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.
Funds go thematic in the war for members
While super fund CIOs view thematic investing somewhat dimly, funds are usually happy to let members do what they want with their money. After adding ETF Securities’ (ETFS) gold ETF to its Member Direct investment option in 2021, AustralianSuper has added a slew of ETFS thematic products to the same option – including those focused on automation, electrification, and tech. Other funds have been busy doing much the same.
“Potentially for the super funds it’s an angle to target some of the younger investors,” said ETFS head of distribution Kanish Chugh. “That’s an area where they need to grow as well… You’ve got some of these trading platforms like Superhero and Pearler that are offering a super product or super menu. So it’s then a way for them to say “we’ve got a defined choice for when you go to an employer, but we can offer you all of this as well – so you don’t have to go to Superhero”.”
While relative upstarts like Superhero and Pearler don’t have the size and scale of the megafunds, they – and other Gen Z focused funds like Future Super – have attracted inflows by promising members they can direct their own investments for some of the lowest fees in the industry. The need to manage members’ money not only for retirement but to their social dispositions has seen branding increasingly blended with the investment function, while some fund CIOs aren’t averse to allocating relatively small amounts of money (double-digit millions) to thematic-style investments as a member attraction or retention exercise.
Still, the last six or so months have been challenging for highly concentrated passive products, and flows into thematic ETFs have slowed. Chugh has instead witnessed a “flight to vanilla” (albeit accompanied by some dip buying in its FANG ETF), as well as a pick-up in use of short and leveraged ETFs.
But the ultimate thematic – crypto – is still on the outs with super funds, which have variously rubbished it as an asset class or said they’ll consider thinking about investing in it. Sans a Your Future, Your Super benchmark, it seems unlikely that any fund would want to take on that much tracking error, and even if they did, they wouldn’t want to run the risk of massive reputational damage if they lose member money to one of Bitcoin’s regular gyrations. Still Chugh believes that, as with their forays into unlisted investments and internalisation, Australian funds will take their cues from overseas.
“At that corporate level, there’s a lot of work that still needs to be done in order to understand what the asset class is – just to define whether cryptocurrency is an asset class on its own,” Chugh said. “Or is it a commodity? Does it sit in the alternatives bucket? My own personal opinion is that it’s a growth alternative. But more work needs to be done.”
