MELBOURNE, Australia — The A$37 billion (US$27.5 billion) Victorian Funds Management Corp. is looking to expand its fundamental indexing program, following the success of the portfolio in down markets.
Responsible for managing investments of Victorian government entities, the VFMC has been running a A$100 million “pilot” fundamental index portfolio since July 2007. In that time, it has returned four percentage points above its benchmark, the ASX300 (-19% vs. -23%).
“We've have had very positive results and it has certainly outperformed during rough times,” Laurence Irlicht, investment director, quantitative analysis, said.
The VFMC is undertaking a “significant review” of its beta strategies, and executives are expected to decide within the month whether fundamental indexation will be implemented across a wider proportion of the fund's equities. The VFMC is also researching minimum variance portfolios, which together with fundamental indexing, is driving the fund's push to create “better beta.”
Mr. Irlicht described better beta as an attempt to achieve more efficient market returns; avoiding the “noise from market sentiment that has exacerbated volatility over the past few months”. The fundamental index portfolio uses quant signals such as a company's sales, book value, dividends, and earnings to select stocks, rather than weighting a portfolio based on market capitalization.
A minimum variance portfolio would use quant techniques to select stocks based on company risk, and the correlations of those risks between companies. “Understanding risk is considerably easier than picking which company will outperform,” Mr. Irlicht said. “The theory says that you should be rewarded for taking on more risk, but tests we've done confirm (similar tests in) the U.S. that have found minimum variance portfolios tend to deliver market or better returns, despite their lower risk. In the year to August, the MSCI Minimum Variance Index returned -5.5%, out performing the MSCI World Index by six percentage points “Even in more normal times, the Minimum Variance Index tends to outperform; it has beaten the (MSCI World) benchmark by an average 2% over the past 10 years,” said Adam Randall, associate director of quantitative analysis at VFMC.
Trustees at funds like AustralianSuper have increased their cash holdings while participants at other funds, such as AGEST, have cashed up themselves as the chaotic markets affect investment mandates.
Ian Silk, chief executive of the A$29 billion (US$21.6 billion) AustralianSuper fund, Melbourne, said at an Australian Institute of Superannuation Trustees luncheon in Sydney recently that his fund's total equity exposure slipped to 50% from 60% over the past year, as trustees directed almost all of the A$3 billion of new inflows to cash.
However, Mr. Silk reported that member traffic toward cash-heavy conservative investment options had not noticeably increased in the recent tumultuous days, nor had call-center volumes.
Michael Seton, chief executive of the A$3 billion Australian Government Employees Super Trust, Wollongong, said the amount of cash in his fund has jumped to $500 million from $100 million in the past year, driven entirely by members switching options.
However he said the buildup had been gradual and not a knee-jerk reaction to raucous September volatility, adding that most of the cash was held by the fund's retirees.
AGEST has recently contacted some of its managers requesting they liquidate portions of their mandates, both to accommodate the switches and to allow it to meet calls on its burgeoning private equity program.
However, Mr. Seton said this was “business as usual” for the fund, which has long had one of the industry's highest proportions of members (about one-third) not in the default.
“There's nothing necessarily wrong with switching to cash. Outside of super, our members might have an Australian equities portfolio, and a house, so they can switch (to the cash option) and retain a balanced portfolio overall,” he said.
Officials at the A$5 billion Auscoal Superannuation Fund, Melbourne, said the fund had seen a doubling of switching requests since July, but that many members were viewing the current markets as a buying opportunity.
For example, a spokeswoman said that of the switching requests processed by Auscoal on Sept. 24, 41% were to the cash option, and 25% to the all-bonds option, but 17% had been either to the aggressive (100% growth assets) or growth (80% growth assets) options.
