Embracing alternative strategies
Global Investment Insights
with Con Michalakis, Chief Investment Officer, Statewide Super
Con was appointed to the role of Chief Investment Officer of Statewide Super in August 2008 and together with the investment committee, he is responsible for managing over AU$10 billion in funds under management.
“It’s been an ‘unusual’ year with COVID-19, early access to super and interventions in fiscal and monetary policy”, Con highlighted. With this in mind, his primary areas of focus at the present time include, managing the team; managing risk; communicating the fund’s investment strategy to members, and; taking on selective opportunities should they arise in the current market climate.
“It is important the team, asset consultant and investment committee/board are focused on the medium to long-term investment strategy and that they do not get side-tracked by the noise in the market. I think we have done that well so far”, Con remarked.
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In terms of risk management, Statewide Super has always erred on the side of caution and managed liquidity conservatively and frequently stress tested the portfolio.
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In terms of risk management, Statewide Super has always erred on the side of caution and managed liquidity conservatively and frequently stress tested the portfolio, even pre COVID-19. This has held them in good stead as the crisis emerged, but they are continuing to enhance their stress testing and risk management. Their next step is to communicate this to their members and stakeholders to ensure they understand the fund’s overall strategy. Con stressed that while this is important, his team are continuously looking for attractive opportunities to deploy capital that the market offers from time-to-time. Recently, they have added some special situations/credit opportunities to their portfolio mix.
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Statewide Super recently added some special situations/credit opportunities to their portfolio mix.
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As part of the overall investment strategy, the fund’s asset allocation has evolved over the past five years, embracing alternative strategies with an overall reduction in bonds and equities.
“I would be surprised if the equities weight changes drastically from here. The most difficult and interesting decisions for us today are what to do with our cash/bond weights and how to manage away from equity risk?”, Con said.
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The fund’s asset allocation has evolved over the past five years, embracing alternative strategies with an overall reduction in bonds and equities.
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Con continued, “these are not easy decisions in and of themselves. Pivoting into high fee alternatives has produced mixed outcomes. Meanwhile, our bond managers have responded to lower nominal rates by adding duration and credit. In other words, the stretch for yield and risk is happening even if asset allocations stay where they are. Our future work is to look at ways the portfolio can benefit in a severe drawdown and what strategies other than cash and bonds will help. This is not easy, but it is work worth doing.”
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The stretch for yield and risk is happening even if asset allocations stay where they are.
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In Con’s experience the trend that has become apparent is to remain diversified and not to attempt to pick trends, which can be particularly dangerous in changing markets or amid unpredictable events occurring, such as COVID-19.
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Our future work is to look at ways the portfolio can benefit in a severe drawdown and what strategies other than cash and bonds will help.
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Near zero cash and bond rates plus the rally witnessed in certain assets imply lower future returns. Under this scenario, long-term investors ought to manage medium to longer-term risk against shorter-term volatility and the lack of bond income buffers to help in a downside/risk-off market. Unfortunately, investors face a market where in absolute terms, all asset classes are expensive, so a comparison on a relative terms basis is appropriate. For example, the equity market may be viewed as expensive, but the equity risk premium is enough to beat cash and bonds.
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Near zero cash and bond rates imply lower future returns.
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For superannuation funds, the danger remains the obsession with peer risk and following what other funds do. Unfortunately, this will be front of mind with trustees and investment teams in lieu of the recent announcement by the Federal Government that it will subject funds to an annual performance test, likely to undermine performance, detrimentally impact on innovation and erode confidence in the system. “In the extreme, we may end up with a super system where everyone follows each other and forgets about meeting members’ journeys towards retirement savings”, Con stated.
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We may end up with a super system where everyone follows each other and forgets about meeting members’ journey towards retirement savings.
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Con left us with some career advice he received from his father, who once said to him, “son, find something you like and make sure you’re good at it. Don’t take on too much personal debt and work harder and smarter.”
“As a 20-year-old, I had no idea what he was saying at the time, but I think it’s meant more to me as I’ve gotten older”, Con said.
He continued, “one of my bosses in a previous job also told me to hire smart people and let them get on with it. I have been lucky to have worked, and continue to work with, some top colleagues throughout my career. The key takeout from me is, work with good people and learn along with them.” My last piece of advice and something I have experienced personally is, “be yourself and not a robot. The world has enough suits and cardboard cut outs”, Con concluded.
Disclaimer
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