First State Super dynamic asset allocations add about 50 basis points per annum, as the super fund seeks for returns in a low rate environment.
The fund uses a systematic process that can be run daily and implemented if the signal suggest that it should buy or sell assets, Dr Zoe McHugh, investment strategist at First State Super, told delegates at AIST’s Superannuation Investment conference in Cairns.
“Valuation is about 50 per cent of the signal based on propriety, although not particularly complex or unusual, measures a fair value. The other 50 per cent comes equally from allocations to cyclical or economic signals, as well as price momentum,” McHugh said.
The superannuation fund is also considering where it can put its cash, which it has been overweight in for two-and-a-half years, finding that real return and global macro strategies are more attractive given that the returns from banks have been dismal.
“But you can also allocate this to market alternative beta, risk parity, CTAs and managed futures funds,” McHugh said. “These managers are CPI plus return objectives, they are liquid and they have a very low beta to equity which is of course important if you are trying to draw down from these managers to make an investment in a timely fashion – you don’t want to be doing so in an equity market sell-off.
“The managers we allocate to in this bucket are fully aware that this is how we will treat them.”
She added they are looking to make in-house investments in systematic beta and also make direct and co-investments in asset classes, such as real estate and infrastructure, where the returns align with those that they are trying to achieve.
Portfolio construction
In terms of portfolio construction though, the major change that the super fund has made over the past couple of years has been to separate out beta and alpha into what they term as market portfolio and portfolio plus.
Beta (or market portfolio) is the starting point and “is actually very hard to beat”.
“This should go quite a long way to achieving a members long-term objectives. It’s where we house our vanilla bonds and equities that are benchmark aware; it’s also where we house a cash.
“Currently we have $24 billion allocated to this though this number is not set in stone, but of course active options are constrained to some extent by MER.”
Portfolio plus (or alpha) is where the liquidity, risk and fees are spent to generate excessive returns, and is also where the super fund allocates to active equity managers, specifically, those that have high conviction or may operate in the niche part of the market.
“It’s where we allocate private markets, such as private equity, infrastructure and real estate, but of course ensuring we are adding value above the liquid alternative.
It’s where we were thinking about DAA and allocate to hedge funds and real-time managers.
“The separation of alpha and beta is not a particularly new concept, but for First State Super it’s important for us to shine the light of this part of the portfolio, alpha or portfolio plus, to make sure we in the investment team are accountable for the returns that we are trying to generate when you use up members liquidity, risk and fees,” McHugh said.
