In the wake of the economic shock of the Brexit vote, Investment Magazine looks at how chief investment officers from three super funds have reacted to the black swan event.

Passive rebalancing

First State Super went into Brexit with an underweight position to US equities and an overweight position to Australian equites. However, this was driven more by the latter representing good value, while the former was fundamentally expensive and prone to risk, rather than a concern about volatility.

“We haven’t changed our asset allocation positions as a result of what has happened, however the one advantage of being a long-term disciplined investor is rebalancing,” said Richard Brandweiner, chief investment officer of First State Super.

The market volatility in the share markets in the days after the referendum meant the super fund bought listed equites in order to rebalance the portfolio to the strategic asset allocation.

Brandweiner added there was a lot of evidence that purely passive rebalancing around a long-term strategic position adds value to longer-term portfolios and reduces risk.

“It’s extremely difficult to know what the implications are going to be and I don’t believe that there is value in trying to manage the portfolio based on assessments of what could happen, so we will remain, as always, focused on bottom-up assessment of individual assets. We believe that’s the best way to invest for the long term,” Brandweiner said.


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Bias to quality companies

Brexit has confirmed some of UniSuper’s strong convictions about the market, John Pearce, chief investment officer of UniSuper, said in a video address to members.

The first conviction confirmed was that interest rates were going to continue to be low, with Pearce predicting that the Federal Reserve will delay a potential tightening cycle by at least three months, and possibly to the end of the year.

“Now, share markets will overall find that a positive, but there will be sectors that won’t benefit from that – banks, for example, would benefit from rising interest rates and they’re not going to get that now,” Pearce said.

“Also those people that are relying just on interest income to fund their retirement are not going to be particularly happy about low rates for a long, long time.”

The super fund had already been underweight in Europe, relative to its weighting in the global share market index.

Despite the fact some European markets are beginning to look cheap, the volatility in the region from ongoing political instability is something Pearce wants to avoid.

“The other thing I’d like to add is the importance of biasing your portfolio of shares to quality companies … These are the companies that have got very robust earnings. Now, we’re not saying that the share prices won’t fall because they have fallen. But their earnings, because of their fortress-like qualities – we do expect the earnings to continue to grow, and over time their share prices should reflect that growth and earnings.”


Market mispricing

While chief investment officer at QSuper, Brad Holzberger’s central position continues to be that growth will slowly recover, the use of a scenario based approach meant the super fund recognised there could be disappointments to this, and as such was able to protect itself from the worst of the effects of Brexit and even find some opportunities.

One of these opportunities related to trading as prices changed levels in the wake of the Brexit result, though Holzberger emphasised that these shorter-term tactics sat inside the wider long-term investment strategy.

“There will always be short‑term geopolitical shocks. We and others are not able to accurately forecast them, or reactions to them. The unexpected vote to Brexit is one of these types of shorter‑term geopolitical shocks. Whilst acknowledging it was possible, both in our assessment of the risk and the positioning of the portfolios, we, like most, did not specifically forecast that happening,” Holzberger said.

In a blog, Damian Lillicrap, head of investment strategy at QSuper, said the team’s initial view was that the likelihood of the UK exiting the EU was low. However, they believed the market had mispriced the risk as a poll indicated the vote could be close.

“If the United Kingdom left the EU, forecasts were that it would experience a significant recession. However, UK equities had broadly tracked in line with other international equity markets. Hence the potential market reaction seemed skewed; small gains if the ‘remain’ won but a significant selloff if ‘leave’ won,” Lillicrap said.

As such, the super fund reduced its exposure to UK equities from 14 per cent to 8 per cent of the international equities portfolio, in the lead up to the referendum.

Following the vote, the super fund saw opportunities it could take through dynamic asset allocation (DAA) in both international equites (purchase of $200 million) and fixed interest (sale of $200 million), as prices went through significant changes.

QSuper is of the view that there will be no material impact on infrastructure in the UK and EU, and the real estate they have remaining in the region would display relatively lower risk, because of the “length of lease, tenant quality and/or dominant position” (prior to the vote they had sold some of these assets because the market was strong).

Meanwhile, over the past 12-18 months QSuper’s investment manager has viewed private equity with caution, and as a result the deployment to this asset class has been at a slower pace than target.

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