Super’s biggest problem likely lies within funds themselves, with many using legacy operational infrastructure ill-suited to the needs of the major financial organisations they’ve become.
The race to the bottom on low cost, benchmark aware solutions for a post-YFYS world has pretty much been run. But while the perception of value currently sits on price, that might not be where it ends up, according to Fidelity’s Simon Glazier.
How to overcome a strategy’s ‘size drag’
Funds managers have been aware for a long time that size is an issue for outperformance. There are various rules of thumb – such as 3 per cent of the market’s capitalisation – but it really depends on style and processes. In recent years, super funds have become aware as well, for their own assets under management.
Complicating the matter for super funds is the campaign by APRA to coerce super funds into merging, claiming the benefits of scale will outweigh the disadvantages of possibly lower investment returns.
Focusing on managers, though, a recent paper by Capital Group, shows how its flagship US$72 billion ‘New Perspective’ strategy has overcome the “drag of size” over a long period. There may be a guide for super funds’ own investments in this, and perhaps some comfort for APRA. The trick has been to split the portfolio into smaller more manageable units.
Capital is a big privately held US-based active manager with about US$1.5 trillion in assets. The recent paper, written by David Polak, a New York-based investment director, focuses on the New Perspective fund and strategy, benchmarked against the MSCI All Countries World Index.
He pointed out on a visit to Australia last week that ACWI represented more than US$40 trillion, so the Capital fund makes up less than 0.14 per cent of that universe. Over its 44 years, for US-domiciled investors, the strategy has returned an average 14.9 per cent a year, versus its benchmark (previously MSCI World) of about 10 per cent. It managed to continue the outperformance even in the years leading up to the GFC, between 2003-2007, which tended to be difficult for active managers.
“We have seven analysts’ teams choosing stocks at the same time,” he said. “Plus, we only the turn over the portfolio about once every four years,” Polak said.
“Our investment process, which we call the ‘Capital System’, plays a major role. It provides the scalability, flexibility and diversity necessary to manage large and growing assets. Instead of star managers, the portfolio is divided into portions that are managed independently… These smaller portfolios enable [the seven portfolio management teams] to act only on their most firmly held investment ideas.
“In addition, a portion, called the ‘research portfolio’, is managed directly by investment analysts, giving them the opportunity to invest in stocks within their coverage alongside the portfolio managers.”
Capital watches liquidity parameters closely, including the estimated time it would take to divest holdings and the effective execution of trades. There is an upper ownership limit of 6.5 per cent per stock.
“Our internal analysis suggests that, notwithstanding the concerns over the New Perspective strategy’s liquidity, around 80 per cent of its assets under management can be liquidated within 10 days,” the paper says.
Polak also revealed on his Australian visit that Capital Group would soon be launching an emerging markets strategy for Australian and New Zealand investors, called ‘New World’. The strategy invests in a mix of multi-nationals with big exposures to emerging markets and local developing country companies.
He said the mix depended on the country. For instance, the firm tended to invest in multi-nationals for its Indian exposure and local ones for China. It had about three-quarters of the volatility of a portfolio investing only in emerging markets domiciles.
