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.
‘You can’t learn to swim without jumping in’: Rest’s impact ambitions
Impact investing is still a nascent science at most pension funds, Australian and otherwise, but – spurred on by member feedback – Rest has been dipping its toes in the water with a multi-asset approach and setting allocation targets.
“One really helpful and critical direction from our board was the establishment of a “one per cent” aspiration for impact investing by 2026,” Rest deputy CIO Simon Esposito told the Don’t Get Fired podcast, an initiative of pension fund researchers Ashby Monk and Daniel Adamson. “To put it in context, by 2026 Rest is projected to be around $100 billion fund, which would imply a billion Australia dollars in impact opportunities.”
That might not seem like a material amount, Esposito said, but just as Rest’s investments in renewables and the energy transition have grown significantly over time from the initial goals it set itself, he expects the impact allocation – and the impact targets of the superannuation industry at large – to do the same.
“I’m reminded of 20 years ago when a lot of funds and investors set targets for renewable energy investment and over that period of time it’s gone from being the fringe and something people experimented with and questioned the investment thesis of to today, where we find renewables projects at the centre of all of our energy and private market investing…This is an area that we don’t want to be on the sidelines, we want to start investing today. “
Rest doesn’t try and pick winning asset classes, and it hasn’t set the portfolio up to be highly illiquid either (despite the fact that 50 per cent of its members are under the age of 30); it also largely works with external managers, including Palisade Impact.
“We’ve chosen to work with managers in this space; we feel it’s a really important area and one that we want to influence but not necessarily get into the trenches in terms of direct investing at this time,” Esposito said. “So we’ve been partnering with impact managers, some of them emerging, some of them mature, a couple that we’ve already invested in on the infrastructure side.”
One of Rest’s biggest challenges was how to start its impact program “from a standing position”; it had always considered ESG factors in its investment process, but didn’t have any experience in the world of impact investment. And the addition of any new capability to a pension fund usually involves building new operational infrastructure; a multi-asset impact sleeve is no different.
“Coming at the total portfolio approach and not picking winning asset classes has meant that we had to raise our systems and processes across the board,” Esposito said. “So what we’re building is investment systems that can handle the increased data and information flows that such investments acquire beyond simple financial risk and return metrics that traditional systems might be able to handle.
“It’s exciting times in the tech space; much of this impact investment management is really only possible with some of the larger data flows that we’re seeing in investing. Many of these areas weren’t measured if we go back 15 years ago, and that measurement really should propel growth going forward.”
