Australia’s Aware Super aims to add value to its portfolio in the short term by building an internal hedging strategy around the macro themes of China’s economic stimulus and global bond selloff.
The A$150 billion ($103 billion) fund expects the Chinese government to announce more measures to stimulate the economy, which has been “weakening so much” lately, said Damian Graham, chief investment officer of Aware Super.
Key indicators of economic activity in China, including services and manufacturing purchasing managers’ indices (PMI), retail sales, imports, and exports, all contracted sharply in April amid lockdowns across major cities in the country due to the Covid-19 pandemic.
The super fund believes this cycle poses good opportunities in renminbi trade if the government goes ahead with stimulus packages, which could further pressure the yuan.
Between April 1 and May 15, yuan slumped over 6% to 6.79 per US dollar. In April alone, yuan fell over 4% in a steepest monthly fall since 2005, on the back of interest rate hikes in the US, weak economic growth, and the selloff of Chinese assets.
Aware Super has put in positions around expected global bond sell-offs as the US Federal Reserve raises interest rates, which has added “good value” for the portfolio, noted Graham, who discussed the super’s short-term shift of its portfolio amid market volatility during a panel discussion at the Milken Institute Global Conference earlier this month.
“So far, they've been on the money. But you know those things are never guaranteed,” Graham said.
The pension fund is building up its internal investment capabilities to be a more active manager of its portfolio, especially in the private market. It has about 100 internal fund managers managing 40% of assets, or about A$60 billion, at the moment.
In the next four years, Aware Super wants to be managing half of its assets internally, with the target to double the total assets under management (AUM) to A$300 billion by 2026.
“I think the capability is going to be important going forward, because we do think the beat is going to be flatter,” Graham said. “We think those internal capabilities can certainly deliver better returns, but also give us greater flexibility to be able to move the portfolio around when we need to.”
“Private market assets are always difficult to move, but certainly where we own assets directly without a fund structure, we feel like there's a much greater opportunity for us to move those assets, to bend them if we want to; put money into different sectors if we want to as well,” he said.
MANAGE ESG RISKS
Aware Super has about 13,500 holdings in private assets. As part of its carbon net zero commitment by 2050 in the investment portfolio, the super is implementing plans to reduce carbon emissions of some real assets, including airports and toll roads, and operating businesses, with engagement embedded.
In the past two years, it has invested about A$1.5 billion in renewables and associated technologies.
“One of our investment beliefs is that managing ESG risks well can have strong value through time,” Graham said, adding that regulators’ mandates are also driving the firm to manage their ESG risks well.
As moves to mitigate ESG risks may affect returns of the portfolio in the short term, there can be pressure from the board, shareholders, or members questioning over the performance. This is especially the case for long-term investors such as pension funds.
Graham thinks Australian regulations about super funds' assessment help to ensure all stakeholders to think long term and drives positive outcomes.
In Australia, the government evaluates the performance of super funds over an eight-year period. If anyone underperform the strategic asset allocation benchmark by 50 basis points over the period, it risks the possibility of no longer being able to get contributions from members, which can effectively put it out of business as a default provider of superannuation services.
“It certainly focuses people on an eight-year window, which I think is a long period of time compared to what most are used to, which is quarterly or six-monthly or annually,” said Graham.