
The amalgamation of New South Wales’ funds management activities under TCorp is based on producing a sustainable operating model that will increasingly generate significant opportunities and cost savings for the state.
“The amalgamation of the majority of investment professionals from TCorp, SAS Trustee Corporation (STC) and Safety, Return to Work and Support, now icare, offers considerable opportunities in asset management for New South Wales,” says Mark
O’Brien. “We now have a model that taps into the specialist know-how of all three fund-management operations.”
O’Brien has been part of the amalgamation process since its beginning in early 2014. While the entity amalgamation is complete and roles have been assigned, the process of refining TCorp’s new operating model will be ongoing.
Feedback and consultation with all stakeholders is extensive. As a measure of this task, TCorp works with eight governance committees to produce defined deliverables each month. It is responsible for 200 separate client portfolios, with 75 investment-manager relationships and more than 120 external mandates, several custodians and asset consultants. Perhaps surprisingly, despite similarities in investment approach, there is only one investment mandate, which is similar across the three agencies.
The story most people want to hear on the amalgamation project is how its 75 fund-manager relationships will be harmonised. But the starting point for any change, and the biggest imperative for O’Brien, is around generating investment performance and managing $70 billion in assets in keeping with the changing liabilities of the STC, icare and TCorp funds.
Compared with managers solely focused on superannuation accumulation funds, these concerns lead to a different language for TCorp’s investment approach.
So O’Brien talks of drawdown, path-dependency risk, liability benchmarks and sequencing risks in describing TCorp’s needs.
Thus, while others might focus on performance in terms of benchmark returns, survey positions, and traditional risk–return ratios for TCorp, the focus is much more on liability-adjusted returns and performance relative to a liability-adjusted discount rate.
“A measure of portfolio efficiency for some of our accounts is not just the return relative to volatility, it is much more linked to the liability-adjusted Sharpe ratios,” he says.
Ensuring TCorp Investment’s ability to assist its clients to close the gap on unfunded superannuation liabilities in a low interest rate environment is one of the organisation’s main objectives. Despite the low inflationary environment in place at the moment, TCorp Investments is actively exploring strategies to head off a future inflation rise and a relative lack of supply of inflation linked assets.
Another ongoing concern is the need to maintain liquidity for client funds, when large movements in currencies could draw on liquidity through forward settlements.
All these factors would matter more to a fund in drawdown than a fund in accumulation mode.
The pressing nature of imminent liabilities means ensuring sufficient liquidity is becoming a bigger issue for some mandates. “We have people leaving the portfolio every day,” he says.
“Every dollar that is earnt in income is paid out to someone in pension immediately.”
For this reason, he says some funds do not have the problem of where to allocate surplus cash, and are often sellers in rising markets.
“We are much more interested returns come through at the right time and that the liquidity exists, so the delivery to the end investor is not interrupted by short-term market volatility.”
This all means TCorp is interested in the characteristics of a different set of assets to the norm. For example, commodities are of interest due to their potential for inflation protection, when their relatively low Sharpe ratios currently might make them less interesting to others.
As is consistent with a long-term investment mindset, the opportunity costs of not achieving funding objectives are of greater concern than the fee scale or alpha expected to be generated.
Efficiency of implementation and a close scrutiny of value-for-money from fund managers will also be crucial in helping the funds meet their liabilities.
O’Brien describes implementation and operations as a “key to the success of the way in which the asset classes, the portfolio strategy and the investment strategy is delivered”.
For this reason, the implementation team is integrated into the decision-making process.
O’Brien talks of everything being “tracked and monitored” for full transparency and that “every basis point counts”.
“It is amazing when you go looking inside the operating models that are inherent in the external manager world, a lot of key information we are interested in understanding is behind the veil,” he says. “We want transparency on every asset we own as it is processed through the system, all the way down to how collateral is managed, how transaction costs are managed; each will be monitored for the efficiency it can bring to the return.”
As far as driving value is concerned, this is where TCorp’s focus will lie. O’Brien says no decision has been taken on whether TCorp will expand its in-house cash and fixed income management capabilities and its co-investments in property and infrastructure as he is focused on delivering value from arrangements already in place.
He says, firstly: “We are going to outsource wherever we can. We are not really interested in insourcing more than we need”; and then, “Managers are always going to play a key role for us; skill does exist”. He also reasons the organisation does not want, as of yet, to limit itself to a particular model.