Jujhar Toki, Senior Investment Manager at Colonial First State

Jujhar Toki, Senior Investment Manager at Colonial First State

Reviewing Defensive Assets at CFS

Interview with Jujhar Toki

As the world changes, portfolios need to change too. Colonial First State’s Jujhar Toki speaks to [i3] Insights about the fund’s current review of defensive assets.

As interest rates have remained low in recent years, with the general consensus predicting that they will remain low for the foreseeable future, institutional investors have been debating what this means for their portfolios.

Traditionally, portfolio construction has relied on achieving a balance between return-seeking and defensive assets. After more than a decade of central bank stimuli and a global pandemic, the rules of the asset allocation game have changed.

“Given where rates are at around the world, we are undertaking a major review of the defensive components of all our diversified funds,” Jujhar Toki, Senior Investment Manager in Colonial First State’s investment team, says in an interview with [i3] Insights.

“For example, the duration in bond indices has increased significantly over the last decade, so if you are doing nothing, then that would mean that your duration exposure in domestic bonds has increased from under four years to more than six years.”

Colonial First State’s investment team manages over $50 billion in assets for superannuation members and retail investors across a wide range of diversified funds, including multi-manager, multi-index, index and lifestage portfolios.

The defensive component of the index diversified funds consists mainly of bonds and cash, while the multi-index suite of funds also includes credit. The team also runs a suite of multi-manager funds, which has bonds, cash, credit and alternatives in its defensive buckets.

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We are also looking at the duration of our indices. We are looking at the split between credit and bonds in our portfolios. We are looking at the types of alternatives that we have in our portfolios. We are trying to understand what we have and if we need to diversify further

“We are looking at the whole portfolio. We are looking at the indices, whether the indices that we have make sense,” Toki says.

Toki and the team are looking at their credit exposures in the portfolios and are considering whether the index funds need to be further diversified by taking on new asset classes, such as emerging market debt (EMD) or high-yield debt.

“We currently have mainly investment-grade credit in our multi-index suite of funds, but our multi-manager suite of funds has the full credit spectrum: it has EMD, it has high yield, it has currency exposures,” Toki says.

“We are also looking at the duration of our indices. We are looking at the split between credit and bonds in our portfolios. We are looking at the types of alternatives that we have in our portfolios. We are trying to understand what we have and if we need to diversify further.

“Should we go up the credit spectrum? Should we have different types of alternatives to complement our current fixed interest exposures? Active versus passive management? And what are the right levels of cash?

“We are undertaking a major review which may or may not result in changes in our portfolios.

“Our initial analysis suggests that any improvement will be incremental. They will be very small improvements in risk-adjusted returns, but if you add up five or six different changes, they add up to a meaningful contribution to your portfolio.

“We offer a range of funds for our members and we want to make sure that we make consistent decisions across the range.”


As a retail fund, Colonial First State’s portfolios have very different liquidity demands than those of industry funds. Since they not only cater for default accumulation superannuation members, but also to members who are both close to retirement and in retirement, the funds have a greater requirement to provide daily liquidity.

The Colonial First State team has developed a liquidity framework since the government enacted the MySuper legislation in 2012 and work on a default super option started.

Toki and his team are now looking to apply this liquidity framework not just to its MySuper Lifestage strategies, but also to the other funds. They also aim to update it for the inclusion of direct assets, which have been introduced into the MySuper portfolios over the past few years.

“We want to understand all of the underlying exposures in that portfolio and as you can imagine the majority of them are very liquid,” Toki says.

“But there were some surprises in credit and bonds. When there is a crisis, liquidity dries up in bond markets, while equities remain very liquid. Things like emerging markets and bonds have slightly lower levels of liquidity than the domestic markets and global equity markets.

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We want to understand all of the underlying exposures in that portfolio and as you can imagine the majority of them are very liquid. But there were some surprises in credit and bonds.

“So, we have created a liquidity framework and we are planning to roll out our liquidity framework across all of our diversified funds. We had a very conservative liquidity framework when we commenced investing in direct assets, so at the end of 2019 we loosened the liquidity requirements.

“We have tested our liquidity requirements over this COVID period and we passed with flying colours.”

As the portfolios were coping well with the liquidity demands, the team increased the allocation to direct assets as prices in this sector had come under pressure and dislocations were starting to form.

“We took the opportunity to buy more direct investments over that volatile Q2, Q3 period and so we actually built up our exposures,” Toki says.

“Obviously, some of our managers saw opportunities to buy investments, but it was a bit of a chicken and egg situation: they didn’t want to draw capital, knowing that some funds might have liquidity issues, but we were very comfortable in being drawn down and invested.

“We just had our final drawdown for infrastructure on the 30th of November, but the manager bought those assets during the COVID period and they waited for markets and funds to recover. So, we had all of our commitments drawn down over this period to take advantage of the dislocations in markets.”

Value and the Pandemic

The value style of investing has not exactly thrived in the recent low-yield, technology-focused environment and as a result many institutional investors have shifted their investments to be more biased towards growth at a reasonable price.

But not Colonial First State. When the team designed the strategies, they designed them with a long-term horizon in mind and they took the view that over the very long term value still outperforms the market.

Yet, it has been a painful ride at times. But the tide turned in November last year.

“November was a welcome relief, and you can see how quickly that can snap back. We experienced underperformance for 12 to 18 months, but in that one month, November, we saw 30 per cent of that snap back,” Toki says.

“We have an index suite of funds, which we call index diversified, that obviously doesn’t have any value exposure, but we also have a multi-index suite of funds, which has a lot of value exposure in the equities components.

“And then our MySuper Lifestage strategy has a significant exposure to value in both the domestic and global shares. The younger members also had a lot more exposure to value than the older members in our default strategy.

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The valuations were at three standard deviations from fundamentals for value stocks. So that was one of the key drivers of the snap back

“It was underperforming until the end of 2019, but it wasn’t doing too badly. And then with the onset of the coronavirus the divergence was significant. Not only did value underperform market cap, which was a major pain point, but also you had these growth stocks that went ballistic. They pretty much drove the recovery in markets, but the recovery was narrow.

“From a valuation perspective, it was so undervalued compared to the broader market that you saw natural rotation into value. The valuations were at three standard deviations from fundamentals for value stocks. So that was one of the key drivers of the snap back.”

But the catalyst for the recovery of value stocks was the announcement that a vaccine had been developed to battle the coronavirus pandemic.

“Obviously this helped value stocks: banks and all the staples. It also helped the likes of airports, toll roads and retail property stocks,” Toki says.

“And probably the other part was that rates are probably not going to get lower, so people are looking forward and asking: is this the bottom of rates, the bottom of bond yields? If rates and bond yields go back up, then that is better for value stocks.

“But we don’t think that value is going to outperform in the near term, given where rates are. We believe that rates will be lower for longer, which is a headwind for value stocks.”

The team is constantly assessing whether the value tilt still makes sense and although they believe it does over the long term, they are looking to introduce other factors into the equity components of the MySuper strategies too.

“We are constantly assessing our value tilt. When we built our [MySuper] exposures, we had a significant tilt towards value. But what we didn’t have was exposure to the growth factor. So, when we were reviewing the portfolio, we wanted to have positive exposures to various style factors,” Toki says.

“We have low volatility and we have size through our Australian and global small caps. But what we were actually missing was a positive tilt to growth. That is something that we are looking to introduce over time to balance the risk factors, but we will still look to maintain a positive bias towards value factors.

“This is only in our MySuper strategies, whereas in our traditional multi-manager funds we built our portfolios slightly differently. We had positive biases to all factors, including growth. So global equities have done particularly well for us on a relative basis in those portfolios.

“It comes down to the construct and the time horizon. For our multi-manager funds, our time horizon was slightly shorter; it was a one-to-three-year time horizon. We built a more balanced portfolio. We wanted to have a positive bias to all style factors: size, quality, momentum and growth.

“But in our Lifestage [strategies], because we had a much longer time horizon, we were building portfolios for very long time horizons in line with the time frame of our members.

“But even here, the older cohorts had a more balanced portfolio. They definitely still had a positive bias to value, but nowhere near as significant as our younger members.”

This is the first part of a two-part interview with Jujhar Toki. To read part II, please click here.


[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.