Uncertainty around the outlook for inflation is one of the biggest challenges facing investment managers at the moment, according to Scott Tully, general manager investments, for Colonial First State.
“We are coming up to the second anniversary of the market crash [precipitated by the global outbreak of the Covid-19 pandemic],” said Tully.
“Asset prices recovered remarkably quickly once we unwound from that situation.
“But, at the moment, the uncertainty is around inflation and how do you manage, not so much inflation, as the market outcomes for the equity and bond markets.”
Reducing exposure to bonds
He said concern about the resurgence of inflation and rising interest rates has seen his investment management team gradually reducing their exposure to bonds over the past few years and other assets “less dependent on interest rates”.
A veteran CFS executive, who began his career as an actuarial analyst with Mercer, Tully is celebrating 20 years of leading investment management teams at Colonial First State, having started as head of FirstChoice Investments in March 2002.
It’s a “milestone,” he said, which has seen him manage funds through many market ups and downs.
Colonial First State has come a long way over those two decades.
Established in 1988, it was taken over by the Commonwealth Bank in 2000 as part of the expansion into wealth management of then chief executive David Murray, a change which sparked similar moves by other banks.
It is a provider of superannuation, investment and retirement products to individuals, company and super fund investors as well as being an operator and administrator of investment platforms with some $150 billion in funds under administration across its products including the platforms FirstWrap and FirstChoice.
Last year was another milestone for the organisation which became a standalone business, following the Commonwealth Bank’s sale of a 55 per cent stake to US private equity giant KKR. Finalised last November, the deal valued CFS at $3 billion.
Range of portfolios
Tully’s investment team manages some $65 billion on behalf of investors, superannuation and pension fund members across a range of portfolios.
He said the recovery of the market after the Covid-19 crash of 2020 highlighted the fact that investors needed to be able to look through cycles rather than make panic moves in reaction to events.
“People said at the time the event was extreme but we have been through some extreme times in the past,” he said.
“It’s important not to panic at times when markets are falling or have fallen or get ahead of yourself when markets are going strongly.
“You need to have an approach which can stand the test of time through the cycle.”
Timing the market
He said CFS did not try to “time the market” in making its investment decisions.
“We review our strategic asset allocation year with a process which looks at whether the characteristics of markets and portfolios have changed enough to warrant a different allocation,” he said.
“Some years it does, some years it doesn’t.”
Tully says the challenges facing CFS in managing its funds are different from those facing investment managers of industry super funds.
The group is the largest payer of pensions in Australia after the Federal Government, with almost a million customers.
CFS has a much older demographic than many industry funds. “Retirement is what we do. It is something we live and breathe,” he said.
This is in contrast to, say, the newly merged Australian Retirement Trust whose chief executive Bernard Reilly recently told Investment magazine how his younger member demographic allowed for more long term investments including infrastructure.
CFS’s role as the largest private payer of pensions means that liquidity management is high on its disciplines.
Tully says CFS paid out some $1.3 billion to members in 2020 in the two early release of super programs which followed the start of Covid-19.
“We were able to meet that without issue,” he said.
Choice of risk profiles
He said CFS offers its clients a number of different risk profiles depending on their stage of life and their appetite for exposure.
“We are really in the choice space. People can select their own risk profile,” he said.
“If you want to have a high exposure to growth assets we have a product for you, if you want to be more conservative, we have a product for that.
“It is about having products which are true to their label and making sure they are well diversified within that particular risk profile.”
Retained independent board
Tully strongly rejected suggestions that KKR’s buy in of CFS would see the US private equity giant move to strip out costs from the company.
He says KKR’s acquisition of a stake in CFS had prompted a $430 million investment program in the business supported by both of its shareholders.
Tully said CFS had also retained its own independent board since the KKR acquisition was finalised late last year.
Performance test issues
One of the next hurdles facing CFS is whether one of its MySuper products, FirstChoice Employer Super (FCES), will pass the Australian Prudential Regulation Authority’s annual performance test this year.
The fund narrowly missed passing the test last year, the first year of the performance test coming into operation under the federal government’s Your Future, Your Super legislation.
CFS moved quickly in response to the news, reducing the administration fee of funds under management for its First Choice Employer Super products to 0.30 per cent, a saving of $50 a year for members.
It has also appointed BlackRock, one of the world’s largest asset managers with almost $US10 trillion under management, to help with the management of its MySuper investment products.
Under the deal with BlackRock, CFS will maintain ultimate control over the LifeStage funds and will continue to set the investment strategy while BlackRock will “provide CFS’s MySuper products with the resources, insights and investment services needed to deliver outstanding member results”.
“We need to pass the performance test by June this year,” he said. “We are quite confident we will make it.”
Tully maintained CFS had a strong commitment to the environment and social responsibility in its investments.
Last October it announced it was aligning the group with the Paris Agreement and committing to transition its investment portfolios to net zero greenhouse gas emissions by 2050.
This included committing to a 30 per cent target of greenhouse gas emissions from 2019 for its investment portfolios by 2030.
The announcement followed CFS’s move the year before to commit to the United Nations endorsed Principles for Responsible Investment (PRI).
“There is a lot of work being done getting the right policies and processes in place,” Tully said.