After a series of mergers, Equip Super revisited its core investment beliefs and decided it was time to update the SAA, the fund’s CIO, Andrew Howard, says.
When Andrew Howard joined Equip Super at the end of 2021 as the fund’s new Chief Investment Officer, he found an organisation that had been through significant growth over the previous five years having completed six successor fund transfers.
One of the most recent ones was the merger between Equip, which had $16 billion at the time, and Catholic Super, which managed $10 billion, in June 2021.
Now at $30 billion, the merged entity was in the middle of reviewing its core investment beliefs and the question was raised whether its strategic asset allocation (SAA) of 65 per cent growth and 35 per cent defensive assets was still the appropriate one.
“I did join at a time where the fund had just been thinking about the asset mix and whether they just had quite the right balance [in place],” Howard says in an interview with [i3] Insights. “One of the things that we did was to just bump that growth defensive mix up a bit.
I did join at a time where the fund had just been thinking about the asset mix and whether they just had quite the right balance [in place]. One of the things that we did was to just bump that growth defensive mix up a bit
“The objective here was to be able to deliver a consistent pattern of returns to members in both rising and falling markets. So we did make some slight changes to the SAA in June of last year. But at the margin; we weren’t talking [about] wholesale changes,” he says.
In the end, the fund decided to move the SAA from a 65/35 growth-defensive split to a more industry aligned 70/30 split, effective 1 July 2022.
This change in SAA didn’t mean that the fund moved to the new target allocation all at once, Howard says. It was always going to take a measured approach to adjusting its mix. In fact, in the last 18 months, the fund has been taking the opportunity of high equity prices to take some profit, while it has increased its bond holdings on the back of high yields.
“We weren’t looking to rip the band-aid off. We were looking to do it in a sensible, managed fashion. And, if anything, the last 15 months have provided those opportunities because of the volatility that we have seen in markets, in terms of interest rates and bond yields,” Howard says.
“Our bond exposure today is double what it was in the second quarter of last year, and our cash exposure today is three times higher than it was.
“What we’ve seen in equity markets has provided us with a real opportunity to trim as markets continue to go higher. I mean, we’ve had the sharpest rise in interest rates on record, and yet our market delivers 14 per cent and global markets deliver 20 per cent.
“Well, that’s a great opportunity to be able to recycle capital. And that’s a big theme and a big focus for us in terms of thinking about that portfolio positioning.”
Howard and his team also spend much time talking about diversification and not just between asset classes, but also within. As a result of these conversations, the fund decided in the fourth quarter of last year that it needed to make some changes within its international equities.
“Dare I say, the promise of emerging market (EM) equities … it starts to lose its lustre. Thinking back to all the BRIC conversations we used to have prior to 2010, we just felt that we could rebalance the portfolio.
“We still have EM exposure, but we were overweight and we’ve pulled that back. So again, we’re probably just slightly under the index in terms of EM,” he says.
Active management also helped the fund perform well last financial year. “Our active management configuration has delivered good results. And importantly there, we actually haven’t been overweight the ‘Super Seven’, the AI and technology stocks,” Howard says.
The Merger
When Equip and Catholic Super merged in 2019 both brands were maintained and the fund continued to operate largely as two separate funds with separate investment options.
But behind the scenes efficiencies were sought and a single board was formed to oversee the merged entity, while the funds also moved to a single administration and single back-office function.
Fast forward to 1 July this year and the merged entity has now consolidated its investment options into one menu of 12 options. It also introduced a new passive option and revamped its sustainability option.
As part of the fund’s growth, Howard has welcomed a number of new investment staff to the team, including a few senior investment specialists. Manish Utreja joined the fund late last year as Senior Portfolio Manager, Real Assets, from Insignia Financial, the rebranded merged entity of IOOF and ANZ Wealth.
Alister Wong joined at the same time as Senior Portfolio Manager, Defensive Assets and Alternatives from Australian Post Superannuation Scheme, where he was Head of Investments.
Equip Super also boosted its sustainable credentials at that time, when it hired Jessie Pettigrew as Head of Responsible Investment, from BT.
The investment management team now consists of eight people, while it has another four staff in investment operations, including Stephen Austen, Head of Investments Operations of the fund.
“We’re still small. As I say, we can still sit around the table,” Howard says. “We’ve got the foundation in place. The next part of the journey for us in terms of those resources is that we’re looking to hire some analysts.
“We will be looking to hire three analysts into the team over the course of the next three to four months. These analysts will come in as generalists so that they have plenty of opportunity to grow and learn and be exposed to everything that we do,” he says.
Howard on Scale Versus Flexibility
At $30 billion, Equip Super is no longer a small fund and the board has committed to grow to at least $50 billion, a size that Australian Prudential Regulation Authority has previously said is the point where it sees economies of scale really starting to kick in.
But Howard also points out that there are certain benefits to not being a very large fund, as became apparent when it was able to trim its equities and buy bonds over the past 18 months.
“The size we are, we can move with a lot of anonymity because when we make a 1 per cent change to the portfolio, it’s $300 million. It’s not moving the market in any way, shape or form,” he says.
The size we are, we can move with a lot of anonymity because when we make a 1 per cent change to the portfolio, it's $300 million. It's not moving the market in any way, shape or form
“We can be nimble. We can be flexible. We have an investment team that can still sit around the boardroom table, so we begin our weekly meeting discussing asset allocation, ensuring we have the both the top down and bottom-up perspectives.”
“We have a strong focus on maintaining asset allocation shape that is in line with our views and while investors can be turned off by volatility in markets, we actually see it through the lens of providing opportunities” he says.
Yet, Howard is aware of the need to scale up as a fund and he doesn’t rule out future mergers.
“We’re open to, and do have conversations and discussions, like all funds, around merger opportunities,” he says. “But front of mind for the trustee is ensuring that it is in members’ best financial interests.
“But at the same time, I don’t think that not being [$50 billion] today is detracting from the benefits that we provide our members. We’ve been able to generate good performance for our members. We have competitive investment fees. And that’s something that we’ve worked really, really hard on,” he 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.