Since taking the top investment job at Mine Super in May, Seamus Collins has swung into action to simplify the fund’s portfolio and move a big chunk of equities into passive strategies.
The decision to shift 60 per cent of Mine Super’s developed market equities, and one-third of its Australian shares into low-cost passive vehicles is a huge change for the $11 billion super fund which stuck to active strategies until this year.
“I’m not a fundamentalist about passive investing,” says Collins, who is ready to tilt back to active management as opportunities arise.
“I’m surprised by how many people in the industry are ‘bi-polar’ when it comes to active and passive strategies,” he added. “There are sectors where alpha is harder to obtain. And, in developed markets while you can get alpha, it’s hard to realise it over the long term. Plus, manager selection is hard with most underperforming the benchmark.”
Emerging market equities allocations at the fund remain 100 per cent active, which the CIO says underscores the structure of these markets for alpha.
A self-proclaimed pragmatist, who has mostly worked on the investment operations side of the business, Collins views his promotion to chief investment officer as an opportunity to focus sharply on generating ‘operational alpha’ to boost returns. This is especially important in a lower return environment for defensive/lower risk spectrum assets. By improving implementation outcomes in areas like operational cash management, agent lending and transaction costs, Collins expects to pick up between $5 -$10 million annually.
“Investment decision outcomes vary over time and efficiencies are permanent uplifts,” he adds.
Historically, Mine Super was a big believer in actively-managed investments. While Collins accepts there is value in selected active investment, he is not all in. “It is not a natural instinct for someone of my background to look for extremes or for Hail Mary approaches,” he said. I prefer “to have a balance of solutions that will serve the fund well in different conditions over the long term.”
It is precisely because Collins does not have an asset management background that he is not wedded to any particular style belief or house view. “Part of that pragmatism is not hoping that your active factors will work in different market cycles,” he said. “It’s why we made some changes in our appetite for active management.”
Portfolio revamp
The investment chief has overhauled other strategies too. He has increased Mine Super’s exposure to developed market currencies, largely exited multi-asset and alternative risk premia and has boosted the fund’s allocation to unlisted infrastructure and fixed income.
That’s not all. Collins raised the fund’s allocation to illiquid assets given his decision it was too conservative given the nature and size of the fund, which has, on average, an older membership with high balances
On currency, he says while hardly a unique view, it was pretty evident that holding developed market currencies will help diversify in a market stress event. Mine Super is now viewing FX an asset class, rather than as an adjunct of the investment. “Where currency was viewed as a risk to be hedged, it is now viewed as a risk, a diversifier and a return opportunity,” he adds.
Other changes include aggressively slashing the balanced fund’s allocation in liquid alts from a very high 20.5 per cent to 4.6 per cent per cent. This represented a return to a more balanced and cost-effective portfolio with less complexity that investors can be prone to.
“With liquid alts we were a fair way away from the industry average and it was an opportunity to rethink,” Collins said. The investment chief initially planned to get rid of liquid alts but he has relaxed that stance a little. “We haven’t exited completely but have stepped back and assessed the value of some of the structures given they are expensive, complex and not always straightforward.”
Mine Super was also very underweight in fixed interest which hurt returns when bonds rallied hard on falling rates. Collins has since raised the allocation – adding Australian fixed interest, sovereign bonds and investment grade bonds and getting rid of junk. Most of the funding for that came out of the liquid alts bucket. He also used funds from that bucket to almost double the money invested in unlisted infrastructure and private credit.
Keeping it simple
Importantly, Collins has cut the fund’s complexity by more than half and slashed the number of investment buckets that make up the portfolio.
“People with my background have an inherent distrust of overly-complex structures,” he said. “They can make clarity, flexibility and responsiveness harder and therefore costly.” He added that having too many moving parts to focus on during times of market stress was not helpful.
Collins underlines the problem of a complexity bias in the investment community. “People are prone to examine quite complex solutions because they promise wins no one else will get. So, if a lot of people are tasked to find those solutions naturally, they will find them.”
The investment head said if a strategy is going to add additional complexity, risks and implementation challenges, there must be a return and portfolio construction benefit.
“If the answer is yes, we are absolutely prepared to spend some of our complexity budget on some of these instruments and strategies,” he said. “Other times there will be no marginal benefit so we will default to the simpler traditional approach. That’s probably going to be my vice.”
Interestingly, Collins’ operations background does not change the way he looks at peer risk.
“Peer metrics are here to stay and it becomes a practical challenge to understand how you respond to this environment, where risk levels are being driven up,” he said.
“Issues that animate the industry like construction of peer groups in SuperRatings; classification of growth and defensive assets and the impact of unlisted assets in improving risk adjusted returns are all facts that we need to work around and ensure that you do so with a member focus.
“Generally, peer concerns focus on underperforming in broad industry metrics rather than practical performance against like for like funds and their membership characteristics and this does cause funds to cluster around the median.”
“We generally have an understanding of the SAA tilts we have against the broad industry and we revisit these as to whether they remain convictions or need to be moderated where they are impacting peer outcomes. This also encompasses looking at our sector construction to see where factor concentration is problematic like our historical exposure to active value management.”
