UniSuper is using the underlying risk characteristics of individual assets to categorise them instead of relying on traditional growth/defensive definitions.
Legislative requirements mean most super funds have defined assets as growth/defensive based on their class, according to Rob Hogg, head of global strategies and quant methods at UniSuper, who will be speaking at the Fiduciary Investors Symposium in May.
“Whilst that’s obviously something we think about, we also think about the underlying risk characteristics of any particular individual asset … from the point of view of how much inherent risk there is in the asset,” said Hogg.
“We divide assets up into high, moderate and low risk, so you can have assets in the same class that are in different buckets according to their inherent riskiness.”
Hogg adds the advantage of this point-of-view is increased competition between the individual assets.
“For example, equities has always been in growth. Whereas with UniSuper there are higher-risk equities, there are moderate-risk equities and there are lower-risk equities.
“That way of thinking really helps inform the whole portfolio construction process, rather than using the blunter growth or defensive categorisation.”
Hogg believes this additional metric leads to a more solid portfolio construction thought process and, ultimately, construction itself.
“It lends itself to being a little more flexible, rather than being hamstrung by the traditional growth/defensive metric.”
Strong focus on quality
An underlying and key part of the fund’s investment philosophy is a focus on the quality end of the spectrum, not just in equities, but across the portfolio.
For example, the direct property portfolio has moved towards the quality end with non-core assets being divested over the last several years.
In equities, quality means examining aspects such as balance sheet and earning sustainability, while in fixed interest there is a significant bias towards investment grade or better in terms of the fund’s exposures.
UniSuper’s external managers also tend to have a quality bias.
“In the post-financial-crisis era – although I am hesitant to use that term because I am not sure we are completely out of the financial crisis – but that focus on quality has led to high-yielding types of assets, with these more sustainable balance sheets and earnings. And these have been the types of assets that investors globally have tended to gravitate towards over the last six or seven years,” Hogg said.
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DB versus DC
Hogg adds there is a subtle difference between how defined benefit funds and defined contribution funds are managed.
In his assessment, having a defined benefit fund that is still open leads towards high-yielding moderate risk assets, and affects how time and holding periods are considered.
“It is a subtly different way to think about investing, and that permeates across all of the funds we manage. Not just defined benefit funds, but more broadly across the portfolio as well,” Hogg said.
“It tends towards thinking about the return relative to cash or to the consumer price index, whereas the nature of accumulation investing is different to that. That’s certainly something I will explore at the Fiduciary Investors Symposium.”
Rob Hogg will be speaking on how asset owners are weathering the perfect storm at the Fiduciary Investors Symposium from May 9-11. To book a ticket click here.
