The mission appeared deceptively simple: move 1.4 million members from one investment strategy to another and do it with little to no impact on costs to members, on markets and on member returns.
That was the task taken on by the $280 billion Australian Retirement Trust in the wake of the merger between QSuper and Sunsuper, in response to the issue that for many Australians, including members of ART, investment market volatility isn’t necessarily the biggest risk they face; rather, it’s the risk they will fall short of accumulating what they need to enjoy a comfortable standard of living in retirement.
Post-merger, ART determined that the way to address this issue was to migrate members who had not made an active investment choice into a higher-returning, but also potentially higher-risk, strategy – its high-growth strategy, which produced a return of 11.3 per cent for the 12 months to June 30 this year.
The basic underlying theory is that members with a sufficiently long-term time horizon can ride out potential periods of market volatility in pursuit of higher long-term returns, and hence achieve higher terminal account balances.
The migration project covers members with assets valued at about $60 billion; accounting for common assets between the two asset-class pools the net value of assets moving is about $10 billion. The migration will be complete in about a month’s time, ending a project that has taken around two years to conceive, design and execute.
The simplicity of the mission statement masks the devilish complexity of the underlying process. ART head of investment strategy Andrew Fisher tells Investment Magazine it’s been an “interesting” opportunity to undertake a one-off, enormously complex project that’s very unlikely to be undertaken within the industry again, and certainly not by ART.
“It’s interesting to me,” Fisher says. “It’s a one-off problem. I’m not going to have a problem like this again, so it’s fun. Unique problems are fun.”
Fisher says there were few precedents to the migration for ART to either follow or learn from. Planning began two years ago and the migration has been undertaken in two main stages, leaning heavily on ART’s internal investment capability to manage cash and derivates, and a close collaboration with the external manager of ART’s passive portfolios, State Street Global Advisors.
Fisher says that before the transition process could even start, the portfolios of two separate groups of members – one group formerly members of QSuper, the other formerly members of Sunsuper – first had to be aligned, so they could be moved to the new strategy as one.
“[The QSuper] growth asset pool looked quite different to the high growth option, and so the first stage of that was transitioning, in the lead up to 30 June, that growth asset pool to be essentially a replication of the high growth option, so that could be combined,” he says.
“I don’t want to understate how big a process that was.
“That wasn’t just a one-directional flow either; both sets of investment options were coming together towards a go-forward strategy. A huge number of moving parts in that. To lay out the high-level process we spent, I’d say, the first three months focused on getting risk positioning where we wanted it to be.”
Getting risk profiles right
Fisher says a critical step in the preparation was “working, within limits, [to] get the risk profiles roughly where we want them to be in terms of equity betas, bond betas, using derivatives as much as possible to get that where we want it to be”.
That took roughly the first quarter of 2024.
“Second quarter, the focus really shifted to getting unlisted assets combined and positioned where we wanted those to be as well,” he says.
“Again, that’s a huge process, ensuring you have equitable and accurate timings on valuations between the two different pools of assets, and getting that all 100 per cent.
“Pleasingly, it was a relatively benign market period, so we were able to proceed with all of that, and pretty much as we hit 30 June all of that had been done.
“All that really remains then is, basically, what does that balance sheet look like versus the risk profile that we’re running?”
Lining up the balance sheet with the risk profile was largely achieved through exchange for physical (EFP) transactions, in which one party buys physical assets and sells futures contracts while the other party sells physical assets and buys futures contracts.
“We’re generally pretty flexible in terms of, on the liquid side of the balance sheet, how much is in physical equities versus how much is in cash and derivatives,” Fisher says.
“We had reasonably sizeable derivative positions. But then what we’re doing in the background is working with SSGA, our passive manager, and doing exchange for physical. So you have cash and derivatives, you basically put it up to market on close.”
Fisher says the benefits of working with an institution on the scale of SSGA include its ability to cross a large volume of transactions and handle large EFP transactions.
“Once you have the position set, there’s an investment bank or a counterparty out there, someone who’s carrying the risk, and they will be carrying the physical position somewhere. If you’ve got the derivative, and that physical is there, you’ve just got to go out and find it.”
Structuring transactions so there’s no cost to the fund was achieved by crossing, where possible, and Fisher says it enabled ART to “deliver this outcome with less transaction costs than we occur in a typical year”.
“You can verify our RG97 reporting that FY24 was actually the lowest transaction-cost year we have experienced since the introduction of RG97,” he says.
“Our transaction costs in most investment options were 50 per cent lower than the average transaction costs we have incurred over the past five years, which is a remarkable outcome that validates the benefit of the planning that went into the transition.
“Working really closely with State Street, anytime they had crossing that was in our favour, we would just say we’re there for whatever you have, and then [worked] with them to understand what sort of flow we can get through the EFP market.
“So, set the derivatives, and then any chance there is to catch up on EFP, we just catch up.”
Resetting the balance sheet
Fisher says SSGA’s relationship with ART goes back to QSuper days, and SSGA has also managed passive strategies for Sunsuper, except for a period when those strategies were managed by Vanguard. He says ART worked with State Street to reset the balance sheet.
“We’re moving first internally, and then transitioning out of our internal cash portfolios into the [external] managers,” he says.
“It was managed like an internal rebalance and then there was no time criticality, that was just purely liquidity windows, where we could find liquidity to buy physical assets we would; and then internal derivative management, basically to get the position set.”
The first phase of the transaction leading up to 30 June could be conducted at ART’s own pace and without the market necessarily being aware of what it was doing.
But once the time came to move MySuper members to the new investment strategy the fund was required to disclose much more information about what it planned to do and the timing of its market activities.
“Therefore anybody who picks up our product update, or picks up the PDS, can actually, without too much energy and effort work out what we’re doing,” Fisher says.
ART’s plans were “not necessarily secret [but] we don’t want to broadcast it”, Fisher says. The bigger issue was designing the migration so that “we don’t detriment members”.
“Quite a lot of effort went into that design process and where we landed – and we thought through a few different options – was using the using our existing glide-path infrastructure that we have to smooth the transition out over three months,” he says.
“Once we smooth it out over three months, each incremental move becomes relatively small, and market volatility will disguise that behaviour. We’re not going to be buying every day, necessarily.”
ART already has the internal infrastructure to manage glide paths – it already uses it to de-risk members’ investment as they approach retirement, for example – so the migration to the high-growth investment strategy was, as Fisher describes it, “treated and processed like a multiplied-up BAU process”.
“Essentially it is just a lot of member cashflow instructions,” he says.
“We know what the cashflow instructions are going to be, so we basically plan for them and trade at the start of the day, whereas typically we trade cash flows at the end of the day. But essentially that’s it. They’re just big cash flows every day.
“Our capital markets team are incredibly skilled and adept at managing cash flows and rebalancing portfolios, using derivatives to get there. And then, in the background, we’re running a regular exchange-for-physical program to get that position set.”
Fisher says a benefit of a glidepath approach is that “every member is on a different glidepath and so on any given day of the month, one three-hundred-and-sixty-fifth of the membership in the 50 to 65 age range is moving”.
Ninety discrete chunks
For the migration transaction Fisher says ART “collapsed it down and said every single member [on one day each month] is going to move 1/3 of the way to the new target. That basically means you spread the whole thing out – it’s 90 discrete chunks”.
Fisher says that when mapping out potential investment scenarios over the period of the migration “a big leg down tends to be what everyone’s worried about”, but Fisher says it’s less of a problem than it might seem.
“[In] a big leg down in markets, we’re actually going to be in the market buying,” Fisher says.
“You have a big stress down, what do you do? Well, we’re doing the right thing for members in response to that, because this whole decision is a what’s best for them over 10, 15, 20, 30, 40, year investment horizon and buying a 20 per cent or 10 per cent drawdown… is definitely better for you over that horizon. That’s what we do for all members anyway.”
Fisher says that in fact a big single-day gain would be more likely to cause the fund to stop and think “is tomorrow the best day to move?”.
“They don’t really happen, but if it did happen, we’ve got contingency plans in place,” he says.
“But it would have to be dramatic, and we’re so far through it now I don’t think we’d pause now.”
As the migration project draws to a close Fisher says it’s run as smoothly as could be expected.
“It’s one of those things where you just see a whole organisation come together for the right outcome,” he says.
Fisher says the migration has been hard work for all involved and “I don’t want to downplay how challenging it is to actually rework that glidepath infrastructure to [execute] a whole new member transition plan like this”.
“For three months, the whole glidepath infrastructure is being asked to do something very different,” he says.
“Everything’s gone really smoothly over the last almost two months now. We’re well into the process, we are very confident that things will continue to go smoothly in this final stage. And so now, as we approach the end of this big challenge, we naturally start thinking about what’s next.”
