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The merger between two superannuation funds based in Brisbane, Australia – $14 billion LGIAsuper fund and $9 billion Energy Super – is likely to see considerable changes in asset allocation and manager selection, according to LIGIAsuper CIO, Troy Rieck.
The merger, slated for July 1, forms part of broad changes that Rieck has embarked on at the fund since his appointment in August 2019.
“We are looking to front-load the benefits of the merger, improving the manager line-up, extracting scale benefits, upsizing preferred strategies,” Rieck told AsianInvestor. Rieck will be CIO of the new fund and Current Energy Super CIO Kevin Wan Lum will be deputy.
As well as greater fee efficiency arising from the merger Rieck listed the ability to scale up successful strategies from either fund, to access closed managers, and to improve the quality of the average manager in the portfolio as benefits.
Troy Rieck, LGIAsuper CIO
Australian super funds have faced pressure from the government in recent years to reduce fees and prove stronger performance.
“Our preferred assets are in the belly of the risk curve, for example property and infrastructure, credit, private capital and certain hedge fund strategies. It’s increasingly challenging to hold the wings, such as cash and bonds at one end, and listed equities at the other,” he said. “Bonds are almost, but not quite, useless assets - they offer no income, less liquid to trade, and don’t hedge the economic risk,”.
Rieck sees little risk of inflation over the next 18 to 24 months, adding that his preferred defensive asset is cash. In the last year he has reduced traditional government bonds in favour of investment-grade credit and alternative, credits-related strategies.
All LGIAsuper’s assets are externally managed as follows: international equities comprise 28% of the total, using 7 external managers including GQG Partners, Morgan Stanley and Robeco; Australian equities, 25%, are managed by Eley Griffiths, Parametric Portfolio Associates and Wavestone Capital; diversified fixed income, 18%, managed across 10 funds including Barings, Goldman Sachs and QIC.
Infrastructure and property collectively comprise 14%. Altis, Lendlease and Rockspring are among 8 property managers; Equus, Lighthouse Infrastructure and Palisade manage all infrastructure investments. Private capital accounts for 7% of total AUM, with Orchard Global, Clearbell and Northaven among 10 managers. Diversifying strategies, 4%, are managed by Ardea and K2. Cash accounts for 4%.
Rieck said the fund has been moving money from international to domestic equities over the last year, adding that the fund had been trimming US equity positions and adding to emerging markets.
Rieck has been actively changing LGIA’s equity allocation over the last year. Early in 2020 the fund’s $7 billion equities allocation was split roughly evenly across passive index, growth and value managers. Much of the growth allocation has been redistributed to index and value or quantitative strategies.
Late last year, as part of the rotation the fund replaced consolidated its three value managers into one, following advice from its asset consultant JANA Investment Advisors. The fund went for a more contrarian value manager whose performance had previously been poor in order to benefit from mean reversion in performance.
The last six months of returns have been excellent, he said, although he declined to give further details.
He chose a single manager because a larger mandate meant he could negotiate lower fees – although he declined to reveal what the fee was – noting that concentrating investments to reduce fees in this way was a theme that would continue after the merger.
“We are interested in fewer and better friends here, who can help us make the fund better, faster, simpler, cheaper and higher returning,” he said. Rieck said he had cut the fund’s operating costs by a third since he arrived, reducing costs to a median member from 1.5% to below 1%
Most of the 20% of the fund allocated to alternatives at the start of 2020 has been sold.
This enabled the fund to prepare for withdrawals under the government’s early release scheme, which permitted members to withdraw a portion of their super fund before the end of 2020 to cope with the hardships of the pandemic.
“We knew liquidity would be super important during Covid. The last thing you want is to be a forced seller of securities in a down market,” he said.
The alternative allocation was a mix of single strategy and multi-manager funds across strategies including global macro, insurance linked securities, relative value and arbitrage.
The remaining money, although Rieck declined to say how much, was channelled to credit related investments, where the fund targets returns between 2% to 8% over cash, and supplying cash to managers to whom capital was committed.
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