It’s not the job of a superannuation fund CIO to precisely time the market, but there are moments when a rebalance or reallocation of capital will result in a critical portfolio repositioning, calling on snap decisions with the potential for widely divergent outcomes. That moment for Michael Block came on March 20, 2020, right at the bottom of the COVID-instigated equity markets plunge.
“There are times when you are doing things and thinking, ‘do I really want to be doing this?’,” Block, the CIO of Australian Catholic Superannuation recalls during an interview with Investment Magazine. Some of the candid highlights of this interview are captured below.
“Do I really want to be buying Aussie dollars at 55 cents when everyone is telling me it’s going to 40 cents,” Block says, recalling the exact moment of indecision when he recommended the fund rebalance and buy equities from a significantly underweight position when markets were still tumbling.
“The market is going lower and lower and people are ringing up and saying there is gong to be a global pandemic with mass deaths and entire economies shutting down, your first instinct is to go into the foetal position and start panicking,” Block recalls.
“We were as disciplined as we could be, not perfect but it ended up working out great,” he said.
Going into the global market dislocation in March with an underweight position in risk assets meant Australian Catholic Super’s month to month Australian equities performance was ranked 50th out of 50 funds and not by an insignificant margin. At the end of April its Australian equities strategy was returning 6 per cent above median fund.
For the calendar year to the end of October 2020 Australian Catholic Super’s Australian MySuper Balanced Option fund was the top performing fund, returning 6.44 per cent, 3 per cent higher than the second-best returning fund as measured by FE Analytics. The median balanced fund during this period returned 4.9 per cent.
Australian Catholic was holding significant amounts of cash at the beginning of 2020 which it deployed into equities and credit right as the market had bottomed.
“It was serendipitous, I don’t want to make out we are absolute geniuses, I didn’t know COVID was coming. But when it got so far down we just thought not only should we rebalance we should go from underweight to overweight equities,” he said.
The relationship between Block, Australian Catholic’s investment committee chair, David Hartley, and Ian Harnett, co-founder of the fund’s UK based consultant Absolute Strategy Research (ASR), were all significant in the critical decisions made in mid-March, as was the positioning of the fund going into the dislocation at the end of 2019, as Block describes.
Loaded up with cash
It was Block’s bearish view of equity valuations combined with an ultra conservative approach to holding capital for commitments that saw Australian Catholic starting 2020 with triple the liquidity it would ordinarily hold.
In November 2019 the decision was made through the $9 billion fund’s investment committee with the advice of asset consultants to go underweight equities. By the end of the year the fund had around 36 per cent allocation to equities split between international and domestic, 24 per cent in unlisted asset split between property and infrastructure, 10 per cent in alternatives and 30 per cent in fixed income, a third of which (or 10 per cent of the value of the portfolio) was in cash.
“Compared to everyone else we had masses of liquidity, some people would have said too much and the reason is we held a chunk of cash because we were scared,” Block said.
Block’s view of equity markets was based on historical valuation comparisons evident in the data shared by consultants which includes Frontier. [Australian Catholic has since – at the end of 2020 – moved to an overweight equities position and is now fully invested. Block points to actions by Central Banks providing support to valuations at current levels as rational for the more bullish portfolio positioning].
Block also notes Australian Catholic was holding cash for up to nine months of property and infrastructure commitments rather than, say, listed infrastructure or REITs or any other liquid securities.
“We take a conservative view we leave it in cash. It turned out it was right because on April Fools Day 2020 IFM [Investors] called our commitments to the tune of $138 million to pay for our commitments in infrastructure and we were able to say no problem. Others would have needed to take that money out of the equity or the bond market at disadvantageous prices,” he said.
“When there is a downturn prices go down dramatically so when prices get low that’s when managers ring up and call in their commitments that’s, why a lot of people get into horrible cashflow problems,” he says.
Been here before
While other market drawdowns have been different than the March 2020 sell off for various reasons, Block draws comparisons in the lead up to his experience in 2007 when he was general manager of investments at Work Cover NSW and made the call to take a significantly underweight equities position while equities markets rallied for the next six to nine months.
“How many phone calls do you think I got saying ‘Michael you’re a goose’ when [local] markets were 15 per cent higher at 6900 when we made the call to go from 70 per cent to 20 per cent equities at 6000,” he described.
“All the equities I sold out at 6000 [in 2007] that went up to 6930, I bought back at 4000,” he said, adding that even though the market continued to drop further the end result saw capital protected and the fund able to take profits from the trade.
“I’ve lived through it a number of times. I was there in 1987 I woke up one morning on black Tuesday and my portfolio was down 40 per cent. I lived through what Australians call the GFC which was different because it was much more gradual.
“What recently happened in 2020 was halfway between both… if you look back it was the shortest sharpest down and up you’ve ever seen but the down wasn’t as quick as ‘87. The up was the quickest it has ever been,” he says.
All the wiggle room
The timing behind Block’s decision to start buying equities, moving from a significant underweight position to ultimately push past the fund’s original equities position, was based on reaching an outer limit threshold where any further drift would have required pointed conversations with the fund’s Investment Committee and the full board.
“We [the investment team] took all the discretion we could and I used all the wiggle room I had left,” Block says. Australian Catholic’s investment governance allows the CIO 2 per cent discretion around target allocations and a further 2 per cent drift from its portfolio settings which were already tilted underweight.
Instead of rebalancing as the market fell, Block held off letting the value of the equity allocation continue to go down until action had to be taken.
“We went right down to the bottom and then flipped to the maximum limit, that’s a big change. Most super funds wouldn’t make that change, we’re talking about a few hundred million dollars,” Block says.
‘We had so much cash’
“I told everyone to go back and read Jeremy Grantham’s ‘Reinvesting when terrified’,” Block says, referring to the famous 2007 letter penned by the founder of renowned US value manager, GMO.
Through its investment partners Block said the fund bought equities and some fixed income, specifically equities that had been hit the most including small caps as well as some credit and emerging market debt and equities. Block singled out portfolio managers Andrew Smith at Perennial’s small and micro caps fund, Blackrock’s Charlie Lanchaster as well as Chris Joye’s Coolabah Capital for credit and Parametric for emerging market execution.
The March 2020 sell down resulted in selloffs in different parts of the market, Block recalls.
“Large caps held relatively well, small and mid caps got slaughtered. People were indiscriminately throwing out everything and as is normal when there is a flight to safety .. people were throwing away what we thought were unbelievably good value and we worked with some managers help us pick these up,” he says.
“We had so much cash we were even able to allocate to credit at the same time. Usually when equity markets are down, in some places 40 per cent and you are rebalancing and changing tack, you are selling everything to buy equities. We had enough cash on the sidelines to buy equities and credit and both worked out fantastic,” he said.
“I didn’t need investment committee sign off but it was a significant enough move I did need to speak to the IC chair and CEO as a sounding board. I remember saying ‘the market has fallen dramatically and as scared as I am and as scared as you are we want to take a positive position on equities,” Block recalls. Australian Catholic’s IC chair David Hartley is formerly the CIO of Sunsuper.
“David was probably more used to frequent daily rebalancing, he was incredibly brave and supportive of what we did,” Block says.
Watching spreads in the bond market widen and liquidity in the credit market freeze leading into March, the months of pain inflicted by the cash drag on the portfolio was worth it, Block says.
“Most funds had to pretty much sit on their hands and do nothing, unless they had huge cashflows and even then the talk about liquidity at the time was defining,” he points out.
Risk on
Following the March drawdown and mid-year equities market recovery, Australian Catholic has from November 2020 moved to an overweight equities position and again this year has increased its long equities position despite rising valuations in public markets at and in some cases higher than pre-March 2020 levels.
Australian Catholic’s current portfolio positioning mostly reflects the already bad news built into markets and the next level support by Central Bank actions, Block points out.
“I challenge anyone to know what’s going on today, you can throw anything you learned in school or through experience out when you see bonds out-performing equities, negative interest rates and a group of technology stocks valued at more than all of Europe,” he says.
Block takes some inspiration and perhaps some solace from Jeremy Grantham’s latest January 2021 note entitled ‘Waiting for the last dance’ and believes there are still opportunities in equity markets despite pockets being more highly valued than anyone has seen.
“You can throw your hands up in the air and say we are in some new paradigm and my 12 year-old has a better chance of guessing what’s going to happen than I do, or you can say ‘I haven’t seen it as weird all together as it is right now but everything happening right now I have seen before’,” he says.
“What it’s about for me is having a view, having a process and most importantly having the courage when everyone else thinks you’re an idiot to hold steady. It doesn’t mean being so pig headed that you won’t admit when you’re wrong, it means having a process that’s tried and tested and have faith things will eventually right themselves,” he says.
