TCorp expects to deliver an additional $400 million to $450 million of investment returns to the NSW Government each year under a new investment structure operating since early September, dubbed OneFund.
The additional returns will be “a tiny bit of alpha, but 99 per cent of it will be beta,” TCorp chief investment officer Stewart Brentnall told the Fiduciary Investors Symposium in Healesville.
The new structure sprang from the recognition that the complexity of TCorp’s relationships with its key stakeholders was holding it back, in an investment sense. NSW Treasurer Daniel Mookhey recognised the potential in untethering TCorp from the constraints that held it.
TCorp applied its total portfolio approach to managing money under the OneFund structure, and by simplifying its relationships with stakeholders, it now manages 10 portfolios, down from 15.
“The project was born a year ago to take these [funds], which operated [from] the conservative end…with return objectives of inflation plus 1.5 or 2 [per cent], to the more aggressive end with funds that had real return objectives of 3.5, 4, 4.5 [per cent],” Brentnall said.
The 15 different stakeholder portfolios fed into a platform of 50 different underlying funds. Each stakeholder portfolio had different risk and liquidity requirements, and some portfolios were in net inflow while some were in net outflow, which led to complexity and often competing or contradictory investment requirements.
Brentnall said the Treasurer’s decision was that “we should run these things all at the highest level of risk appetite represented within these six funds”.
“So, $47 billion of constituents came together, pivoted up to a risk appetite reflecting a real return objective of 4.5 [per cent], which meant a far more equity rich strategy than we’d had previously,” Brentnall said.
“We basically transitioned $8 or $9 billion out of cash and fixed income into equities. In the long term the capital market assumption for return expectation for equities is obviously higher. The maths equates to about an additional return of $400, $450 million per annum, on a rolling 10-year basis.”
Across the six funds “there was a fair amount of cash sloshing around”, Brentnall said.
The funds’ risk appetites were each determined by different stakeholders and even though the T Corp investment team had worked closely with those stakeholders, they reflected a range of personalities who had “an interesting spectrum of different risk sensitivities and tolerances”.
“You put all that lot together, you had bits of sequencing risk; you had too much cash; you had return expectations that were too constrained by conservative people; you had one or two funds that had significant sequencing risk,” Brentnall said.
“These things are all quite constraining risks when you think about individually putting portfolios together. And it was these sorts of things that we were struggling with, and could see that there was a so much more efficient way of dealing with these things if they were one [fund].”
A simpler picture in aggregate
Brentnall said bringing the funds together and having clear direction from the Treasurer meant the investment picture in aggregate looked far simpler.
“Some funds in outflow, some in inflow: push them together, the result is not in outflow,” he said.
“Sequencing risk: largely gone. You get a nice, clear, crisp instruction from the Treasurer that his risk appetite is equivalent to a real return of 4.5 per cent objective. Conservative stakeholders’ risk tolerances that are too low: gone. Too much cash lying around, strategic level of cash now below 5 per cent, return forgoing: gone.”
Brentnall said that the investment transition aspect of the reorganisation was in some ways the more straightforward aspect of it.
“You start off with a project plan that looks like a mathematical puzzle and an investment transition at the end of it,” he said.
“I’m not going to say we do those in our sleep, but we’ve done lots of large investment transitions over the eight years. It’s something that part of the team is extremely accomplished to doing.”
Brentnall said TCorp was dealing with stakeholders with different personalities, different degrees of connection and ownership of the funds and the project, and the governance issue of “how you get from six different ownerships and stakeholders and risk appetites to a very different owner in the centralised Treasurer-ownership of this, and a new investment structure”.
“That’s ultimately probably why it took nine months,” he said.
“The investment transition [alone] wouldn’t have taken anywhere near that long; the governance and cultural pieces of planning, engagement, iteration, benefit articulation, project planning, these are the pieces that take time.”
Brentnall said projects such as OneFund tend to be more successful “if they have a sponsor with a clear vision attached to them in the first place”. He said the ability of the Treasurer, Secretary of Treasury “and senior folks in TCorp, including me, to articulate that clear vision is incredibly important”.
“Hopefully one builds a good coalition, having articulated the vision clearly, and you bring people on board who buy in because they understand and are motivated by where you want to go, and you have the right actual mechanical journey and implementation plan to do the job,” he said.
“Those were the key constituents of this, as they would actually be probably for any large project.”
Team numbers
Even though it manages a total of $115 billion, the TCorp investment team numbers just 65 and it lost only three members because of the reorganisation. Brentnall said that it was clear from the outset that the “Treasury were not going to allow us to build an enormous team”.
“I used to feel sad about that in some ways, but in today’s market context I actually cherish the small size that we have of 65 people, who all work in half of one floor of one building in one city, as a comparative advantage against some of the huge organisations who operate in multi jurisdictions and who, I think, find it much more difficult to have that cultural bond between everyone,” Brentnall said.
Given the modest size of the team Brentnall said TCorp has been forced to be “very cold-faced and clear-eyed on what our comparative advantages were or, perhaps more confrontingly, were not”.
He said the organisation was assisted by former Future Fund chief investment officer Sue Brake “who workshopped with us to really dive in and think about truly how to demonstrate and articulate what one’s comparative advantages were”.
Brentnall says TCorp has two comparative advantages.
“One, in fact, is the domestic cash and fixed income team, who’ve been there for 20 years, and I think have an information advantage, and performance would suggest that that is borne out,” he said.
“The other is the very tight hybrid model that we run in real assets. I perhaps would have liked to have been like the Canadians and bring the whole lot in-house and build a team of a thousand people; that was never going to happen.
“What we do, however, is still own a lot of our assets directly with our name on the title. We don’t put money into third party manager funds, and we have assistance from outside advisory relationships where we basically engineer strong alignment with these folks.”
Brentnall said that while TCorp pays manager fees, “the all-up cost of delivering real asset investment to our clients is a fixed fee of well-sub 1 per cent, so it’s not a large fixed and a huge performance fee”.
Challenges to manage
While a total portfolio approach applied a simplified range of stakeholder portfolios is about to start paying very real dividends for the NSW government, it’s not without its challenges to manage, Brentnall said.
“TPA is a funny animal, because it needs collegiate decision making and a collaborative, cultural approach to survive and thrive,” he said.
“The honest truth is, as humans, we are all built for craving autonomy and empowerment. They’re not natural bedfellows, so you’ve got to work really hard to make that work in in an investment team.”
He added that implementing the approach is “a lot less hard with 65 [people] in one building than it is with disparate units around the world”.
Brentnall said the simplification of portfolios and the associated investment transition “just gave me the opportunity to look at the model and say what’s working really well in a TPA sense, [and] what isn’t”.
For example, he said, “the portfolio managers were in the wrong place”.
“I moved them,” he said.
“I’ve put the external partner team into one listed and unlisted asset management unit and have done something that actually looks reasonably like what the Future Fund has done, where it’s now a flatter structure of more even decision-making support and authority with five direct reports.”
