In this preview on the [i3] Podcast with Stewart Brentnall, he defines what TCorp looks for in a strategic partnership.
As part of the structural overhaul that took place following the merger of TCorp, State Super and, what is now called, icare, TCorp embraced a whole-of-portfolio approach in an effort to take a more holistic approach to investing and reduce agency risk.
A direct result of this new approach is that the asset manager for the state of New South Wales has been looking to develop strategic partnerships with a select group of fund managers and reduce the overall number of managers in the portfolio.
“A sector-based process will seek to construct the risk in the portfolio and then select a component so that it will diversify active risk at the sector level by appointing a number of different managers in that sector,” Stewart Brentnall, Chief Investment Officer at TCorp, says during an interview for the [i3] Podcast.
“And if you multiply that by the number of sectors, you end up with a very large number of managers, but you don’t have a particularly clear picture of the interaction between the risk and returns, the active risk and active returns of each of those managers.
“So the … change [under the whole-of-fund approach] is that we’ve been able to streamline the portfolio and we have a significant smaller number of relationships, but they are more strategic in nature.”
Defining the Model
The Texas Teacher Retirement System in the United States was one of the first funds to implement a formal partnership model and under this model it gave each partner a slice of the overall portfolio, which included a wide range of asset classes, to manage.
This model has received much interest from pension funds around the world, but it has been interpreted differently by individual funds. For example, some pension funds don’t carve out a slice of the portfolio, but instead focus on particular research projects.
Asked how he would define a strategic partnership, Brentnall says: “I look at that with a slightly simplistic lens, perhaps, and say that the best way to operate a strategic partnership is for each side to be really clear on what the motivations and contributions are.
“From our perspective, we look for partners that are able to put themselves in our shoes and to absolutely understand what the client mandates, missions, risk appetites and constraints are in order to be able to help.”
This might sound straightforward, but Brentnall has found that in practice it is not always easy for organisations to do.
“Firstly, they are often quite narrow and only offer certain capabilities. Secondly, they might be very large, but have historically operated on a siloed basis, rather than a customer basis,” he says.
“But increasingly we are finding that organisations are accepting the challenge that I’ve outlined and seeking to have relationship models which enable their clients to quickly identify and access all of their different capabilities, and to do that in a coordinated way so that there aren’t too many touchpoints and not huge numbers of people on either side of the fence.”
Active v Passive Split
TCorp currently stands at around $100 billion in assets and the question is whether it will have to move more investments to passively managed strategies as the fund continues to grow.
Many large funds in the US and Europe have found they simply can’t put enough money away with active managers as their capacity to take on large mandates is limited.
But Brentnall does not expect TCorp to make a big move into passive.
“Yes you are right, we are an organisation that manages around 100 billion in Australian dollars, which does present challenges that smaller organisations don’t have. We simply cannot be as nimble and dynamic in moving money around asset classes,” he says.
“However, that in itself is not a condition in which you would say: ‘Let’s move to passive; it is all too hard.’ Our mission is to provide customers with the best risk-adjusted, net-of-fee performance that we can.
“In our portfolios at the moment, a very significant part is active and we don’t feel the imperative to save costs [further]. That is not one of our missions and that was a very specific discussion point in the investment committee. It is not one of our aims to save cost.
“So we look really hard for parts of the market that are inefficient and where we feel we can enter them effectively and where we have a clear understanding of how to exit them effectively and efficiently as well.
“Now, some of this actually involves sourcing assets in an advantaged way from our peer group.
“I’ll give you an example. We source assets from, in several cases, our Canadian peers, where both sides have decided they prefer not to go through public auctions. They agree a price upfront and they agree a partnership horizon upfront, and we’ve done deals at a very acceptable price, which has enabled us to access active return on opportunities that have already been very good for clients.”
This article is a preview of the [i3] Podcast with Stewart Brentnall, Chief Investment Officer at TCorp. The full podcast will be published in the next edition of [i3] Insights on 7 May 2020. Brentall speaks about his career, the new investment structure at TCorp, the move towards a total portfolio approach and his views on the Canadian Model.