The $59 billion Cbus Super is positioning itself for more mergers by expanding its investment options to be in line with about 95 per cent of the available options in the market.
The merger with Media Super, which will be completed later this year, was the catalyst for the expanded investment options which will include sector-only options, indexed low-cost options and some other pre-mixed options.
The board has given approval for internal testing in the first half of this financial year with a view to launch later in FY22. The options include: Growth Plus (which will sit between Growth and High Growth), Australian shares, overseas shares and diversified fixed interest.
“The increased options will make our next merger easier,” chief investment officer, Kristian Fok, said. “We are doing a lot of groundwork for things to be in place. We feel there is an appetite, particularly when it comes to corporate super, for some of these expanded offerings.”
Scale matters
Fok said the fund was in “constant dialogue” about mergers and Cbus was of the firm belief that scale matters and mergers are good for its members.
Cbus has been very deliberate in passing on fee savings to members as it becomes bigger and in the past five years has reduced its asset management fees per dollar invested by 40 per cent. The reduction in fees coinciding with an increase in AUM of 20 per cent.
In the past year alone investment costs, including transaction costs, have reduced by 5 basis points to 51 basis points.
“Internalisation has been a big contributor but also we look at fees with a holistic view and discipline,” Fok said. “Even this year there has been a lot of focus in talking to managers around what their fees are and how we can be more innovative around how we do things to keep good alignment and leverage scale.”
Cbus currently manages 36 per cent of its assets internally, with the expectation that will be about 40 per cent. All the strategies are benchmarked against external equivalents.
New strategies and ideas
Some of the strategies measured as “internal” use the internal team for idea generation and external managers for execution, and Fok is open to new strategies and ideas.
“Within the 36 per cent internal there are some strategies where we partner with managers particularly on the quant side. We design the strategy and they implement. It is very economical and allows us to think about ideas and opportunities and express them through our own IP and research.”
During Fok’s almost nine-year tenure as CIO, the investment team has grown from around 10 to now 115 with a further 20 positions to be filled across equities, responsible investment and operations.
“You can get huge leverage with internal management, you can have the same people managing 20 per cent extra in assets with no extra cost,” he said.
Despite the internalisation Fok says the allocation to managers has actually increased.
“65 per cent of the assets are still external and the assets have doubled,” he said.
And like other asset owners Cbus has reduced the number of relationships, looking to managers to get insights that can benefit their decision making. An example is the insights on the built environment from the private equity investment with Brookfield Technology Partners.
“As an investor in that fund and co-investor in some of the companies we have the benefit of being an investor but also how that technology might be incorporated in the assets we own and we can introduce those insights to our managers so they can benefit,” he said.
Key data and technology
Cbus has a program of work around bringing in key data and using that to help automate some of its processes. One example is the use of the Matrix Investment Data Management system that provides a clearer look through of the true nature of exposures and the indirect fees.
“When we are adding sophistication and complexity we need the right data to understand the risks we are taking,” Fok said.
The fund is also looking to restructure the way its custodian pulls together the different investment accounts so the fund can create options in a building-block approach in a more granular way.
“It is important to be able to take control around rebalancing, and we need a system that can handle it, automate the information and seamlessly interface with the custodian. The technology aspect is incredibly important in allowing us to be more granular in the way we look at things, but also so we can scale.”
Performance benchmark
Fok said the introduction of the new listed performance benchmark meant the fund only had to change “a few small things around the edges”.
“We are spending a lot of money and resources managing money for our members and if we can’t outperform a simple index product then we should rethink things,” he said. “We have always managed the portfolio relative to benchmarks, it’s not just about returns but about the risk we take.”
As part of its process the fund has detailed attribution it applies to sectors, alpha and allocations which Fok said had also been engrained in the culture of the team.
“So when it came to the YFYS side of things, and looking at the way we understood the performance metric and where we were adding value, we already had an understanding and culture of doing that,” he said. “Like everyone else, when we’re looking at asset allocation we are deliberate in not taking benchmark risk in areas we don’t have conviction.”
One of the results of the performance benchmark however is that the fund now needs to focus on short term metrics as well as its more typical long-term view. This is particularly relevant to the unlisted sectors which had to be put in the context of what would realistically be achieved.
“In the past our performance was long term and it was ok to talk about strategic asset allocation in that context. This time we had to be a bit more pragmatic, if we don’t achieve the allocation it’s considered an active decision. We had to treat SAA in terms of what we say we’ll do. It’s a bit more short term. It doesn’t change the long term but changes how you report it. Apart from that type of analysis, what we believe in and how we create value remains unchanged,” he said. “We have the benefit of having a very strong track record of adding value and we have the skills and frameworks to do that with confidence.”
Investment opportunities
Fok believes investors will have to work harder for the opportunities going forward and is looking to combine the top-down asset allocation function with ideas from the bottom up.
Mark Ferguson recently joined the team as head of total portfolio management overseeing three key aspects of the portfolio. The first is portfolio development which includes traditional asset allocation, and tilts across different time horizons, as well as thematics and longer-term trends. He’ll also look after portfolio implementation including securities lending, options strategies and more sophisticated strategies to become a provider of liquidity.
“As you grow larger there needs to more sophisticated ways to express your market views and that will be uplifted. For example Mark has managed currency strategies and we will look to do more trading inhouse,” Fok said. “We will continue to increase the breadth of that and the opportunities. The challenge around low interest rates means fixed income is not as defensive as you think and having more tools will be really important.”
And the third area is the fund’s quantitative capabilities. This includes managing money quantitatively but also providing insights from those strategies to the broader team.
“That also provides the automation and insights to help the team gather broader information to make better decisions. They will continue to work with the direct investing teams and see that the information flows through into the valuations of that team,” he said.
