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StatePlus uses fundamental research for tech risk in beta

Dan Purves




StatePlus is using fundamental active manger research to understand risk from technological disruption to holdings in its beta portfolios.

As every asset owner has exposure to technological disruption in its equity portfolios through its underlying fund managers, StatePlus has been considering how it can monitor its fund managers to understand its exposure to disruption.

“The benefits of having a better understanding of disruption across our portfolio include a number of things, such as improved dialogue with our managers around unintended risks in the portfolio to exposures,” Jo Cornwell, investment specialist at StatePlus, told delegates at the Equities Summit in Melbourne.

“We can also notice how even a position that might be in one or two of our managers, even if it’s a small position, might aggregate up to a much a larger position at a total portfolio level.”

She added it could also provide an additional lens for performance attribution and risk analysis.

As such, scenario analysis needs to be strongly considered with fund managers being asked questions such as:

  • Have you considered what the best-case scenario is for the company or for the portfolio if technological disruption happen quicker than currently predicted?
  • What is the worst-case scenario?
  • Which of these scenarios is currently priced in by the market?

“A lot of fund managers will base their assumptions for their valuations models and their positioning in their companies around a typical time horizon of three to five years,” Cornwell said.

“But we’ve seen that the time horizons [for disruption] can be vastly outside of these time horizons, so it is worthwhile asking our managers what might they change in their assumption, given the evolution of digital technology. And how might this impact on valuation models or the positioning of such a company?”

Disruptor or disrupted?

At total portfolio level, Cornwall said asset owners could probably take a more high-level view by simply looking at the top 20 holdings, and going line-by-line, and asking if a company was a disruptor or was likely to be disrupted.

“That kind of overview can give you a broad idea of how you are positioned in this space. And then you can delve into company specifics, if you like, to gain a deep understanding.

“And this is a good way to use the research knowledge of your fundamental active managers.

“As asset owners we will have a broad portfolio. Some of our positions will be from beta portfolios or from factor portfolios, and while fundamental active management may not have a position in a company that is in our top twenty, they will likely have a sector specialist who understands how that company is structured and the impact that might come through from disruption, which can help us in our total portfolio view.”

She added that having all this information on disruption did not necessarily mean the portfolio needed to change, as hopefully fund managers have been hired that can already help super funds meet the objectives.

“[This analysis] might help us identify some things we need to do to have more exposure to opportunity. And if there’s an active manager who specialises in this area, an additional allocation may be worthwhile.

“Or it might be that we better understand the risk in the portfolio and exposures that may not be obvious at first sight, but are very important for us to consider as long term investors.”