Telstra Super has scored a double win: gaining insights into a market anomaly and discovering which of its fund managers are true partners.
In recent weeks, the $18 billion corporate super fund for Telstra employees had identified a disconnect between a trusted volatility index and some known issues in the world. To understand the anomaly, the fund asked its external fund managers what they thought.
“We saw that the VIX [the Chicago Board Options Exchange Volatility Index], which is meant to measure the amount of investor fear and uncertainty, was very, very low – lower than almost ever seen,” Telstra Super chief investment officer Graeme Miller told delegates at a seminar hosted by the Investment Management Consultants Association (IMCA) in Sydney on Friday, April 28, 2017.
Typically, the higher the VIX, the more fearful and volatile the markets. The index is highly influenced by the actual level of short-term volatility in US equity markets. In the last five-month period, the S&P 500 has not dropped by more than 1 per cent.
The all-time high for the VIX was 80.26 points on November 20, 2008, at the height of the global financial crisis. At the time of writing, the VIX was at 10.82 points, close to the 1993 record low of 8.89, indicating extreme market confidence. The low levels of short-term volatility stand at odds with what else is happening in the world.
“Assets are pretty expensive right now,” he said. “There are all sorts of geopolitical risks, and the amount of debt the world is encumbered by is going to act as a very strong headwind that makes the system somewhat fragile and brittle.”
‘Swimming without bathers’
Miller approached a dozen fund managers and gave them a week to give their thoughts on the issue. Some engaged with the question much more fully than others.
“It exposed, to some extent, those that were ‘swimming without bathers’ on the whole partnership thing,” Miller said. “It’s one thing to say, ‘We truly want to be a partner, we truly want to engage with you.’ But [only] some of them thought deeply about this, really brought the full weight of the organisation to the problem and came back to us with well-thought through answers.”
Armed with the insights from a selection of managers, the super fund was more confident about implementing actions in response to what it considers to be a disconnect between the short-term risks reflected in the ‘fear index’ and longer-term risks building in global markets. Miller said the fund now has a “sharper central scenario” view on the evolution of economies and investment markets, and has positioned portfolios to respond to this.
The success of the approach has emboldened the Telstra Super investment team to reach out to fund managers for their views on market issues concerning them more often. Consequently, one of the managers felt empowered to come to the super fund with a new idea.
“It has signalled to our fund managers [that we want insights]. It has given them a much deeper understanding of what we are interested in and what we are worried about.”