Total portfolio management is a portfolio completion and implementation strategy and all large asset owners should be looking to manage their portfolios this way, a panel at the Fiduciary Investors Symposium said.
Stuart Corradini, associate portfolio manager, liquidity, fixed income and markets at First State Super said the fund didn’t have a mandate called ‘portfolio completion’, rather its strategy was to manage the entire fund.
“The strategies we have internally fit in an active asset allocation framework, adjusting to markets when they look cheap, or taking positions when we are taking too much risk or the market is expensive. Having that agreed delegation is imperative to making that work and it is defined like an internal IMA between internal team and board IC,” he said. “It allows for the flexibility needed to operate such a program. We use outsourced and external trades or internal where we think we can take on the operational risk.”
“From a simplistic point of view portfolio completion is looking at what you have in your portfolio that arises from your mandates. You can use that as the starting point for portfolio completion and what rolls up into a total portfolio that an internal team can see. It is what asset owners should do, see all the parts of the fund. Start from the basic and build complementary mandates and do overlay strategies on the side,” Corradini said.
“Portfolio completion starts with maintaining SAA and any tactical positions you have put on. Then you can go into the asset classes and think about other metrics, risk, style, factors.”
Louis Crous, chief investment officer of Beta Shares, said implementation and completion is the “end position you’d like your portfolios to be in from a risk and portfolio perspective and then how best to go about implementing that”.
He said that different clients were using ETFs for different completion purposes, from cheap beta to certain strategic tilts.
“It comes down to the operational capability within the client and what suits them and their capabilities. Larger asset owners are a bit more sophisticated and have a bit more flexibility in implementation so they are a bit more sophisticated in how they use the vehicles, they often go and directly execute,” he said, adding his team works with smaller funds to help their investment committees understand the various strategies.
But the Australian market is a long way behind overseas markets, Crous said, where there is very strong usage of ETFs by institutional investors.
For example in the US about 25 per cent of all assets are allocated to ETFs and about two thirds of those ETF assets are institutional. In Europe about 80 per cent of ETFs are used by institutional investors.
In Australia there is much lower participation from institutional investors which account for only 15-20 per cent of ETF assets.
“The ETF market is growing about 40 per cent per annum, albeit from a low base. But the institutional take-up is behind other markets, such as Canada which we see as most similar to Australia. The usages is usually driven by flexibility, cost and liquidity.”
Corradini said some ETFs were more liquid than the underlying securities and could be useful for strategic replacement positions.
The audience at the Fiduciary Investors Symposium was asked about their current portfolio completion and implementation strategies. About 40 per cent said it was internally managed with a full team in place to manage all aspects of implementation and costs, and 33 per cent saying they had an internal team with implementation and trading outsourced to a third party.
The audience was asked what were the most relevant factors in analysing the investment tools used for implementation: 52 per cent said operational ease of implementation and regulatory reporting; 35 says liquidity and transparency; and 9 per cent said costs.
The most difficult asset class to implement completion strategies was alternative investments (77 per cent), the delegates said.