Competitive and regulatory pressure – leading to greater peer awareness and less investment diversity – is the risk that most keeps Anna Shelley awake at night.
Shelley, the investment head of the new Catholic Super and Equip Super joint venture, says APRA’s heat map will greatly exacerbate the problem of peer pressure and change the way that portfolios are built. She adds that there will likely be more emphasis on beating peers than reaching long term investment objectives.
While she supports the regulator’s aim objective of publicly exposing underperforming funds, she says the controversial appraisal system comes at a time when equities have soared so those funds which have the highest allocation to shares will look good on the heat map.
“The best thing that can happen to the heat map is some market dislocation that would see equities normalise and allow some of the alternative investments look as good as the listed assets,” she says.
“The five-year time period used is so short and coincident with this post GFC boom so it’s a bit dangerous.”
Shelley concedes that checking the balance between beating peers and reaching investment objectives is especially interesting for her at the moment as she brings together two very different funds.
Catholic Super and Equip formally launched their $26 billion merger late last year. The tie-up between the two super funds came as trustees come under regulatory pressure to consolidate so that members can benefit from economies of scale.
Catholic Super’s balanced default fund returned 13.03 per cent for year ended November 2019 while Equip’s equivalent achieved 12.03 per cent. Neither fund was flagged by the prudential regulator for returns generated during the period under review.
Making mergers work
Shelley says comparing the two super funds on performance grounds isn’t reasonable since their structure and membership base differ widely. Equip’s default balanced fund covers all ages, whereas the bulk of Catholic Super default fund has members who are under 50 where a high growth portfolio makes sense.
“The main challenge will be aligning the product suites between the two funds to ensure they are as fit for purpose as they can be for both member cohorts,” Shelley adds.
“It’s an interesting issue especially since the joint venture was made under an extended public offer (EPO) licence. Are they distinctly different or can they be served by the same product suite?
“That’s what we will be researching over the next six months.”
Similar to her counterparts, Shelley worries about being caught in a vicious circle of high debt, low rates, low inflation and low growth. Unlike her peers however, Shelley has to look at asset allocation across both funds because under an EPO model, the new entity’s trustee oversees two funds, not one merged fund with two lots of investments.
The funds are fairly similar in terms of asset allocation and positioning relative to their benchmarks but there are some differences too, according to the investment chief.
For example, Catholic Super’s equities allocation is equally weighted across Australian shares and international shares, whereas Equip has more money allocated offshore.
“That bias is partly due to Catholic Super having a higher weighting to very high alpha Australian share managers,” she says. “We have not decreased that fund’s allocation to Australian shares because we don’t want to reduce our weighting to what we believe are great active managers at this point in time. But, we have slightly increased the international shares weighting to be more in line with Equip.”
Shelley’s view on markets is that central banks will continue to support markets for another six to 12 months – despite the late cycle signs. “But the risk is always in that very latter part of the cycle that you stay overweight too long.”
Catholic Super and Equip each have about 48 per cent allocated to equities. While Shelley believes that allocation is about right for “most of the cycle” she is planning to adjust that “downwards slightly.”
Shelley says with returns so compressed, her peers are buying more private assets which means retirees are being forced to go up the risk spectrum to try and get more yield.
“The great risk with the private asset bubble is that all the money is flowing in the same direction,” she says. “It becomes about paying less attention to the riskiness of those assets and potentially just following blindly into anything with a slightly higher return.”
Even so, she has increased the exposure of both funds to private credit, both offshore and domestically but with a very low duration “so the money is not locked up for long.” Funds allocated to growth alternatives stand at 8 per cent of which she says private debt is a “significant proportion”. Just 5 per cent of funds are invested in private equity.
“We have been investing in real estate debt that we think is relatively attractive at his point of the cycle and we are always looking at new infrastructure assets at the right price as some opportunities have come up recently although price becomes bit of an issue,” she says.
Domestically, Shelley has invested with money manager Revolution Asset Management and internationally, she has allocated money to Hayfin in Europe and Monroe in the US. “We like the US domestic exposure at the lower market end of the spectrum which tends to be loans to multi-generational US family companies with very low historical default rates and adequate risk compensation.”