An investment philosophy underpinned by a whole of portfolio approach and diversification – “the most important tool we have in the kitbag” – is key to the strategy of the $30 billion Equipsuper.
Andrew Howard, the chief investment officer of the 150,000-plus member fund, tells Investment Magazine asset allocation shape and diversification is critical across – and within – asset classes.
“When you look at performance across the industry in the last 12 months, those funds with a strong focus on diversification have done well,” Howard says.
“The majority of our members are in either the default or multi sector. We’re not running, for instance, a credit option or a small cap option.”
Diversification has allowed the fund to navigate through the volatility of the last 12 months and created some buying opportunities in for example bonds as yields have risen, says Howard.
“Volatility can provide opportunities, we’ve certainly taken the opportunity to materially increase our bond exposure, [similar to] a lot of funds.” Likewise, Equip took advantage of a 7 per cent jump in the Australian equity market in January to trim back exposure and continues to take a cautious outlook on equities.
“We’re not trying to get too cute with timing, but we have a strategy, we take advantage of opportunities and we’re prepared to be patient,” Howard says.
“If we continue to sort of try and navigate the volatile markets that we have, that will lead to positive results over the long term.”
Howard joined Equip in November 2021 from Hostplus where he was deputy CIO.
He says under the default MySuper option, Equip’s exposure to both Australian and international equities is broadly in line with the strategic asset allocation (SAA), with a slight overweight to infrastructure. The SAA is 55 per cent equities, 7 per cent property, 9 per cent infrastructure, 5 per cent alternatives and private equity, 19 per cent fixed interest and 5 per cent cash.
Fixed interest has increased over the course of the last year, in line with SAA. The fund’s cash allocation has moved higher and is now slightly overweight relative to SAA, providing the fund with some “dry powder” to take advantage of opportunities as they arise says Howard.
Much has been made of the re–opening of China and expected positive effect on the global economy and investor sentiment. However, the country’s shrinking population presents long–term challenges to productivity and consumption.
“All investors will benefit from China re-opening and Australia, more so than others arguably when we think about our reliance on China as an export partner,” Howard says.
“In the longer term, we are a bit cautious of the changing demographics… we’re not taking a specific position on China.”
Managing money externally
Equip adopts a more traditional external manager investment model, eschewing the growing trend for super funds to develop internal investment teams. “Everything is managed externally, so we don’t manage money in-house,” Howard says.
He believes for a fund of this size, the “external management model works for us as that gives us the greatest choice in terms of being able to identify the most attractive skill sets”. He takes the view the fund is able to get strong alignment from managers for the types of investment strategies it favours at attractive investment fees.
Further, the internal investment model introduces significant complexity around governance, infrastructure and personnel, without adding extra return. “If you look at the performance of funds that have gone in-house versus funds that are still external, there’s not a lot of difference. The jury’s still out as to whether running money in-house actually delivers more attractive returns for your members over the long term,” he says.
“That’s not to say it doesn’t work, there are a lot of funds out there who’ve shown it does. But it does come with its own set of challenges that you need to be mindful of and how you structure it.”
Equip’s investment team is 12-person strong, including investment operations, with three new hires last October to beef up its defensive assets, alternatives and real assets expertise as well as a new head of responsible investments.
Regulatory impost on trustees
With the continuous raft of policy and regulatory changes implemented by APRA, ASIC and the ATO, it is a challenge for investment teams to ensure trustees are not overwhelmed by reams of reports and data.
“There is not an investment committee meeting that doesn’t go by where there’s an update to a policy. There’s a real balancing act in terms of how we navigate through the increased regulatory requirements and ensuring that the trustee is not swamped with paper,” says Howard.
APRA is revising Prudential Standard SPS530 in relation to investment governance around unlisted valuations, liquidity management and stress testing as well as undertaking a multi-year project to improve the quality of data from the superannuation industry.
“The revamp of SPS 530, APRA has certainly made it very clear in terms of heightened expectations with regards to how all funds, monitor and manage their portfolios with a particular focus on hot topics such as unlisted valuations. liquidity management and stress testing,” he says.
While the amount of data monitoring is considerable, it is “understandable when you think the industry now as a whole is north of $3 trillion”.
He cites last September’s UK pension crisis over liability-driven investments as an example of a failure by British regulators to properly monitor the risks created by these derivatives.
“What was evident was the oversight and monitoring from their regulator was probably pretty light at the end of the day. They didn’t have the same coverage, understanding and same knowledge in terms of what the funds were doing and you don’t have that here.”
Eye on returns
Amid the growing regulatory oversight of investment risks, Howard says it is important to be mindful of the need to balance risk and return, else investment performance will suffer.
“When we think about the job of running investment portfolios and superannuation funds, the bottom line is there’s always that balance between risk and return,” he says.
“We need to be careful that if you effectively remove all the risk, the outcome for your members over the long term is going to be extraordinarily underwhelming.”
“Our primary role is to generate strong returns for members so that they have a good balance when they when they retire… we can’t lose sight of that.”