Australian superannuation fund Cbus could yet raise the threshold of assets it internally manages from 20% to up to 35% to better position itself as cash flows into the fund continue rising, according to its chief investment officer.
Speaking to AsianInvestor on the sidelines of our 13th Asian Investment Summit in Hong Kong on May 30, Kristian Fok said Cbus has spent several years seeking to find the best combination of externally and internally managed assets.
The current stated goal of the fund, which manages the retirement savings of mainly construction workers and union members, is to raise internally managed assets under management (AUM) from about 11% today to 20% by 2021. But such is the degree to which the fund is expanding its own investment resources that it could be ready to go well beyond that by the same date, Fok said.
“While this needs to be officially approved by the board, they have signalled an appetite to go above 20% internally managed, up to 35%,” he said. “They have supported it [such an increase] and given us budget approval to put more resources into this [internal investment] space.”
Cbus’s AUM have been growing quickly and had reached $35 billion by the end of last year, during which it saw net cash inflows of $1.5 billion. Fok said the fund’s investment returns were “hovering at 8%” for the past 11 months to the end of April.
The rapid growth of Cbus’s AUM has offered its own challenges, Fok said, noting how some of its favoured external fund managers had closed their funds to new money and handed back investment returns to Cbus.
For Fok the danger is that as Cbus’s AUM grows, the fund will have to assign money to fund houses that are not among its top preferences or that focus on areas it doesn’t favour, hurting its ability to ensure a steady investment return.
“We went through an exercise to see how susceptible our model was to growth and change,” Fok told AsianInvestor. “And there were small things, such as whether there was a fund merger, or a decision to change asset allocations, that [potentially] stretched our capacity to make a portfolio. And then if we added a manager we had to see what conviction this offered to alpha in the portfolio.”
To combat this Fok spent several years researching and canvassing for advice on how best to ensure good returns, as well as building Cbus’s internal management capabilities. In late 2015 he initiated a nine-month strategic exercise to study how best to safeguard its investment returns.
That began with a focus on how much Cbus should internalise its investment management but swiftly morphed into a broader focus on what the correct investment model should be, given Cbus’s rapid asset accumulation.
“Where we landed was a combination of internalised and externalised strategies,” he said. “Some are internalised and for others we utilise other fund managers but bring our own IP (intellectual property) to the table.”
Fok’s progressive attitude in this respect was partly why he was named one of AsianInvestor’s 20 leading pension executives earlier this year.
In the two years since concluding its investment consultation, Cbus has rapidly expanded its investment team and added to its middle and back office systems to better manage its assets.
The asset owner has internal analysts and portfolio managers to help decide when and how to invest, and it typically favours a highly active approach.
Cbus now has a team of 70 investment professionals and Fok wants to hire another 30 by June 2019. It typically uses State Street for much of its internal execution and broking needs.
Consisting of a global equity portfolio of 40 to 50 stocks that was initially seeded with A$400 million ($306.1 million) in assets, Cbus launched Its first internal investment strategy in October 2017. Fok said Cbus will seek to raise this to a “full weight” of between A$1.2 billion to A$1.6 billion over the coming year or two.
It’s planning new internal investment strategies too, including a domestic Australian corporate opportunities focus, which would identify corporates with sustainable business models into which Cbus would seek to invest over the longer term.
Fok said he’s fairly open as to how the pension fund would look to do so. In addition to standard public equities, “we could potentially be a provider of capital on the debt side and, if it was unlisted, then we could potentially be investors,” he said.
An initial size has yet to be finalised, “but you can expect that in order for it to be worthwhile [to add the necessary resources] you would need at least A$500 million”.
In addition, the fund is targeting Australian small cap stocks, aiming to gradually invest roughly A$600 million into that space on a careful basis. While it is managing 11% of its AUM internally today, “given the uplift in equities we probably will add 1% or 2% and as we add small caps and Australian opportunities we would add another couple of percent,” he said.
Fok said Cbus could also seek to launch an internally managed global quality strategy for the Asia region. But that’s further ahead, with Fok estimating that Cbus would look to start hiring for that strategy in 12 months' time.
Plus Fok is looking to hire more in the traditional asset spaces, as well as better defining how to use factor strategies around Cbus’s investment plans.