Cbus has finalised the first phase of its new DAA program and is getting ready to roll it out across more granular cross-market positions, Brett Chatfield says.
Cbus Super has finalised the first phase of its revamped dynamic asset allocation (DAA) program, which has seen the fund create an extensive quantitative framework for assessing opportunities.
The program was developed under the leadership of Mark Ferguson, Head of Total Portfolio Management at Cbus, who joined the fund in July 2021. After promising initial results, the $85 billion fund is now gearing up to widen this program to a much broader set of opportunities across markets.
“Over the last couple of years, we have rebuilt the whole dynamic asset allocation process. Part of that was to systematise the process more and to have a really strong quantitative base to the process that then provides us with signals in terms of whether we want to be overweight or underweight and the orders of magnitude,” Brett Chatfield, Chief Investment Officer at Cbus, says in an interview with [i3] Insights.
“And then we have obviously a qualitative process that sits above that, but it was really important for us to build a really strong quantitative base to the DAA process.”
Cbus has finalised the first phase of the new DAA program and it is now time to expand the program into a broader range of positions across markets, also making the process less reliant on the general direction of markets, Chatfield says.
We're looking to move to the next phase, which is about adding a lot more breadth to the DAA process, to trade across more markets, across different countries from an equity perspective, across different bond markets and more cross-currency positions. It is about giving us many more levers to generate returns
“We’re looking to move to the next phase, which is about adding a lot more breadth to the DAA process, to trade across more markets, across different countries from an equity perspective, across different bond markets and more cross-currency positions. It is about giving us many more levers to generate returns,” he says.
“It also means less reliance on directional positions. When you are long or short equities, for example, you rely on whether the market goes up or down. But if you’ve got more relative value positions in place, so you might be long US equities and short European equities, then it just gives you another breadth of the types of trades, and it also makes you less reliant on just the direction of the market at any point in time.”
The fund has set a target return of 25 basis points a year on a rolling five-year basis for the DAA program. Although the returns from such a program can be volatile in any one year, Chatfield doesn’t believe the Your Future, Your Super performance test will make it harder to take dynamic positions.
“We obviously monitor our tracking error to the Your Future, Your Super benchmarks across the total portfolio and at an asset class level. But our fund has had very good long-term performance and we’ve significantly outperformed the benchmark over time, so we’re not changing our decision-making around that benchmark. We’re just making sure we’re aware of it and we’re monitoring our tracking error to it,” he says.
“We see the DAA process as a source of additional, incremental return and ideally it should help further outperform the performance test benchmark. So we’re not trying to reduce our risk versus the benchmark or anything like that.
“In fact, we want to take very considered active risk to make sure that we’re well positioned to outperform over the long term.”
TPA and DAA at Cbus
Like many of its peers, Cbus has adopted a total portfolio approach. For some funds this means they put less emphasis on a strategic asset allocation (SAA) as considerations at the total portfolio level can influence investment decisions at the asset class level.
But Chatfield is adamant to point out SAA is still a core part of the fund’s investment strategy.
“The SAA is a core part of what we do in our long-term portfolio and then we dynamically tilt around that on a shorter-term view, usually a nine to 12-month view,” he says.
“The way we think about the total portfolio [approach] is ensuring there are no silos across the team, that all the teams are working together. The asset class teams feed insights from the bottom up into the asset allocation team, but also the asset allocation team feeds down their views into the asset classes.”
The SAA is a core part of what we do in our long-term portfolio and then we dynamically tilt around that on a shorter-term view, usually a nine to 12-month view
To facilitate the sharing of ideas, Cbus doesn’t rely just on informal collaboration, but also holds a monthly portfolio group meeting, where the asset allocation team and all the asset class heads have discussions about the developments they see in the markets.
This way the information sharing can flow both ways, Chatfield says.
“Total portfolio, for us, is really making sure everyone’s working towards the ultimate overall diversified portfolio and is sharing views and insights across the team,” he says.
“For example, we find there are much more ongoing discussions between the asset allocation team and the private markets team around what is in the pipeline. What are you seeing in terms of opportunities? And it allows us to have a more informed assessment around where we allocate new money.”
In May, Cbus announced it had implemented a new five-year investment strategy. The continued development of the DAA is an important part of the new strategy, but Cbus also indicated it would continue to focus on the internalisation of asset management functions.
The fund runs about 38 per cent of its assets internally, as of June 2023, and aims to increase that to 50 per cent over the next five years. Chatfield says further growth of the internal strategy will not only come from scaling up the existing strategies, but also from adopting new ones, particularly on the equity side.
“We already manage a number of Australian equity strategies, a global equity strategy and emerging market equity. Firstly, we want to scale them up further. Particularly on the Australian equity side, they can be increased further in size than they currently are,” he says.
“But also, we want to look for new teams and strategies that are complementary to our existing portfolio. In global equities, for example, we might look to put a value team in place to be complementary to our quality approach.
“And likewise, in Australian equities, we’ve got a broad-cap, quality growth strategy in place and we are looking at complementing that with other styles and approaches as well.”
Cbus also has its eye on private markets, defined as infrastructure, property and private equity by the fund. Although Chatfield says he doesn’t expect to increase the overall strategic allocation to private markets significantly from its current 28 per cent, he does look to do things a little differently.
“On the private market side, it is really about doing more directly and more through co-investments, particularly in infrastructure,” he says.
Cbus has also revamped its private equity strategy in recent years and is currently looking to scale that up, including via co-investments in order to keep fees to a reasonable level.
“Alex [Campbell, Head of Private Markets at Cbus], has done an exceptional job putting together very clear and strong strategies across the private markets portfolio. In regard to the private equity strategy, that is now in the relatively early stages of building out both offshore and here in Australia,” Chatfield says.
It is about trying to further disintermediate some of the middle players by putting together deals and opportunities and being more of a creator of opportunities rather than just being a receiver of deal opportunities from managers or others
He sees a number of benefits through building partnerships and increasing the number of direct and co-investment deals beyond simple fee reductions and control. He argues this would enable Cbus to become part of the deal creation process and have an early seat at the table when investment structures, risk allocations and potential returns are developed.
For example, the energy transition towards more sustainable forms of energy generation is likely to require significant investments in new infrastructure by the various states and territories in Australia, as well as overseas.
Getting involved at an early stage in these discussions would help Cbus shape the transaction in a form that is attractive to the fund.
“Being more involved in the creation of initial transactions might be relevant on the energy side with renewables, for example, but also more broadly,” Chatfield says.
“Certainly on the energy side, rather than just assessing an already developed deal, [it would help] being more involved upfront, whether it is with governments or with corporates, in helping create what the opportunity looks like.
“What structure works well for us? What risk mitigants do we need? What type of returns do we need for it to be suitably attractive to us?
“It is about trying to further disintermediate some of the middle players by putting together deals and opportunities and being more of a creator of opportunities rather than just being a receiver of deal opportunities from managers or others.”
[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.