Cbus super executive manager, investment management, Trish Donohue, is publicity shy, while the fund’s executive manager, investment strategy, Kristian Fok, loves the limelight. It is just one of the many differences in their personalities and skill sets that have made them such a winning partnership for nearly two decades, held together by the glue of a shared sense of purpose.
The pair were joint winners of the prestigious Chief Investment Officer of the Year trophy at the Conexus Financial Superannuation Awards 2017, announced at a gala dinner at Ivy Ballroom in Sydney on March 9. Together, they share responsibility for the traditional chief investment officer role at the $37 billion construction industry fund.
“Kristian and I have actually been working together for 17 years,” Donohue said as the pair stood together on stage to accept the award on the night. “And while we don’t always agree, we do work well together. I put that down to a shared belief in always looking after the best interests of our members.”
Fok thanked Donohue for her vision in bringing him on board to help implement the fund’s ambitious growth strategy.
“I’d like to thank Trish for guiding me since I joined, and for understanding the enormous potential of the fund,” he said.
Donohue was the founding member of the Cbus investment team in 2000 and has led it ever since. A former Mercer consultant and actuarial analyst, she was originally hired by the fund to oversee its asset allocation strategy and external fund manager selection process.
In 2011, she spearheaded a major review of the fund’s investment strategy that led to the board approving a proposal to bring Fok, the fund’s long-time asset consultant from Frontier Advisors, in-house to share the chief investment officer role.
Fok’s former boss at Frontier, the firm’s inaugural managing director now its director of consulting, Fiona Trafford-Walker, has observed the dynamic between the Cbus co-CIOs up close.
“I’m sure they don’t always get along perfectly but they are really good at having healthy professional disagreements and I think they bring out the best in each other,” Trafford-Walker says. “It is definitely one of those situations where one plus one equals three. It is very refreshing to see two such senior people in the finance sector who are so much more focused on the long-term goals of the fund than their egos.”
In a crude sense, their respective responsibilities at the fund are split so that Fok now has primary oversight for investment strategy, while Donohue has primary oversight of implementation.
In August 2016, the Cbus board approved a plan Donohue and Fok assembled to lift the proportion of assets managed in-house from 8 per cent to 20 per cent within five years.
To support this strategy, the board also signed off on the hiring of an additional 25 internal investment staff. The new members of the internal team will mostly be specialists in equities and infrastructure.
As of March 2017, the growing Cbus investment team consists of 55 staff, who are researching and readying to take on mandates. Subsidiary Cbus Property, the fund’s wholly owned real estate developer, manages another 5 per cent of member assets.
Cbus Property employs roughly 35 staff and has created more than 70,000 construction jobs via its direct investment program since the business was created.
The Cbus Property portfolio exceeds $3.2 billion, with a further $5.0 billion of development work in hand.
In total, roughly 10 per cent of the fund’s total assets are managed in-house. Under the new insourcing strategy, and with total funds under management projected to swell to $50 billion by 2021, the internal investment teams are set to be collectively managing at least $10 billion within four years.
The real number could be significantly higher.
“Getting up to 20 per cent is a fairly conservative target. If you look at some of the big international pension funds, 30 per cent internal management is quite typical,” Fok says.
He was adamant that they are in no rush.
“We want to do this right, and let me be clear, we are not looking at removing all external managers. Although [we are already] finding new ways to work with our managers,” he explains. “Things we expect to do more of include co-investments, designing strategies and having them implemented by external managers, and non-discretionary mandates, where the manager produces opportunities and we say yay or nay.”
Donohue takes the lead on negotiating manager contracts and has already had success in reducing costs since the insourcing strategy was announced late last year. The strategy aims to allow the fund to lower member fees by 10 to 15 basis points within five years.
Fok says that estimate is now “looking conservative”.
As well as shaving off costs, these types of structures all make it possible for Cbus to exert more control in their fund manager relationships. By investing in fewer prepackaged products alongside other investors, Cbus is reducing the risk of managers being able to lock-up their members’ funds in the event of another market crisis.
De-risking the portfolio
Even without a significant downturn, the current investment outlook is challenging.
About two years ago, Cbus lowered the target return on its MySuper product by 25 basis points and there remains a risk this may have to be reviewed again, amid meagre global growth and ultra-low interest rates.
Over the past four years, Cbus has progressively reduced its exposures to private equity funds and listed equities, while increasing diversification.
Less headline grabbing than the insourcing strategy, but equally important, is Donohue and Fok’s ongoing effort to de-risk the portfolio.
Another outcome of the investment committee review back in 2011 that led to separating out the strategy and management teams was a change in the investment strategy to focus on absolute returns.
Donohue says this was a pivotal decision because it has freed up the investment team to care less about how they might be performing against rival funds in the short term.
“Peer risk…still needs to be acknowledged but it’s important that it is not allowed to be a big driver of investment decisions,” she says.
Peer risk refers to the risk of members choosing to take their money out of the fund during a period of relative underperformance.
“We are mindful that we are in a choice environment, so people can always switch if they feel the fund is not performing,” Donohue says. “But we don’t want that to be a driver because when you are comparing yourself to others you are always looking backwards.”
Of course, it is easy to say you don’t care about league tables when your fund is doing well. According to data from research house SuperRatings, Cbus MySuper has outperformed its peers over the past one, three, five, seven and 10 years.
Donohue says having a focus on absolute returns, rather than benchmark-relative returns, makes the most of the competitive advantages of strong liquidity and cash flow the fund gets from its default status by allowing it to maintain an allocation of about 40 per cent to unlisted assets.
Roughly 90 per cent of the membership is automatically signed up by their employer.
“The fund is very resilient. Inflows have grown significantly this past year, compared with recent years, and forward-looking stress testing indicates continued strong cash flows,” Donohue says.
She is mindful, however, of the risks associated with relying on this. “We do a lot of work around liquidity stress-testing on a regular basis, to check how the portfolio would react to a number of elements that might affect liquidity, not just if there were changes to default, or another driver of changes to contribution rates, but also to downturns in markets and how that might affect our unlisted assets and other exposures,” she says.
Cbus is holding about 10 per cent of total assets in cash.
“That’s a higher allocation to cash than we would typically have but it is offset by a much lower than typical allocation to fixed income,” Fok says.
Roughly half the cash holdings are managed internally.
“Managing more cash internally, as well as lowering costs, gives us more control,” Fok explains. “In the GFC, lots of funds had their whole cash accounts locked up for periods.”
Donohue adds the fund has spread out the roll-out periods on their cash accounts to make the liquidity profile less lumpy.
Since the global financial crisis, and particularly in the past four years, the fund has expanded its use of sophisticated derivatives and futures overlays. This will allow it to move more quickly if there was ever a rising concern about any potential changes in the liquidity profile.
“There were a couple of lessons from the GFC and, in response, a lot of things have been repositioned and we continue to enhance the strategy’s flexibility,” Fok says. “The great thing about using options is it allows you to generate cash when you need it most.”
Flexibility is important when such a high proportion of the fund is in unlisted assets.
The financial year ended June 2016 was a bumper period for Cbus Property, with the portfolio returning above 24 per cent for the 12 months. Over the past 10 years, the property fund has delivered an average annual return of nearly 17 per cent.
But many, including the Reserve Bank of Australia, have questioned the sustainability of the nation’s property boom, which raises the question of whether Cbus Property’s success is another potential source of future vulnerability for the fund.
Donohue and Fok argue that the direct investment structure makes Cbus less vulnerable in the event of a property market downturn than if it only invested via external property funds.
In the GFC, it became quite difficult to redeem out of a pooled property trust. But Cbus was able to liquidate a couple of small real-estate assets it owned directly to tap into cash.
A property downturn could be a double whammy for Cbus, as it might be accompanied by a drop in employer contributions on behalf of its construction industry members.
Someone Donohue and Fok turn to for advice on managing the risks associated with the fund’s property exposures is Cbus investment committee chair Stephen Dunne, who is a former chief executive of AMP Capital, one of the country’s biggest property investors.
Dunne joined the board as investment committee chair in November 2015, bringing a “different personal flavour” to governance than his predecessor Peter Kennedy.
“He’s put a five-page limit on all papers to the committee, which really forces us to be succinct, then questions us to drill down when needed,” Fok says.
Donohue says Dunne’s background at AMP Capital gives him great insights into what the fund is trying to achieve in building up an internal investment team.
As investment committee chair, he will no doubt also have curly questions about how Donohue and Fok are reviewing the performance of internal management teams.
As with external managers, those who do well can expect to see their allocated funds under management increase, while those who underperform long term will face the axe. Frontier has also been engaged to play a formal role in internal manager assessment.