Alternative investments have an important role to play in institutional portfolios, but opportunities in this asset class are more fleeting in nature than in traditional asset classes and allocations should reflect this, TelstraSuper says.
Most superannuation funds have permanent exposures to traditional asset classes, including equities, fixed income and real assets, even if they have certain asset allocation bandwidths to play with.
But when it comes to alternative assets, including hedge fund-type and alternative risk premium (ARP) investments, TelstraSuper believes this approach is inappropriate because these positions are more temporary in nature, seizing the opportunity of market dislocations and thematics.
The fund, therefore, places alternative strategies in a separate opportunities portfolio, which constantly rotates capital into new ideas, depending on the market conditions.
“We believe there is a role for alternatives, but we just don’t believe that should be on all the time,” Arthur Bengasino, Acting Head of Opportunities and Real Assets at TelstraSuper, says in an interview with [i3] Insights.
We believe there is a role for alternatives, but we just don't believe that should be on all the time
“The view we have in alternatives is rotation of capital, constantly rotating capital to where we see the best risk-adjusted return.
“Pension funds have an always-on exposure in their bonds, equities, property and infrastructure portfolios and so [alternatives] should be augmenting at different parts of the curve relative to those exposures.”
Bengasino gives the example of a strategy the fund implemented in the past that looked at mitigating the effects of higher inflation levels, when inflation was still ramping up.
“We built inflation-targeting sleeves back in 2021-22 and we did that through an ARP expression. We also took advantage of commodity markets through ARP and Absolute Return, that worked. But then we shut it down when we didn’t think we were getting adequately compensated for the risk we were taking anymore,” he says.
The opportunities portfolio can be anywhere from 0 to 10 per cent of the total fund and currently it has just over $800 million in it. Typically, TelstraSuper targets investment opportunities with a time horizon of less than five years.
This means capital is constantly rotated into new opportunities.
“If I think about the capital discipline that we employed in that opportunistic portfolio, then we’ve rotated around 55 per cent of its capital since inception five years ago, which is a lot,” Bengasino says.
Taking Tactical, Dynamic and Thematic Bets
The opportunities portfolio can be roughly be divided into three different sections: tactical, dynamic and thematic trades.
“It’s like a three-legged stool. It’s about dislocation opportunities that we step into, both public and private. It’s thematic views that we have across the fund. For example, carbon markets and AI have been just some of them,” Bengasino says.
“And finally, if we see a really good opportunity in an asset class, but [the transaction] just throws their risk metrics out, or alternatively is something that we want more of, then we can put it in the portfolio as well. It’s a portfolio where we believe we can get really good opportunities, which in other funds may have slipped through the cracks.”
TelstraSuper has not been shy to seed a new strategy for the opportunities portfolio if it believes the investment case stacks up. The fund has invested in a quantitative equity, market-neutral strategy that considers the level of carbon emissions of the companies it invests in.
“We believe that high emitters will be penalised more than low emitters and, as a consequence, you could take a market-neutral position in that vertical and be rewarded. That has worked,” Bengasino says.
“One of the big differences of that strategy is that it’s not naive to what’s going on in the world and it fits with our philosophical view of good bottom-up stock selection, married with good top-down views of where we think things are going.
“That particular investment has been really good for us .”
Good Governance and Constant Revision of Trades are Key
To run an opportunities portfolio like this requires a solid governance framework with clear delegation as to who is responsible for each decision. Bengasino says the asset class governance structure allows the fund to be nimble while not sacrificing analytical rigour and depth, with transparency a key component of the asset class guidelines, aimed at testing a thesis and creating better decisions and outcomes.
“The valuation, risk and control processes are very rigorous. For example, I only target investments with an expected holding period of less than five years. And if we are to remain tactical and fluid, we need our capital to rotate, so currently, and to loosely borrow a metric from the debt world, the duration of that portfolio is currently around 3.2 years, keeping it true to label,” he says.
Every day I walk in and I look at the book and say: ‘Am I holding the right investments for the environment that I think we are in? I test my theories and track the decisions that I've made. What did I learn from that decision process? Was it a good decision? Was it a bad decision? Can I repeat that decision? What blinded me in hindsight to a bad decision?
He takes a similar rigorous approach to his investment decisions, constantly reviewing how he might improve the structure and process of transactions.
“Every day I walk in and I look at the book and say: ‘Am I holding the right investments for the environment that I think we are in?’” he says.
“I test my theories and track the decisions that I’ve made. What did I learn from that decision process? Was it a good decision? Was it a bad decision? Can I repeat that decision? What blinded me in hindsight to a bad decision?
“And so learning from that process keeps your eyes open when you’re going forward to make good decisions.”
He points to TelstraSuper’s recently targeted investment in a pre-initial public offering (IPO) company as a further example of cross-team collaboration, in this case from the Australian Equities asset class, highlighting how the team is constantly seeking to expand its understanding of markets and the opportunities they present.
“We took a small, pre-IPO position because we can learn from it and marry it to our tactical views,” Bengasino says.
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[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.