AQR co-founder and CIO Cliff Asness talks to ISN about how social media might be making markets less efficient, the cloak and dagger world of alternative data, and why using machine learning means having to “let go of some things you cherish”.
The benchmarks that are supposed to measure performance and create alignment with end investors are working against asset managers, and the industry must find new ways to demonstrate value before it’s too late, according to MFS.
How Mine Super’s investment reset took it from a YFYS ‘clobbering’ to top of the charts
One of the easier arguments against the idea that being very big is automatically better is that the circa $13 billion Mine Super has once again topped Chant West’s ranking of growth funds alongside products from Colonial First State and Insignia.
How it accomplished this is not mysterious: growth assets have (again) done very well this year, and its product – which caters for members in the 50-54 stage of its lifecycle default – has one of the highest allocations to them in Chant West’s range. Still, the gong should put paid to the idea that $300 billion of FUM is a necessity for intelligent product design, or to make money for members.
But Mine Super was not always primed for this kind of performance. Before an investment reset that began in 2018, its lifecycle product was “out of sync” with members’ risk appetite and was not taking into account that many were working longer (whenever a member saw a financial adviser they were immediately being put into high growth options). The fund’s own investment philosophy was conservative, resulting in an investment strategy that was “very sophisticated, highly advanced, technically outstanding” – and poorly suited for what has been a golden age of investment.
“It was constructed to protect capital in almost all circumstances,” Mine Super CIO Seamus Collins tells ISN. “The hedge funds were there to protect against interest rate risk; they were things like alternative risk premia, multi-strat, and a number of momentum and tail risk strategies… This was a really robust strategy that would have held up extraordinarily well in a downturn.”
“We haven’t seen a major drawdown – there was a little correction in 2018, and there was that really aggressive ‘V’ during Covid, but it came out of that hot. It made running those strategies really tough; it’s like when you keep buying insurance and there’s no natural disasters.”
Previous CIO David Bell had already realised that the industry was coalescing around a simpler, more equity driven strategy and began the conversation with the board around changes to the investment structure and philosophy. When Collins took the top job he began implementing those changes and others worked up with the investment committee and its chair, Deirdre Wroth.
“(At the board level) we were very aware that members were more averse to losses than they were to getting higher returns,” Wroth tells ISN. “That very conservative philosophy of really making sure our members were protected on the downside was really strong in the fund and had served the fund quite well previously. But as we started to head into conditions where markets were very robust and you could get great performance out of equity markets and growth it started to become obvious that it was going to impact our performance.”
Out went the portfolio insurance and hedge funds; out went the idea that everything – from manager selection to sector construction – should be done in-house. The investment team and committee rebuilt the strategic asset allocation, “drastically overhauled” the manager line-up and moved away from a highly active stance and to a barbell strategy with a big anchor in passive equities, especially in areas like large cap developed markets (it retains an “enduring conviction” to Australian and global small caps).
“A lot of those signals were really concerning – signals around central bank policy, inflation, geopolitical risk. They were tough signals, and a lot of funds responded to those signals and were really prudent, and I have nothing but respect for funds in that environment that prudently took risk off the table.”
Seamus Collins
The fund was still “absolutely clobbered” by the original Your Future, Your Super performance test because of the particularly punitive approach it took to alternatives. The first redesign of the test removed many of its more problematic aspects by disaggregating growth and defensive alternatives, though by then Mine had mostly jettisoned the hedge funds that had been a drag on its performance. Costs fell; complexity decreased.
“The fund was very conservative and the setup of the investment team was fairly complex… We had come from an outcomes focussed, CPI+ return target,” Wroth says. “But we started to think about what was really important for our members was getting strong returns, and we needed to compete as a fund to make sure our performance stacked up for them.”
‘Tough signals’ and stormy weather
Mine ditched a lot of its commercial property exposure in 2019, and prefers private credit to private equity – even when “you get into a taxi and they ask who you like in private credit”. Fee structures are more transparent and more reasonable, while Collins, who has a self-proclaimed bias against complexity and opacity, feels that the asset class is more transparent. Its illiquidity is less an issue for him than the risks associated with liquid credit assets like syndicated bank loans, and collateralised debt/loan obligations, which – when everything goes to “hell in a hand basket and everybody’s trying to get out the door” – turn out not to be all that liquid after all. Infrastructure assets that were in the portfolio before Collins’ arrival are also “really strong”, including Melbourne airport.
“I’d stack up our private portfolio against almost anybody,” Collins says.
But the kind of portfolio that is now in Mine Super’s rearview – one built around not losing money, and potentially making it, when disaster strikes – is now increasingly popular with big investors like the Future Fund. Geopolitical risk is higher now than at almost any point since the end of the Cold War, while equity markets look somewhat overheated even as inflation hangs around, and Collins concedes that now is potentially a time where you might want to do some tail risk hedging.
“But there’s one thing I firmly believe: it’s really hard to time risk, and it’s staggeringly hard to predict geographical risk; we see that as tail risk, but we look through it,” Collins says. A lot of funds have been caught out in the last 12 months trying to time macro risk; we had discussions back in September last year about whether we had too much risk, but we elected to stay invested and it just ran.
“But a lot of those signals were really concerning – signals around central bank policy, inflation, geopolitical risk. They were tough signals, and a lot of funds responded to those signals and were really prudent, and I have nothing but respect for funds in that environment that prudently took risk off the table.”
