QSuper’s move away from the efficient frontier has seen its risk budget allocation to equities drop from 90 per cent to only 60 per cent.
“Equities are now just one risk premium for us; it used to be the only one,” said Damian Lillicrap, head of investment strategy at QSuper, adding the super fund had increased its risk budget allocation to areas such as long duration bonds, infrastructure, and property.
Like most funds, QSuper used to set portfolios along the so-called ‘efficient frontier’ with an increasing allocation to equity risk, starting from cash, through moderate, balanced, and finally aggressive.
“The efficient frontier was 1950s’ thinking and sometimes it’s like nobody remembers the 60s,” said Lillicrap.
“The 60s brought the capital markets slide where you can get better risk-reward outcomes by selecting the best mix of risk premium and structuring your portfolio kit to get the desired level of this mix in the portfolio. This means portfolios above the efficient frontier.”
He added, in theory, this would lead to a higher return for the same risk or alternatively, lower risk for the same returns.
“And this is what we have seen in practice the last few years.
“Members tell us they like the more robust returns we are seeking and have got, so I’m confused when others say they need to stay so heavily exposed to one risk premium because of peer risk.”
How QSuper invests in equities
Another reason for QSuper moving its risk budget away from equities is its view that active management is hard, with the few good managers difficult to find amongst the bad. As such, the $60 billion super fund has invested passively in equities for years.
“We also found the distinct focus on alpha distracted us from getting a better mix of beta, which is where the priority should be for portfolio construction – it’s where the biggest bang for the buck is.”
Although it uses passive implementation, it is moving further and further away from market cap weightings. Instead, it has its passive managers invest against bespoke indices, one of which diversifies the stock level and another that diversifies at the sectors level.
“We’re really pleased that we got good positive returns from these non-market cap portfolios last year. They performed well when you really needed them to.”
In addition, QSuper has moved from having around two thirds of its total equities in the Australian listed market to now only having about 25 per cent. And in its international allocation, it has decreased its exposure to the US because a 50 per cent weighting was viewed as excessive.
“We are looking at emerging markets, but we are also looking at other countries that are outside the five core markets that we used to be invested in. These are the countries that fell off the radar simply because they did not have a massive cap weight. But we think we can be diversifying and add value to the total portfolio.”