Friday, 1 July 2016

In this, the third and final of our Brexit articles we profile the risk management activities undertaken daily by our capital markets desk to rebalance asset and currency positions, maintain appropriate levels of liquidity, and implement Dynamic Asset Allocation1 (DAA) decisions as may be required.

The Capital Markets function at QSuper is responsible for monitoring and managing the impacts of financial market movements on QSuper’s various investment portfolios.  This activity is done ‘around the clock’ aiming to ensure that each portfolio2 is actively rebalanced to maintain target asset class and currency exposures.

On Friday 24th June the process of monitoring and managing asset class and currency exposures continued to operate on a real time basis as the results of the UK referendum started to filter through the media and through to the financial markets.  From about lunch time in Australia the probability of a Brexit was becoming clear to the market.

The immediate reaction was for equity markets to sell off aggressively and for bond markets to rally.  Currency markets were also impacted heavily with the “safe haven” currencies of USD and JPY strengthening significantly against GBP and EUR and to a lesser extent the AUD.

For the multi-sector portfolios3 the sell-off in equity markets and rally in bond markets resulted in a dislocation of equity and bond exposures away from our operating targets.  The Capital Markets team undertook a series of rebalancing trades including the following: 

  • After the market having sold off, the purchase of more than $150 million equities exposure was required; and
  • After the market having rallied, the sale of approx. $150 million Fixed Income exposure was required to rebalance back to target weights.

In addition to rebalancing activity, the Strategy team also initiated a DAA decision that required the Capital Markets team to execute the following additional trading:

  • Purchase of approx. $200 million of International Equities exposure; and
  • Sale of approx. $200 million Fixed Income exposure.

The DAA decision was opportunistic, taking advantage of significant short term market movements.

The investment rebalancing requirements are not limited to equity and bond asset classes but also include foreign currency exposures.  Given the significant moves in the value of foreign denominated equity assets, the Capital Markets team also undertook currency rebalancing trades totalling approx. $350 million worth of exposure across various developed market currencies (primarily USD and EUR).

These activities were undertaken across Australian, European and US times zones to ensure that all trading was being done on a real time basis and in line with actual market movements that were impacting the portfolios.  As at the close of business New York (early Saturday morning AEST), all trading requirements had been completed in full and all portfolios were at their target asset class exposure weights. 

The Capital Markets team is also responsible for the liquidity management requirements across portfolios.  The significant events of Brexit and movements in both currency and asset markets have increased the need for available liquidity to ensure that all financial obligations can be met as and when required.  These liquidity needs will be required to meet portfolio margin and collateral calls and also to ensure all member payments are made as demanded. Cash flows can also be generated by members switching between member investment options. 

Whilst this brings to an end this particular series of posts we will of course continue to monitor market risks and pricing, and seek to manage these risks and add value within the overall strategy when risk and pricing does not seem aligned. We trust you have appreciated the insight to the question “So what has QSuper done?” using Brexit as a case study.

1. DAA recognises that from time-to-time, asset valuations can move away from economic fundamentals. With a belief that economic fundamentals drive asset prices in the long-run, these deviations can be used to adjust asset allocations to take advantage of these moves away from fair value.

2. Noting that rebalancing activities and DAA decisions are implemented within asset class portfolios and therefore the effect of such moves will impact differently depending on the asset profile of the individual option/s you are invested in.

3. Multi-sector portfolios includes QSuper’s multi-asset class Ready Made and Lifetime Options.

The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of the QSuper Board. We’ve put this information together as general information only and you should get professional advice before relying on this information.

Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.