Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
‘It was a feather in my cap’: Block looks back on eight years at ACS
As of Thursday (December 1), Australian Catholic Super (ACS) is no more. It’s disappeared into the $110 billion UniSuper in a successor fund transfer planned after it failed the Your Future Your Super (YFYS) test the first time, in July 2021. For ACS’ now former CIO, Michael Block, the merger comes one week short of eight years at the fund. No members of its investment team are going across to UniSuper, and are now “ministers without a portfolio”.
“I’ve got mixed feelings,” Block says. “On the one hand, I totally understand that it is policy to try and reduce the number of funds in Australia and that our fund was collateral damage of that policy. I thought that being massive and passive was not the only way to go. I think smaller funds can offer boutique strategies and different strategies and I would love to think that one day there are still going to be funds operating in that environment.”
“The way I like to think about it is there are going to be some supermarkets; there’s going to be smaller stores like Aldi and Costco; and there’s going to be delicatessens. And I would have classed funds like us as a delicatessen. And I hope that some will remain… I loved my time at ACS, and I think my team – a lot of this has to do with them – had a reputation for being innovative and different. There is a place for super funds still to be like that.”
The story is more complex than the label of ‘underperformer’ that has been slapped on ACS. As former editor Greg Bright wrote in 2021, APRA spliced data from ACS’ default LifetimeOne product, launched in 2018, with returns from the previous MySuper product – a conservative balanced strategy – to make up seven-year numbers. There were a few “anomalies” in the way that APRA cobbled together the performance data, Block says, while the construction of the test did ACS no favours.
“It’s now fact that our fund failed the YFYS test twice… I don’t think the introduction of LifetimeOne was the proximate cause of that,” Block says. “It had more to do with how APRA dealt with data, and one would hope that APRA will make changes in the future to more properly accommodate funds such as ours. If you look at the most recent returns, we’re certainly above median, and the last time I looked we were first quartile 77 per cent of the time.”
“The reasons are things like they count alternatives as half equities, half bonds, even if they’re running lower risk. And data issues in terms of how we gave APRA the data… It was giving them bulk data. We operated by having a long-term strategic asset allocation and tilting around it. So let’s assume on average we’re 70/30 but when we’re conservative we might be 60/40. We were still telling APRA we were 70/30 and they were still measuring us against 70/30 even though we were actually invested in 60/40.”
“If we’d updated APRA on a quarterly basis (through the YFYS lookback period) we’d have passed the YFYS test. If they had classified our alternatives as defensive alternatives (benchmarked against) 15 per cent equities rather than 50 we’d have passed the test.”
“We had less bonds, because they offered a very low interest rate, and less tech stocks, because we thought they were overly expensive. Those two things effected our performance against YFYS, our peers – and it all came good this year with us outperforming the median super fund by four or five per cent.”
The merger between UniSuper and ACS was announced on December 1, 2021, after a previous attempt at merging with NGS Super fell through. The level of bureaucracy and paper work required to get a merger over the line is almost unbelievable (which is probably why funds have stopped doing so many). Two of the biggest problems to deal with were term deposits and stranded Russian assets; the Russian assets temporarily sit with BNP Paribas and will (hopefully) be transferred to UniSuper by the skeleton crew looking after the fund until the trustee winds up, which is early next year.
Around 95 per cent of moving members into new products was straightforward, Block says – “shares go to shares, bonds go to bonds, cash goes to cash” – though member-directed property investments, which were in unlisted property, went to a balanced fund rather than the UniSuper equivalent in listed property as it was believed to be a better match.
APRA also considers all default funds to be more or less the same, even when they aren’t; all the members of LifetimeOne, which has 31 life stages and changes asset allocation based on them in an effort to reduce sequencing risk, will be shifted into UniSuper’s balanced fund. Block expects UniSuper will give younger members the chance to pick something more aggressive, and older members something more conservative.
Block’s single proudest moment at ACS was the development and introduction of LifetimeOne, which allowed for mass customisation for members by putting them into age-appropriate strategies – a boon for members who were disengaged, and unlikely to have seen a planner or take up intrafund advice. Block firmly believes that one size does not fit at all – that having a balanced fund for people in their 20s through to their 70s doesn’t make sense.
“And so having a lifecycle strategy – a state-of-the-art one, that was award winning – was a feather in my cap. And we got to see where it really worked, across Covid, in early 2020, and also more recently, where we saw it protect our older members,” Block says.
“The most important thing for any CIO to do is understand their member base and act accordingly. You might think that’s a very simple and trite thing to say, but certainly I got the most pleasure from hopping on a plane and going and meeting all our members all around the countryside. Seeing the differences. To put it bluntly, how can you possibly hope to design products for consumption by your members if you have not met them?”
“So many people in the upper end of the hierarchy have not spent as much time as that with their members and don’t understand their needs. For our particular membership I have a very good affinity, with my daughter being a school teacher, my mother having been a school teacher, and me having worked in education. So a combination of that and wearing out a lot of shoe leather, I think I stand a chance of understanding what our members want.”
While it’s now a fact that ACS failed the YFYS test twice, it’s also a fact that this year it outperformed its merger partner, UniSuper, by a significant amount. ACS was in SuperRatings top 10 funds this year, with a return of -1.2 per cent for the year (UniSuper was down -4.2 per cent, though admittedly remains in the top 10 over 10 years). Block says his other proudest moment at ACS wasn’t really one moment but many – the investment team having the courage to stick with its strategies.
“Some which didn’t work early on, and which came good this year,” Block says. “We had less bonds, because they offered a very low interest rate, and less tech stocks, because we thought they were overly expensive. Those two things effected our performance against YFYS, our peers – and it all came good this year with us outperforming the median super fund by four or five per cent.”
“So often what happens with a strategy that doesn’t work is you cut and run at the wrong time. We were lucky enough or clever enough or brave enough that that didn’t happen, and our members reaped the benefit this year.”
“Isn’t it interesting that a fund with an investment team of three portfolio managers and two investment operations managers and higher investment admin fees can compete against the massive funds on performance? Credit to John Phokos and Joshua Bloom and Chris Drew and all the others that a little baby $10 billion fund with higher fees has performance that was first quartile most of the time.”
