QIC, the fund manager for the A$20bn QSuper superannuation fund, has carved itself a reputation as an investment pioneer. Rachel Alembakis speaks to some of its top investment personnel
One of the most innovative institutional fund managers in Australia, QIC invests more than $50bn in assets for 26 superannuation fund and insurance body clients. It was founded in 1990, and while originally known as Queensland Investment Corporation, it now officially trades as QIC. QSuper, the superannuation fund for current and former Queensland government workers, is its single largest client, and the client that has wholly embraced the idea of alpha and beta separation and omega.
Changing tack with QSuper
In 2006, QIC totally revamped the investment approach for QSuper, doing away with traditional asset allocations like equity, fixed income and alternatives, instead managing all assets on an alpha and beta basis and using a combination of in-house and external fund managers to achieve these goals. This is already a bold move in superannuation management, but QIC took things one step further by establishing a third team to manage omega.
"We're all using the same capital and the same capital efficiency," said Brad Holzberger, general manager of strategy at QIC. "We want to squeeze the lemon on everything we have. We wanted to make sure we're getting the best out of the alpha and beta teams. We had a look around the world to find a model to have a team to work on implementation needs and we attached omega to it."
The theoretical underpinnings of the omega team came from Richard Ennis, cofounder and chairman of the board of Ennis Knupp + Associates, said Troy Rieck, head of capital markets, the official name for the omega team. "I think the thing people would find most surprising is the proportion of time we spend in strategic planning," said Rieck. "We spend a lot of time with both the alpha and beta teams. It takes a holistic perspective. For example, we think of currency [risk] at the fund level. We manage cash at the fund level, not the asset class level. There is strategic thinking in cash management. A lot of the programme is cash recycling. For example, we extracted $10bn in physical cash from the portfolio and set it aside. We don't want to be the forced seller in the market. We want to always meet our margin calls."
Rieck's portfolio also oversees functions such as transition management, currency management, implementation of portfolio level risk overlays, asset class rebalancing and maximising the postexpense returns for each type of investor, including considering the impact of taxation. As it has been barely 18 months since QIC implemented this reorganisation with QSuper, it is too early to judge whether doing away with traditional approaches to asset allocation yields higher long term return, but QIC reports that the separation of alpha and beta in investment and implementation has allowed them to delve into assets and financial instruments with a flexibility atypical of managing institutional funds. Holzberger provided a hypothetical example to illustrate how the process worked.
"If one of our alpha seeking managers comes in and says, 'I've found a great alpha source, and it's in Japan, and they're using a mix of Japanese equities and bonds,' we can give them the go ahead as they see fit," he said. "Prior to that, viewing that allocation in the traditional setting would have meant implementation would have been nearly impossible.
"The alpha seeking people have gone out and acquired things like joint mandates, hedge fund mandates, all over the place. At the same time, we have an asset allocation that we try to achieve. What Troy and his team are doing is accepting the alpha mandates and seeking the beta. If, as a result of what we're doing in the alpha space, we have less equity, Troy's team will acquire that for us using futures."
QIC's management of QSuper's assets is governed by an investment policy statement written by the fund, Holzberger said. "QSuper delegated to us, rather than a strategic asset allocation, ranges in which we operate," he explained. "We have some discretion in terms of ranges and then we have their complete consent to move the fund. The other thing that they gave us was this wide discretion to seek alpha wherever. The only constraints are things like the total amount of risk in the portfolio, the amount of risk or core assets that are allocated to a single manager, the amount of the management expense ratio, and the amount of capital, and within those broad guidelines, we operate. We report to them across a balanced scorecard of risks and returns. We're also not allowed to let the risk for a potential investment rise above a certain level."
Being given that discretion by QSuper, as well as some other clients, has given QIC a unique opportunity to pursue these strategies, noted Doug McTaggart, QIC's chief executive. "The other key attribute here is that for many of our clients, we have invested all their money," he said. "We've had the luxury and privilege to manage the whole portfolio for them. Separating the alpha and beta at a fund level is a natural thing. Other fund managers cannot take that whole of portfolio view."
By freeing the constraints that come from a traditional approach to strategic asset allocation and by delegating QIC the authority to manage assets to a risk budget, the fund manager has been able to move more swiftly to immunise the superannuation fund from the ructions in equity, credit and fixed income markets this year. "QSuper has a large defined benefit (DB) fund and we monitor and manage the surplus of that fund. During July and August, when equity prices were falling and interest rates were falling, the surpluses in the DB fund were evaporating," Holtzberger said. "Being aware of that, we have increased the inflation hedge over the past 12 months, significantly reducing the losses. We think equity prices are at risk, we think interest rates won't fall, and there could be a spike up in inflation.
"That has, over the last 12 months, somewhat reduced the nominal return of the fund - you can't accept risk protection without reducing the returns. But we put in place some inflation hedging that paid off when markets became volatile, and [it is] still in place because we don't think the environment has changed."
The alpha/beta approach on the fixed income side has seen the Global Fixed Income division design a Global Credit Opportunities Fund which seeks return of bank bill plus 3% by using higher yielding credit markets and long/ short credit strategies, said Susan Buckley, general manager of fixed income.
The fund was launched in May and according to Buckley, "the increased volatility in credit spreads across the spectrum as well as overhanging pipeline of credit assets at cheaper prices has created the best opportunity for credit managers to generate alpha in years."
To capture beta, Buckley's division designed a fixed interest beta mandate that began in June 2006. The mandate uses physical assets, futures and swaps exposure, including inflation-linked swaps, to capture beta returns in fixed income. "The traditional approach to inflation is going to US [Treasury Inflation Protected Securities] and physical inflation-linked securities. If you were trying to generate alpha on top of that, your universe is quite constrained," Buckley said. "We access inflation in the most efficient way, not being benchmark driven, which is another constraint as well, if you think of inflation of indexes, maybe you're not using the full opportunity set to access that inflation data."
QIC's work has served to bring the discussion of alpha and beta to practical levels, but the challenge for the superannuation industry remains implementation. "While the theory and concepts are now commonly discussed in the investment industry, the process of implementation is where the challenges lie, including the governance approach, extensive use of derivatives, after-tax management and access to solutions that enable clients to separate alpha and beta with confidence,"
Buckley noted. "In our discussions with clients and consultants, even in the area of global fixed income, we encourage discussions around objectives and thinking explicitly about the role of fixed income in the portfolio - to match liabilities, to play a defensive role when growth assets fall, to be used as a source of meaningful alpha at the total portfolio level and/ or return seeking objectives. As a result we have moved down the path of offering beta and alpha products separately as well as combined."
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