Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 81

Interview with David Bell, CIO, AUSCOAL Super

David Bell recently became Chief Investment Officer at the $8.5 billion AUSCOAL Super (AUSCOAL) fund. Previously, he ran his own consulting business and spent 12 years at Colonial First State.

GH. Investing is an art as much as a science, how do you come into a business and bring your subjective opinions into an existing investment process?

DB. My first step is to make use of the asset management tools we have, and to realise the strengths and weaknesses of the science. Then you introduce the art. You have subjective overlays as you become more experienced. In a super fund, you are working with an investment committee and a trustee board to come to final decisions. An important skill is to explain the strategy clearly to both the investment committee and trustees so they are comfortable with your level of subjectivity. Some traditional trustees may not know the investment science, but they all have the subjective piece. AUSCOAL wants a CIO who can bring the thoughts together and lead the conversation.

GH. Is there anything in the portfolio that surprises you or you feel strongly against?

DB. It’s a good portfolio in good shape. AUSCOAL was one of the first super funds to have a default fund which ran a lifecycle strategy and allocated to private assets. After the introduction of MySuper, about 20% of the industry is now running a lifecycle default strategy, dominated by the retail players who put mostly liquid assets into their lifecycle funds. I think there’s a lot to be said to have a wider universe of investments, in terms of return and diversification opportunities. As long as you’re confident you’re being rewarded for it. So it’s good that we’re already investors in private assets.

GH. How much will you bring market timing into your investments and how will that vary from the past?

DB. In its recent history, AUSCOAL has not been an aggressive market timer. They make small tactical tilts in consultation with the asset consultant, Mercer, and the Investment Committee. It looks like some super funds last year made quite large tactical tilts, and some better performing funds probably did one or more of the following tactical trades: go overweight growth assets, go overweight global equities (even better if the currency exposure was unhedged) versus Australian equities. I’m not going to come here and say market timing is what differentiates AUSCOAL in the market.

GH. People will be encouraged by recent successes to do more market timing, so will you be managing that expectation?

DB. History and academia shows market timing is hard to do consistently. It is also one of those areas where it becomes clear in hindsight. We are probably more focussed on tactical asset allocation for risk reduction, and we will use our tactical budget when we see risks emerging. Even playing defensively you need to be careful. If you get out too early, you can have two or three poor years before you’re proven correct. Across the industry there is the risk that a trustee says they can’t take the heat. The investment committee and trustee have to come on the journey, buying into the process with you.

GH. How much pressure do you feel to match your competitors, putting emphasis on the peer risk?

DB. Since I’ve been here, there is more focus on member outcomes and our PDS defines our objective as CPI-plus. But the peer group element is still there. APRA has added to a peer group focus through initiatives such as the product dashboard. Nobody really knows what everyone else is doing, so it is difficult to manage for peer group risk on a forward-looking basis. You cannot be too worried about it and it’s not what members want anyway. If we’re telling members we intend to outperform a peer group, and in the GFC the median fund was down 20% and we were down 18%, the outcome is not properly aligned. In focusing on outcomes we create some risk that we might underperform peers in a good environment. To manage for this we need to educate – externally to explain to our members how we are contributing to their retirement outcome, and internally across all our staff, senior management and our trustee.

GH. Do you have a feeling this is not a great time to become a CIO with rates so low, US equity markets at all-time high, government debt out of control?

DB. You are challenged to find attractive value at present. But I would reverse the question and say, “Do you want to captain a ship in smooth waters or rough seas, where you can add the most value?” When values are stretched, that’s when you want to be there, when members will benefit the most.

GH. Can we drill deeper, with your defensive allocation, where do you put your money?

DB. Fixed income has become challenging, and defensive options are trying to earn real returns but the real returns on cash are currently negative. It’s a flat yield curve so taking term risk is not rewarded unless you think inflation will fall. Then you go out on credit spreads but both investment grade and high yield grade spreads are tight. So we start to see it’s a tough sector. Predating me, we moved away from managers who have benchmarked portfolios to those who are more flexible, with a total return focus. You might allocate to a manager who has a CPI-plus mandate or a cash-plus mandate. There is so much complexity in fixed income that there is value to be added in this sector by skilled managers. We pay a little more for these mangers but we feel they are a better fit with our objectives. There are some good opportunities in mortgage-backed securities in the US, so we give money to a manager in that space.

GH. Do you always gain exposure to an asset class through managers rather than going directly?

DB. Nearly everything we do is through managers. Generally, the industry funds who are managing money themselves have $20 billion plus and at that level they have a constant debate about efficient implementation. So for example Unisuper with $40 billion manages 50% internally. Some smaller groups such as Equipsuper manage Aussie equities internally.

GH. Do you give global managers currency hedging instructions?

DB. Generally, with global fixed income we fully hedge our currency exposure. Fixed income is low volatility and currency volatility would swamp it, defeating its role in your portfolio. We have a strategic target for global equities. We use a currency overlay manager to make and implement tactical calls around this strategic target.

GH. Are there any asset classes that you feel active asset management is not worth paying for, that you should save your ‘fee budget’.

DB. I’m a bit of a contrarian to the marketplace. I’m quite happy to pay higher fees than most for fixed income as I feel there are a lot of opportunities for value to be added. In equities, our managers have done well over time, but the question for me has been how much of that was due to the ability of the manager versus a simple style-based rule. That’s something we’re working more on. This brings it back to the point about ‘science’. Can we use some of these simple style-based rules ourselves?

I think there’s more potential for active managers to outperform in Aussie equities than there is in the global space. Much of the academic literature paints a poor picture of outperformance in global equities, where you pay fees without much reward, and our experience has been that active performance in global equities has not been as compelling. So what’s the best way to achieve global equity exposure? In recent years, the emergence of smart beta (style-based) strategies increases our ability to assess their true value-add, and also broadens our range of implementation options.

GH. Is it worth paying active fees for other assets such as property and alternatives?

DB. Yes, we have allocations there. But the more you move into non-traditional asset classes, the harder it is to benchmark your managers. For example we have found it difficult to find a good property benchmark which reflects what we are trying to achieve. The benchmark we have is a little more aggressive than our property objectives so you have to be mature to accept that our portfolio will likely underperform in current buoyant market conditions. We have a lot of team experience investing in hedge funds but again you have to really understand what you are getting for that exposure. I see a triangle of risk, return and fees, and one of my roles is to decide the appropriate balance.

GH. Australian super funds have traditionally focussed on accumulation, but more recently on retirement incomes and outcomes. Why doesn’t AUSCOAL make its best estimate of likely retirement balance and resulting income and give clients a number they can understand?

DB. There’s a lot of responsibility in providing that number. We are pushing down the path to produce the information. But there is much greater opportunity than the addition of a single number to a statement. Imagine if you had a tool that could project outcomes with a range of possibilities, and members could interact with this tool. This may help direct them to a more appropriate portfolio mix. Then if they give us a bit more information, such as their personal balance sheet and savings characteristics, we can give them an interactive tool with a clearer picture. This same system could be used to tailor the design of our lifecycle default strategy, and could also be used by our financial planners. We are building these models at the moment, I’m very excited about it.

GH. Do you think longer term you’ll be doing more in-house and having your own traders?

DB. I think there are a lot of good managers out there, and there’s a lot to be said for transaction skills. You might lose a lot through execution without realising it. Slippage and market impact costs are not well understood. If we have a good idea, we might use an external party to execute it. I can’t see us having ten traders inside the office. So even if we go down a core/satellite approach, we’d likely use a manager to implement the core for little cost rather than do it ourselves. We use mandates rather than unit trusts so we have all the tax efficiencies. I don’t think people overcharge for execution, and the big players have purchasing power. There’s a lot of operational risk doing it internally, one mistake and it’s very expensive. An external manager will generally pay for any mistakes they make.

GH. So have you seen where many of your members work, down a mine?

DB. That part of my initiation is coming soon. There are 2,000 kilometres of tunnels around Lake Macquarie, some two kilometres deep. It’s going to be quite an experience.

 

In addition to being Chief Investment Officer at AUSCOAL Super, David is working towards a PhD at University of NSW and is a Principal at Cuffelinks.

4 Comments
Michael Swinsburg
September 28, 2014

Great article Graham and David. We do a great deal of work assisting industry super funds build their investment teams. These topics - bringing the IC and board on a more detailed investment journey and the complexities of inhouse investments ops and risk mgt is the ongoing conversation. Another great contribution.

Balaji
September 26, 2014

David,

You touched on many important issues. Thank You.

Could you provide further colour into the use of Alternatives into the super portfolios.

There is much written and debated about the use of Alternatives within portfolios. Why in your case would you use them and how do you justify putting member monies into a fairly expensive and complicated product? Calpers recently decided to get out of hedge funds due to the sheer complexity involved. How does this influence your own allocations (if one of the largest players cannot deal with this complexity, then what hope do the smaller players have?).

Also, how do you go about determining an appropriate allocation into Alternatives (taking into account the triangle you described in your interviewiew) particularly in the context of low rates, US equity markets at all-time high, government debt out of control. Could you see liquid Alts being used as a proxy for listed bonds and equities?

Thanks

Jon B
September 26, 2014

Balaji, I too hate complicated structured products, but not all alternatives fit that definition. I would suggest that for Calpers to ditch the Hedge Fund sector due to alleged complexity is most likely a PR decision and not an investment decision.

David Bell
September 28, 2014

Hi Balaji,

You ask some good questions. Obviously it is pretty difficult to give a complete answer in a forum like this but I make a few dotpoints as food for thought:

- In my view you shouldn't invest in alternatives unless you have the ability to identify what part of the returns is active skill-based returns and what part comes from underlying market exposures

- In a super fund / diversified fund environment alternatives can provide some hard to get market exposures (eg merger spread risk premium) but it is more generally the active return which is of interest

- However hedge funds don't 'own' active returns - there are lots of quality traditional fund managers out there which may be a cheaper source of active returns. And further, the grey area between alternative and traditional fund is becoming larger

- So I see alternatives as another tool at my disposal. Broadly I have a family of market exposures and a range of active return strategies at my disposal from which I try to work out the best mix. So if for example markets become really stretched then this may make the role of active returns more important

- Regarding Calpers, it is difficult for me to add a unique insight, except to observe that every fund has its own unique size, structure and governance model. Perhaps hedge funds just wasnt a good fit for their model

Note the use of 'I' means the above comments are my personal views rather than the view of AUSCOAL Super.

Cheers, David

 

Leave a Comment:

     

RELATED ARTICLES

Income investing during COVID-19 demands a dual technique

Three fascinating lessons overlooked by investors

A decade of Magellan: lessons in building a fund manager

banner

Most viewed in recent weeks

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

Latest Updates

Investment strategies

Maybe not the four most-costly words in investing

A surprisingly high percentage of respondents believe 'This Time is Different'. They may be in for a tough time if history repeats as we have seen plenty of asset bubbles before. Do we have new rules for investing?

Investment strategies

Firstlinks survey: the first 100 tips for young investors

From the hundreds of survey responses, we have compiled a sample of 100 and will publish more next week. There are consistent themes in here from decades of mistakes and successes.

Strategy

What should the next generation's Australia look like?

An unwanted fiscal drain will fall on generations of Australians who have seen their incomes and wealth stagnate, having missed the property boom and entered the workforce during a period of flatlining real wages.

Shares

Bank results scorecard: who deserves the gold stars?

The forecasts were wrong. In COVID, banks were expected to face falling house prices, high unemployment and a lending downturn. In the recovery, which banks are awarded gold stars based on the better performance?

Exchange traded products

In the beginning, there were LICs. Where are they now?

While the competing structure, ETFs, has increased in size far quicker in recent years, LICs remain an important part of the listed trust sector. There are differences between Traditional and Trading LICs.

Shares

Should you bank on the Westpac buy-back?

Westpac has sent out details of its buy-back and readers have asked for an explanation. It is not beneficial for all investors and whether this one works for some depends on where the bank sets the final price.

Investment strategies

Understanding the benefits of rebalancing

Whether they know it or not, most investors use of version of a Strategic Asset Allocation (SAA) to create an efficient portfolio mix of different asset classes, but the benefits of rebalancing are often overlooked.

Shares

Six stocks positioned well for a solid but volatile recovery

The rotation to economic recovery favouring value stocks continues but risks loom on the horizon. What lessons can be drawn from reporting season and what are the trends as inflation appears in parts of business?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.