Brighter Super - the A$31 billion Australian superannuation fund formed in July 2021 from the merger of Energy Super and LGIAsuper - has terminated a number of active equity mandates in favour of passive managers amid continued concerns over the direction of global financial markets.
“Equity markets have a little more pain to wear. We still haven’t seen an end to downgrades or supply shocks or [pressures from] inflation," Fiona Mann, head of listed equities and ESG at Brighter Super told AsianInvestor.
"It’s still too early to call the bottom of the market or the peak of interest rates and normalised inflation. Things could still very easily deteriorate,”
Energy Super and LGIAsuper merged in July 2021, before acquiring Suncorp Super in April; the new group, called Brighter Super, manages A$30 billion on behalf of approximately 250,000 members.
Mann noted that appetite for risk at the newly merged fund had changed in the new regulatory environment. Australia’s new Your Future Your Super regulations, which came into force in November, include tighter scrutiny of funds and penalties for funds that underperform their peers.
Mann added that, like a lot of trustees, those of Brighter Super had looked to de-risk in equities from an asset allocation perspective over the past 6 to 12 months, in part because of concerns at the future direction of global financial markets.
“Trustees were looking to avoid peer and benchmark risks under the Your Future Your Super regulations and equities is an easy place to do that where some sectors might be perceived to be too risky,” she said.
She said that growing risks in regional equity markets were making focussed investments, such as Indian equities, European small caps or US top 50, less attractive to investors.
“The geo-political risks associated with some markets as a pure standalone regional investment [mean they] have been avoided,” she said.
RISK OFF ON ACTIVE MANDATES
“Like a lot of merged funds that must combine portfolios, one route is to increase passive mandates,” she said. “Over the course of the merger there has been some attrition. Changes to the way [the fund] is structured can be a difficult journey for managers,” she said.
She declined to give detail on which managers had been terminated, or of the managers or strategies to which assets had been reassigned, but stressed that it was not always underperformance that had caused the terminations.
“We are conscious that some managers are not part of the merged portfolios but [choices] were not necessarily based on performance,” she said, adding that she expected to see a dispersion of returns among managers as markets continued to present challenges.
Mann said that in equity markets, current anomalies in the growth-value dichotomy were likely to endure the current period of volatile or falling equity prices.
“In some cases, you’re having “traditional growth” companies being bought by value managers because they are falling in price so much, so there is [less of a] distinction [between the two strategies],” she said.
Brighter Super builds portfolios in a manner that avoids large value or growth tilts in their construction.
“We believe that quality thematic will provide returns at the end of the day rather than tilting [our allocation] to other available factors; so we don’t want to hold just deep value or growth managers,” she said.
RISK AND ALLOCATION: A COMPLEX RELATIONSHIP
Academic research published in May found that asset class volatility, rather than investment returns, was a stronger predictor of whether Australian super funds left an asset class.
However, writing in the Annals of Operations Research in a paper titled Asset Allocation of Australian Superannuation Funds: a Markov Regime Switching Approach Emawtee Bissoondoyal-Bheenick, Robert Brooks and Hung report that the relationship was inverted between domestic and international equity markets.
Analysing asset allocation over 30 years, the authors found that increased volatility in domestic equities caused funds to increase their risk exposure – shifting allocations towards a more growth-focused mandate – while increased volatility in international equities caused a shift from growth-focused mandates towards more balanced options.
“These results may reflect the confidence of the Australian superfunds in their diversification capacity to protect themselves against the domestic market’s volatility, but they are less confidence [sic] to be immunised against the volatility in international market,” the paper’s authors observed.