While risks are plenty in the current market environment, so are opportunities for those willing to pivot, according to the chief investment officers of Commonwealth Superannuation Corporation (CSC), Spirit Super, and Victorian Funds Management Corporation (VFMC).
Speaking at a recent investment conference in Melbourne, the executives acknowledged that risk management was coming to the forefront in portfolio construction, particularly as markets move to a place of “genuine uncertainty”.
“We’ve moved from an environment of decision making under probabilistic certainty to decision making under genuine uncertainty,” said Alison Tarditi, CIO of the $70 billion CSC.
Tarditi opined that fund managers are no longer “predicting the future” when they approach asset allocation, instead they are “risk allocating” in an environment where economic vitality has drifted from “things to ideas”.
“When I’m thinking about constructing portfolios, and for my teams, we’re really allocating not to assets so much but to risk attributes,” she said.
Tarditi explained the fund, which manages the pension assets of Australian government employees and members of the Defence Force, is allocating to public markets with a close eye on potential market surprises.
“At the core of our portfolios are our private assets and, at a high level, we’re hunting for those in real time all of the time. We’re hunting for them opportunistically … Around that core of private assets we then complete our portfolio with allocations to public markets,” she said.
Over the past two years, Tarditi elaborated, CSC has remained “risk-on” in its approach to public markets.
“Over the last two years we’ve remained in risk-on portfolio characteristics because we thought the market was underpricing the probability of continued resilient growth even as interest rates normalised, because we saw structural changes […] and also in terms of the resilience of household and corporate balance sheets.
“I recall just nine months ago, sale-side economists had a 68 per cent probability of a US recession within 12 months. Now that markets are starting to adjust to the view that a soft landing is plausible, we’ve started to analyse our duration, so that’s an example of how we think about constructing and managing our risk allocation.”
Securing a ‘portfolio of choice’
VFMC CIO, Russell Clarke, said he believes that a shift away from investing “along asset class lines” needs to be considered in the current climate in order to secure a “portfolio of choice”.
“As an industry, we’ve tended to invest along asset class lines, and when you invest on asset class lines in general, particularly in public markets, you tend to get what the market serves up,” he said.
Touching on the passive versus active debate, Clarke said the fund is currently operating against “conventional wisdom” which suggests that active managers perform better in turbulent markets.
“I think there is some truth in that, but I probably would make the observation that we’ve all been in the industry for many years, and generally, active managers often don’t do well in the period of uncertainty,” Clarke said.
“They don’t see significant change actually coming. So, although I think that intuition tells you active management should do well in this sort of environment, and we have a substantial proportion of active management in our portfolio, we are mindful that active managers don’t always get that right. We’d be eyes wide open from that perspective.”
Adding to this debate, Tarditi said CSC is “pretty pragmatic” in its view of the passive versus active debate.
“We’re not hunting for active returns in every asset class even though alpha might exist in every asset class,” she explained.
Dangers of de-risking
Spirit Super CIO Ross Barry alerted to the dangers of de-risking too often, noting that while it’s “tempting” in this current environment of geopolitical risk to always be on the lookout for problems, caution against “jumping at shadows” is key.
“We de-risk portfolio far too often and [we] take far too long to put this back on, often when those risks aren’t borne out,” he observed.
“I’d ask you, have you ever sat in a room and heard people ask the question, what could possibly go right?”
The CIO elaborated that the $27 billion fund is exercising asymmetric thinking when surveying opportunities and ensuring it doesn’t succumb to paranoia.
To support that, Spirit Super has created a framework for “dynamic asset allocation which discards a lot of traditional models”.
“It’s a framework that is based on complexity theory and complex systems and looking at more dynamical systems, and it leads us to discount a lot of the volatility we see day to day in markets, and focus on slow burners,” he said, noting that “slow burners” can be thematics such as globalisation.
