Investing in the current low yield, low growth climate is tough, but Lisbeth Rasmussen, CIO of State Super, says solving real problems is also exciting.
It is a tough world out there.
With almost $11 trillion of sovereign debt trading at negative yields, equity returns looking meagre in the years to come and private market assets bid up highly, there are few places where investors can go.
For State Super’s defined benefit schemes, the situation is made more difficult by the fact it pays out about 8 per cent of its assets in pensions and benefits each year.
Yet, Lisbeth Rasmussen, Chief Investment Officer of State Super, does not seem fazed by this scenario.
In fact, quite the opposite.
“It’s exciting, isn’t it?” Rasmussen says in an interview with i3 Insights.
“Navigating through this high level of uncertainty is hard, but it is also very exciting, because the problems we are trying to solve are real problems,” she says.
Rasmussen is a veteran of the investment industry and has been working in superannuation and asset management for more than 30 years, including in Australia, the United Kingdom and her country of origin: Denmark.
Much of her time has been spent at State Super and she has seen the organisation at a time when it still had positive cash flows and when it had an in-house asset management team.
She has seen the organisation go through mergers, which meant she was responsible for creating new funds and new strategies.
Rasmussen also oversaw the move away from multi-asset mandates to sector specialist mandates and back again.
So it may not be surprising that she sees the current climate as more of a challenge than a burden.
“I think that we will be in this environment of low growth, low interest rates and low inflation for quite a long time.”
“What we need to do is to really think smarter about how we invest. To confine ourselves to benchmarks and standard asset classes will not do it for us.
“We need to think, not necessarily outside the box, but perhaps also inside the box…, or both.
“I think that you have to look at individual countries and individual sectors and really carefully assess where we get compensation for the risks that we’re taking.”
“But what it means is that investors have to think about different ways of accessing opportunities and I think that’s really exciting,” Rasmussen says.
Partly, this means institutional investors will need to let go of benchmark constraints while keeping a tight hold on risk.
“What it means is that we remove ourselves from the, if you’d like, ‘safe world’ of benchmarks,” she says.
“What we need is a more unconstrained world: Go where you can make money, it doesn’t matter what the benchmark says. If you can’t make money in the US and it’s 50 percent of the benchmark…, well, don’t go there.”
What we need to do is to really think smarter about how we invest. To confine ourselves to benchmarks and standard asset classes will not do it for us.
State Super has adopted a more unconstrained approach by awarding mandates to multi-asset strategies, and given the managers similar risk and return objectives as State Super’s defined benefit portfolio.
“We started in the multi-asset area probably five years ago, but I must say some of these strategies haven’t quite delivered the performance we had hoped.
“Yet it is probably a little bit too early to assess if multi-asset strategies will deliver the intended benefits. From a strategic perspective we continue to support these strategies and say to our managers ‘Look, go out there and make money’. It is not an easy task.
“In a way, it is much easier if somebody says: ‘You should have ‘x’ per cent in international equities and here’s your benchmark’ and then as a manager you just deviate slightly relative to that benchmark, but the risk inherent in the benchmark is carried by the trustees.
Optimising Through Factors
In today’s investment climate, investors have been increasingly looking at factor investment strategies for solutions to the difficult investment climate, often because this approach starts from a risk basis, rather than a return focus.
Rasmussen points out that State Super uses factors when constructing the manager configuration for international equities.
“At the total portfolio level we optimise the portfolio based on asset classes. When it then comes to the manager configuration within internationally equities, we look at factors, but it’s very difficult to use factor investing for Australian equities.
“There is a little bit of that coming into the Australian equity portfolio but it’s just hard to do, and we don’t do it across the other asset classes.”
“So I cannot say that we are optimising the total portfolio based on factors because we can’t do it across our infrastructure, property and fixed income portfolios,” she said.
Yet, Rasmussen is enthusiastic about what factor strategies could do for portfolio optimisation.
“I recently went on a tour to the US focussed on asset allocation . One thing which piqued my interest was that it sounded like some managers were working towards integrating the optimisation process across various levels of the portfolio: across the overall asset allocation, the manager configuration and stock selection,” she says.
“It has always bothered me that we optimise the portfolio at the asset class level: We set an expected return and expected volatility and then we say: ‘Okay, we will have – let’s say for argument’s sake – 50 per cent in equities’.
“Then the Head of Equities will go away and will put managers together, but that would be to beat the benchmark for the two equity asset classes. There is no direct link back to the overall volatility at the portfolio level that was optimised.
“And then our managers they go out and do the stock selection and again it is divorced from the overall volatility level. So the way risk percolates down through the portfolio is not controlled and that has always bothered me,” she says.
“And it seems as if there is a lot of work going on to try and deal with that problem and I think that’s exciting. It is possible that as a result of this work we will be able to construct more robust portfolios going forward and hopefully continue to deliver strong outcomes for our members.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.