Australia’s LGIA Super, the retirement fund for Queensland local government staff, is making major changes under its new chief investment officer with a view to improving the efficiency and performance of its portfolio.

These include refocusing on asset class tilting with the help of a new overlay programme, and expanding its illiquid investment holdings, Troy Rieck told AsianInvestor in an exclusive interview.

“We’re not talking about a dramatic reshaping of the plan. We’re talking about an evolution rather than revolution,” he said, having started as CIO in September.

Nonetheless, Rieck is clearly already having an impact on the A$13 billion ($8.4 billion) fund. Following the recent exit of its previous CIO and its head of investments, he is hiring two portfolio managers. And Brisbane-based LGIA Super established its first dedicated investment operations team in February after chief executive Kate Farrar asked Rieck to take a look at this area.

Troy Rieck

“We set up the investment operations team to make our day-to-day investment process work better – the custodian relationship, unit pricing, accruals and taxes, cash flows, account set-up and the like,” he noted.

Rieck is also making changes to the portfolio allocation: “We’re altering the mix of active to passive equities as we speak, but I’m reluctant to give too much detail.”

He did, however, indicate that LGIA Super is widening its already strong focus on private markets (see asset allocation table below).

“We’re very comfortable using index and enhanced index approaches in traditional asset classes and then spending the risk budget in alternative and real assets,” Rieck said. ”And we think we can get much better returns and much better bang for our buck by spending the higher fees on less liquid strategies.”

For instance, LGIA Super is looking even more closely at infrastructure and also eyeing private credit, a new asset class for the fund.

“We think it’s possible to allocate long-term capital in real estate, infrastructure and related asset classes and earn a good premium doing that,” Rieck said. ”The discount rates in infrastructure in particular – at around 8% to 12% for a project, when bond yields are 0.5% – are providing very generous compensation for taking illiquidity risk.”

TIME FOR TILTING

Meanwhile, on the public market side, LGIA Super is putting a focus back on tilting, including by introducing a derivatives overlay programme.

“The fund used to make substantial use of tilting, but in recent years it has moved away from that,” Rieck said. “Given the returns we’ve seen in listed equities, you can totally understand that. 

"Our view is that it’s time again to think strategically about tilting," he added, "and the investment committee has just endorsed that idea.”

Overlay strategies employ derivatives instruments to gain, offset or substitute portfolio exposures beyond those provided by the underlying portfolio assets in the existing investment strategies. Overlays are often seen as useful tools in challenging environments.

LGIA SUPER’S ASSET ALLOCATION, MARCH 2020 %
Domestic equities    15%
Foreign equities 30%
Real estate 15%
Infrastructure 10%

Alternatives*  
(Includes mostly liquid or semi-liquid alternatives, such as global macro hedge funds, insurance-linked securities and emerging market debt.)

16%
Traditional bonds 10%
Cash 4%

LGIAuper introduced its first tilting positions in late February when it moved overweight cash against bonds, and overweight Australian shares versus international shares, Rieck said. It also has a large overweight to foreign currency, he added.

“The overlay programme will help us with our trading efficiency at the asset class level,” he said. "Derivative overlays allow greater control over allocations – I think about them as the Swiss army knife of institutional funds management."

Cost-efficiency is all the more important now, Rieck stressed: “When returns are 10% to 12%, no one cares about the details, but when returns are potentially 2% to 4%, everyone cares about those extra pennies.”

And the investment environment has become no less tough since the arrival of Covid-19 and its potentially devastating effect on the global economy.

Asked about the potential impact of the virus on LGIA Super’s investment strategy or allocation, Rieck said: “The biggest issue we are struggling with is that there are so few comparable events to gauge the potential impact of coronavirus on the economy and financial markets.

“When coupled with that elusive variable of investor confidence… we don’t have a deep enough understanding of the long-term impact – if any – to form that judgement yet."