internal equities

Russell Clarke, Chief Investment Officer, VFMC

VFMC Shifts Internal Equities to Benchmark Unaware

Russell Clarke Interview Part II

Managing assets in-house is not a new exercise for Victorian Funds Management Corporation (VFMC). The fund has run bond and equity strategies internally for a decade and these strategies now comprise about a third of the assets in these sectors.

But more recently it has changed the way it runs its equities strategies.

“We have evolved in the way that we run internal strategies, particularly on the equity side,” Russell Clarke, Chief Investment Officer with VFMC, says in an interview with [i3] Insights.

“On the fixed-income side, our team has done a fantastic job over an extended time period. We have a couple of external managers and we look at the internal team as just another manager. So given the structure is working really well, there is no need to change that.”

VFMC’s internal fixed-interest capability is a three-person team led by Nick Tribe.

“On the equity side it has been a bit of a journey,” Clarke says.

“We started off with adopting a large-cap Australian equity approach, looking at the top 50 stocks in the market. It was almost a bit of a completion-type portfolio.

“We found that although it didn’t detract value, it didn’t add a lot of value either, which is perhaps not surprising given the efficiency of that part of the market.

“But it was valuable from a participating-in-capital-markets point of view. The flow of information and news was certainly heightened and helped in how we managed the overall portfolio.”

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We have rebuilt that internal process and we run a much more benchmark-unaware [approach, with a] smaller number of stock positions, using a multiple-portfolio-manager approach

Yet, it wasn’t enough to justify an internal team and so the strategy had to change.

“In recent years, we have rebuilt that internal process and we run a much more benchmark-unaware [approach, with a] smaller number of stock positions, using a multiple-portfolio-manager approach,” Clarke says.

The current internal fundamental Australian equities group is also a three-person team, led by Michael Stavropoulos.

“We’ve got three individuals, who are all portfolio managers, and they have different styles. Each builds their own portfolio, which then creates a blended portfolio. It has a high tracking error because it has a benchmark-unaware approach,” Clarke says.

The decision to shift to a benchmark-unaware strategy was made about two years ago, but has been gradually implemented, he says.

“The experience has been good so far. This was a strategy where we started with a small amount of money and have been scaling that up because it was a material change,” he says.

“The 2019 financial year was a very tough environment for Australian equity managers, including for our external managers. But the internal team comfortably beat the benchmark, which I thought was a very good effort, and we are continuing to upscale that portfolio.”

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If you are going to retain your external managers, you don’t want an internal team that does essentially the same thing,” he

In hindsight, running a concentrated, benchmark-unaware strategy makes much more sense than focusing on large caps, he says.

“If you are going to retain your external managers, you don’t want an internal team that does essentially the same thing,” he says.

Clarke doesn’t plan to expand the internalisation program much in terms of the percentage relative to the portfolio or bringing in new asset classes, such as infrastructure or private credit.

“Any insourcing decision has to be rightsized for the organisation, but at our size – we’ve got about A$68 billion in AUM (assets under management) – it does make sense to have some insourcing, but we don’t want to fully insource,” he says.

“Some funds are getting very large and are choosing to go down the Canadian-type model and might want to fully insource. But at our scale, we don’t think that makes sense.”