First State Super is looking to extend its tactical asset allocation (TAA) models to additional liquid asset classes to take advantage of market dislocations.

European and Asian equity markets are next on the list, but are subject to the board’s approval.

For two-and-a-half years, the $75 billion fund for education, health and service-based vocations has run daily TAA models in US equities, Australian equities and Australian 10-year bonds – the liquid asset classes to which First State has the highest exposure.

The TAA models use broadly similar quantitative processes. In each asset class, 50 per cent of the tilt signal comes from value indicators, 25 per cent from cyclical or economic indicators, and 25 per cent from momentum indicators.

“The value cycle and momentum indicators will be different for each of those asset classes, but the underlying framework is the same,” First State Super investment strategist Zoe McHugh said. “The reason for that is consistency…These models should hold up over time.”

While the strategic asset allocation remains the main return driver, McHugh added that the reason tilts were taken in the shorter term was that markets can move away from value for a period. Overvalued equity markets are one example of this.

McHugh said the model has helped reduce exposure to such markets, cutting the risk of value erosion that would affect member returns.

“That’s also the reason value is such a large component, because one of the team’s central philosophies is that you can make money by buying assets when they are cheap and selling when they are expensive,” McHugh said. “Now that seems obvious, but the [TAA model] enables us to do that in a disciplined framework and add value for members during those times when markets are quite dislocated.”

In its balanced fund, First State Super’s strategic asset allocation to Australian equities is 17 per cent, international equities 21 per cent, and fixed income 20 per cent. The super fund does not disclose its exact tilts, but McHugh said they were marginally underweight US equities, moderately overweight Australian equities, and neutral on bonds.

While the TAA process runs daily, the super fund changes position only when it receives the correct signals. McHugh added that while the models have been live for only two-and-a-half years, they have been back-tested to the early ’90s.

“We do take quite a sledgehammer – for lack of a better word – to the results, because we know that back-test models will always produce results that look good,” McHugh said. “[But] we are confident in the framework for the back-tested results, in the sense that we use only data that was available in real-time.”


McHugh will be speaking on market dislocations and dynamic asset allocation at the Fiduciary Investors Symposium in the Blue Mountains, May 15-17. To book a ticket, click here.

Join the discussion