Friday, 9 June 2017

Last month I presented at the Investment Magazine Fiduciary Investors Symposium on the topic of Fiduciary responsibility and true risk-adjusted returns for superannuation members.

While QSuper’s focus on reducing risk while maintaining returns was not news to my peers – we’ve been beating the drum since 2011 – it was an opportunity to promote industry discussion about the need for increased reporting to include a comparison of the risk taken to get returns.

Everyone in the room agreed that if you can get similar long-term returns with much less risk you should. That’s been the objective for QSuper’s portfolios and that’s what we’ve been able to achieve.

A quick recap. QSuper has evolved its investment strategy over time. In the late 2000’s we adjusted our approach following lessons learned from the tech wreck, and again after reflecting on member experience during the GFC. The result was a far more balanced, long-term investment strategy – unique in Australia – that focused on delivering a robust return stream without sacrificing long-term returns. We came to believe that we, along with most of the industry, had become too focused on a short-term returns race with other funds, resulting in members experiencing unnecessary volatility.

What does that mean? Simply put, we don’t set ourselves a target to beat the investment returns of other super funds over the short or medium-term. Such targets lead to a focus on managing risk compared to other funds, rather than managing the risks our members face in reality. There is a widespread view that this focus leads to lots of super funds having similar looking, equity-heavy portfolios.

While around 90 per cent of the investment risk in a typical Australian fund comes from equities, QSuper’s diversification strategy means less reliance on equities which produces more consistent returns over time.

To use a simple analogy, an equity-heavy fund creates a rollercoaster of returns for its members; up when equities do well and down when equities do badly. While such equity-heavy funds may have a rollercoaster of returns, with the ups and downs potentially lasting a number of years, we have reduced the ups and downs via diversification, thereby smoothing the ride for our members. 

Members want information about whether a fund is good or bad. A natural place to start is to look at recent fund returns – this seems reasonable to the everyday person. But as most fund returns are dominated by a high strategic equity weight that doesn’t change much over time, if equities happen to have a good few years these funds will have a good few years.

To go back to our previous analogy, if a rollercoaster fund has a few good years going up, this is more an indication that they got lucky with their equity-concentrated strategy, rather than an indication of a good strategy. Personally the higher I go up in a rollercoaster the more worried I get about what happens next.

QSuper understands that people want to compare funds, but the view I outlined at the conference is that what is compared is also important; risk should be considered as part of these comparisons. As obvious as considering risk sounds, most industry comparison of funds doesn’t take risk into account with comparisons of the past one-year returns generating far more discussion.

The aim is not to smooth the bumps of month-to-month returns; this isn’t the kind of risk that keeps our members awake at night. But the more robust we are to these moderate performance swings, the more robust we are likely to be to big swings.

As I said at the outset, the goal of true risk-adjusted returns is not a new concept for QSuper and its members, this having been our goal for years. We are simply trying to increase the focus on the measurement of risk as well as returns in the industry, but regardless of whether others come on board we don’t plan to change what we do.

To quote a recent piece by Sally Patten in the Financial Review on our approach, "If it is possible to achieve the same level of return with lower risk, what member would say 'no' to that?”

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The views of the author and those who provide the responses to the 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.

The term ‘QSuper portfolio’ is used to refer collectively to the underlying portfolios of assets which in combination make up the individual asset allocations of QSuper Lifetime and the Balanced and Moderate investment options.