As the $100 billion Cbus Super pushes towards managing 50 per cent of members’ assets in-house by 2028, if the events of the past month are anything to go by, it may run into more periods of extreme market volatility as it goes.
How investors respond to severe market volatility can depend greatly on whether they are part of a super fund’s internal asset management team, or work for an asset manager hired by a fund, with multiple other clients. But what doesn’t change is the pressure to perform.
Speaking on the eve of US President Trump’s on-off introduction of “reciprocal tariffs”, Cbus deputy chief investment officer Leigh Gavin tells Investment Magazine that the fund’s “internal teams are our colleagues”.
“We understand their positions well, we understand them as people well [and] what motivates them,” Gavin says.
“That gives us a much better lens into their investment philosophy than perhaps some of our external managers, where we just don’t know what’s going on inside the black box as well as we do with our internal teams.”
Gavin says there may be instances where external managers are “under a lot of performance pressure from other clients, not from ourselves, and they may be changing positions to try and massage short-term performance”.
“It’s always difficult to know that as well in an external manager versus an internal manager,” he says.
Gavin says the 50 per cent by 2028 in-house assets goal “is not a hard-and-fast target”, and Cbus will only internalise investment management “if and when it makes sense”.
“We internalise things because we want to, not because we have to,” he says.
“We’re not running up against capacity limits in any asset class.”
No easy ride
Not that internal managers necessarily get an easier ride in the event that they underperform, Gavin says. But he quotes a former mentor who once told him that “underperformance is a source of questions, not of answers”, and the correct short-term response to underperformance is rarely to sack anyone right away.
“We try and benchmark our internal managers the same way we benchmark our external managers when we assess them,” Gavin says.
“The advantage internal has is that we think they can take a genuinely longer-term perspective, so when they’re underperforming, they don’t have to go and speak to multiple clients, multiple research houses, multiple consultants to explain their underperformance. There’s only one client here, and that one client looks at the portfolios on a regular basis, so generally understands the style very well.
“And when it’s true to the style, it’s often quite explainable. With that being said, we’re pretty tough on our internal teams as well. We do examine the performance pretty closely when strategies are going through a tough patch.”
Full visibility
Gavin works closely with the fund’s head of equity manager selection and portfolio constriction, Myooran Mahalingam, whose team receives daily feeds from the fund’s external managers and, because Cbus’s investments with managers are structured as individually managed accounts, has full visibility of all transactions.
“What they typically do with the external managers is try and get a sense of what was the motivation behind certain trading decisions,” Gavin says.
“That’s how we bridge the gap with external managers.”
Gavin says the response to underperformance, whether by an external manager or an internal team, is not to move the manager on or ditch the strategy too hastily.
“In fact, often that’s the worst time to move them on, particularly if their style has been out of favour,” he says.
“That’s exactly when they come back. The industry’s got a noted track record of hiring outperformance for the last three years, and sacking underperformance for the last three years; and they tend to mean-revert.
“One of my old mentors once said underperformance is a source of questions and not a source of answers. We look at [internal] underperforming strategies in the same way we would in the external manager universe. We work with Myooran’s team, and Myooran’s team is putting the whole portfolio together, internal and external, so they’re understanding performance drivers of our internal strategies in the same way they would our external managers.”
Gavin says that when underperformance has occurred int the past, responses have varied. In some instances there have been changes to personnel; in others, additional resources have been brought in.
“It’s been pretty rare, but we have made some changes within the teams before my time…and those changes have worked well,” he says.
“So, it’s not about terminating a whole strategy and bringing in a new strategy; it’s generally making changes within the strategy.”
Perspective
Over a career spanning decades Gavin has learned to treat both underperformance and outperformance as transitory states, and to not get carried away with either.
“In the investment markets – this is a sporting analogy – when you’re outperforming by a lot, you’re really not going as well as you think; and when you’re underperforming, often you’re not going as bad as you think, or as much as stakeholders think you’re going,” he says.
Gavin says part of his role working with portfolio managers is to ensure the reasons for underperformance are understood, and “making sure that [for] both them and their team that the morale stays high when style’s out of favour, or the like”.
Gavin borrows an observation from a former ALF coach: “When you’re winning the media are all over you and think you’re great; and then when you’re losing the media are more likely to think you’re terrible.”
Despite the recent extreme volatility driven by, among other things, uncertainty over the targets and the scale of US-imposed trade tariffs, Gavin says that “in this industry things are cyclical, and things are volatile at the moment”. The reasons for both underperformance and outperformance can be multivariate, he says.
“Generally speaking, our teams that are outperforming by a lot there could be a number of reasons for that; the teams that are underperforming there could be a number of reasons for that,” Gavin says. But in either case the correct response is “understanding the reasons for that, ensuring that they’ve got the resources they need; they’ve got the support they need; and that we can keep morale up, so they can stick to their knitting”.
Cost-effectiveness
Gavin says internalising investment management generally is cost-effective, but the degree depends on “depends on the strategy, the number of people you need to resource that.”
“But obviously the advantage of it is that for most equity strategies it costs about the same to run $5 billion versus $10 billion, near enough, and that the money that we save by not paying out ad valorem fees… to a fund manager go straight to our more than 900,000 members, it goes straight to their net return,” he says.
“So it is about economies of scale, and that’s a big part of internalisation. We build up strategies that may not be cost-effective on day one, and we typically start them with a relatively small amount just to check the pipes are all working as expected. That’s worked well, and in all cases the pipes have worked and then we scale them up over time, and obviously that’s for the benefits of economies of scale. That’s when they kick in. For instance, running a five-, five-and-a-half billion-dollar global quality strategy with a team of about 11 is very cost-effective to do that internally.”
But Gavin says the benefits of internalisation run deeper than just cost efficiencies.
“Having 43 people who are looking at companies both here and offshore, all day every day, the IP that that brings to the broader 105 people in the investment team is significant,” he says.
“When one of them gets back from a trip to the US seeing Magnificent Seven companies, [they] share what they learnt with the rest of the investment department. We have a senior group of investors meet once a month in what we call the market insights group. It’s designed for people to share their bottom-up insights, and also our asset allocation team will share their top-down views, and we try and marry the two up.
“What people are saying, literally on the ground, from the bottom up, particularly when they get back from a trip, is really insightful and really useful for the rest of the organisation. So if we were zero per cent internal, we wouldn’t have that.
But by the same token, if we were 100 per cent internal, we wouldn’t get the IP that we get from our external managers, which is also a great source of IP for the broader investment business.”
Democratisation of knowledge
As super funds become larger and more complex organisations, and as investment markets evolve and new opportunities emerge, the task of managing money also becomes more complex. But whether the additional complexity makes the task more difficult than it was a couple of decades ago is debatable, Gavin says.
“That would be unfair to the people 20 years ago, who probably would have said… ‘well, it wasn’t easy back then either, mate’,” Gavin says.
“But certainly we’ve had a democratisation of knowledge – you see that through ETFs and the retail market. They have better access to more contemporaneous information than they did 20 years ago. Information just gets out and about much quicker, so that just means markets, all else being equal, can be more volatile, but that also presents opportunities, because markets can overreact to news.”
The trick – as always, Gavin says – is to try to ignore the noise and focus on what genuinely matters.
“We’ve always focused on long-term investing,” he says.
“We build the overall portfolio, we want to ensure that the internal strategies follow that as well, and so to that point earlier about under performance as a source of questions not a source of answers, it’s important that they’ve got the introspection to understand what’s going on, what they’ve learned.”
