Crisis environments are always tough for the investment chiefs of super funds. It’s important to recognise the range of demands they face during a crisis. You shouldn’t expect most CIOs to make “heroic investment calls”.
In addition to extra operational demands from a range of different areas, CIOs are expected to be the central source of investment knowledge during a crisis, its impact on portfolios, and ultimately provide knowledge authority. The coronavirus situation is especially challenging, since at its centre resides a health pandemic, which has expanded to become not only an economic crisis but a social one as well. Much of the knowledge challenge resides outside traditional finance skillsets, information is fast moving and hard to aggregate and everyone will have a view. It is particularly hard to hold authority in such situations.
First, the extra operational demands. In a market crisis, CIOs are required to step up in the areas of communications and operational team leadership. There are also greater demands on the fund executive to which CIOs often bring unique perspectives.
Communication demands increase at multiple levels including board, executive, broader firm, to the broader firm and to members. The coronavirus situation is so fast moving that information can quickly appear outdated. Effectively the updating demands are continuous.
The operational leadership of an investment team is always important, but is critical in a crisis environment. Investment teams, just like any other group of staff, may experience stress and anxiety issues, yet need to maintain focus. The coronavirus has created the perfect storm for investment leadership: just as teams face a crisis for which they have few parallel experiences to draw on, making communication and information flow critical, they are faced with the operational challenge of working from home.
Before we get to portfolio decision-making, consider the heightened portfolio activities faced by super funds in a crisis situation. More volatile markets and greater investor switching activity generate heightened rebalancing activities and more risk breaches.
We then have the critical area of liquidity management, where some funds were caught out during the global financial crisis. All funds, under the supervision of APRA, should have better practices in place. But every crisis is different. Here we have already seen the traditional liquidity gremlins, namely falling public equity markets, a falling Australian dollar and member switching. But there are unknowns: how functional and liquid will the credit markets remain, what will be the impact of a pause on superannuation guarantee contributions, and what will be the impact of the just-announced super grants scheme?
Many funds have developed or will likely develop new risk scenarios specific to the current crisis so they have a tactical investment framework around which to tie together what they are seeing on the crisis front with rebalancing activities.
Beyond all of this, will we see major market calls from CIOs? Often it is these crisis moments where people expect them to make heroic calls (perhaps a perception partly fuelled by remuneration).
What does a CIO need to be able to establish to make an investment call with conviction, on behalf of many members, and in a broader environment of heightened peer group assessment?
The answer is simple but getting there is extremely hard. Simply, they need to establish an information edge in which they have high confidence. But in an environment like the GFC, and coronavirus particularly, it is extremely hard to attain that insight with confidence. That is partly why markets are so volatile in crisis moments – a stable information footing is hard to find and so speculation abounds.
Where can CIOs get coronavirus insights which are leading indicators? Are their information sources superior to those broadly available? Can they rely on value when the scenarios for the economic depth, length and recovery from the coronavirus are so unclear? Can momentum-based strategies work in the presence of government policy interventions?
Physically, how many CIOs will have sufficient quality thinking time to form such views? These views can’t be made flippantly, yet the starting point is heightened workflow demand from a whole variety of sources. There is also an interesting reflection here on the two styles of CIO: the investment-executive CIO and the investment-led CIO. Both face challenges but the investment-led CIO, to my observation a shrinking breed, will likely be closer to the portfolio but could be overwhelmed by all the other operational demands.
There is also the question of whether super funds are really prepared to make major market calls. To what degree would trustees back their CIOs? Are they 100 per cent clear in their objectives: for instance, what is the balance between managing member outcomes and peer group risk? Do existing risk limits allow for a significant call? During the crisis is not really the right time to be establishing such policies.
Overall, I expect very few funds will implement significant market calls during the coronavirus. This is not to reflect poorly on CIOs. It reflects more on how hard it is to get ahead of the information curve, particularly with regards to this crisis. Investment chiefs face a range of additional demands and this limits their access to quality time to attain the required level of conviction.
From my own CIO experience, this can also be an extremely frustrating time: during the crisis you find yourself explaining what has happened and what may happen, but not really what will happen. The CIO title heightens that frustration.
CIOs will do many good things for their funds and their members during the coronavirus crisis. It’s important to recognise this, rather than mis-perceive their role to be the “heroic investment call”.