Aware Super is committed to “smoothing” out returns for retirement age members by utilising tail hedging strategies to guard against another shock similar to the early days of the pandemic, according to the fund’s retirement strategy portfolio manager, Jackie Ellis.
While it doesn’t make sense for younger members with more risk appetite to pay for the protection of tail risk strategies, Ellis said the $125 billion industry fund – formerly known as First State Super – is keen to mitigate sequencing risk for older members.
“[Younger members] have a very high-risk capacity so the idea of paying that risk for tail risk hedging for that cohort of members probably doesn’t make sense,” Ellis said. “But being able to reduce sequencing risk for members in the retirement risk zone, that can be hugely beneficial both from a sequencing risk reduction perspective but also perhaps helping them stay the course.”
The portfolio manager was speaking on an online panel with Statewide Super CIO Con Michalakis as part of the Conexus Financial Absolute Returns Conference Digital 2020.
Ellis, who recently won the ASI Investment Rising Star Award, said that when the fund formulates investment strategy they specifically look at how the investment options are being used by members and the needs of those members.
“For pre-retirement and in retirement we have a greater focus on risk management for those strategies and tail risk hedging is definitely part of that, so we have long volatility strategies and some trend strategies, and a more defensive orientation for our liquid alternatives in those portfolios,” Ellis explained.
The strategies have not only protected the downside during the March volatility period, but provided a boost to returns.
“That returned something like 30 per cent through the Covid period at sector level, so it gave a really meaningful boost to the returns of those portfolios and really helped dampen the effect of the drawback.”
Michalakis said that while Statewide wasn’t using tail-risk hedging strategies per se, the fund had managers that already embedded “versions” of it in their strategies.
Michalakis recalled the initial stages of the pandemic when the government’s early release of super policy was announced and markets took violent swings.
“The first 4 to 6 weeks was unbelievable, I mean nothing like I’ve ever seen before,” the CIO said. “You see two to three per cent switching in a big market fall, you see the Aussie dollar fall by about anywhere between 10 to 15 cents. Then you had this other thing to come out of nowhere called early access… so you’ve got all these things happening at once.”
Michalakis said Statewide was able to cope with a $200 million early release drawdown with its won “break the glass” strategy, which stemmed from thorough stress testing. “We kind of sailed through it,” he added.
Both Michalakis and Ellis rued the lack of returns for cash and bonds in the current market, and fixed income’s broad inability to shore up defensive portfolios.
“It’s such a difficult problem for asset owners everyone,” Ellis commented. “We really need to think how we’re managing our portfolios. Currency hedging can play a role and the reality is we probably need to be a bit more active in our positions.
“It’s a mess,” Michalakis said. “It’s a bloody mess.”