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.
Move to standardise ‘growth’ and ‘defensive’ definitions
In an overdue attempt to improve how co-mingled superannuation investment categories are presented to the general membership base, David Bell, a former fund manager and fund CIO who now runs the Conexus Institute, has called on the industry to comment on a working group’s recent deliberations on standardisation.
He said last week (July 23) that the growth/defensive exposure of a portfolio was an entrenched part of the financial services industry. This has historically, and still to this day, sought to estimate the exposure to growth assets (generally equities and property) and defensive assets (cash and bonds). The categorisations, though often different among different researchers and big funds, are used to create peer groups for members to compare notes, by APRA as an input into its new ‘Heatmap’ calculations and are often part of the financial planning process. “Yet,” Bell said, “there is no standardised approach for growth/defensive calculations and this undermines confidence in industry calculations.”
He put together a working groups of eight investment professionals who have spent the best part of a year developing a set of background notes and papers on which he is calling for industry-wide comment. The aim of the working group, Bell said, was that, following consultation and review, a single standard for growth/defensive investments would be established and applied by all industry participants.
The eight working group members, apart from Bell, are: Debbie Alliston of AMP Capital Investors, who oversees multi-manager portfolios; Ian Fryer, the head of investment research at Chant West; Carol Lee of AustralianSuper; Tim Macready, the CIO of Christian Super; Kirby Rappell an executive director of the other main institutional funds management research house, SuperRatings; Anna Shelley, the CIO of Equip and merger partner Catholic Super; and, Scott Tully, the general manager of investments at Colonial First State.
Bell said: “Growth/defensive categorisation is one of those tough projects. It is complex, controversial and everyone has a different view. I thank each member of the working group for their positive contribution to the proposed solution.” He said the working group believed a standardised approach to growth/defensive categorisation would benefit the industry by increasing confidence in performance assessment. APRA had been kept informed of the progress of the working group.
Standardisation of these terms for super fund co-mingled options is probably of greater importance to members than it is to the industry. Members are more likely to judge a growth or defensive fund option on recent past performance or any awards it may have won. Both SuperRatings and Chant West rate individual commercial and not-for-profit funds and hold awards, as does the other provider of super fund information to members, Rainmaker Information, which highly rated funds and awards winners generally seek to publicise.
The Conexus Institute proposal considers all investment sectors. “A detailed solution provides greater insight into the exposures in more nuanced sectors (such as unlisted and alternative assets), while a simplified solution is an option for funds with immaterial exposure to these sectors,” Bell said. “All industry participants are encouraged to review the materials and make a submission to the consultation.”
Submissions need to be received by September 28. Email these to: [email protected]
The Conexus Institute is funded and administered by Conexus Financial, a privately owned conference and publishing house.
– G.B.
