QSuper Investment
Philosophy and Strategy
2009
2015
2
QSuper Investment Philosophy and Strategy
WINNER 2015
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3
QSuper Investment Philosophy and Strategy
Contents
CIO foreword
4
Executive summary
5
Background7
The new investment environment
8
Investment principles and philosophy
8
Investment principles
8
Alternative philosophies
9
Investment strategy
11
Risk management
12
Balanced option as a case study
13
Transition plan
13
The current strategy
14
Calibrating risk tolerance
15
Bond allocations
16
Reducing risk while increasing the
weight to risky assets
16
Balanced option risk-adjusted returns
18
Fees20
Summary of case study
21
Conclusions22
Attachment 1: Timeline of investment policy
decisions23
Attachment 2: The investment
environment post GFC
24
Attachment 3: Risk parity
25
4
QSuper Investment Philosophy and Strategy
CIO foreword
In 2009 QSuper embarked on a range of initiatives that set
it on a course to reposition the Fund as one of the most
innovative of its type in meeting the financial needs of its
members. One of these initiatives was to establish a new
investment capability which would allow the Trustee more
independence in setting its investment philosophy and
strategy. An Investment Committee was appointed with three
well-credentialed independent members and an internal
investment team was commissioned. I was appointed Chief
Investment Officer and invited to think broadly about where
this new capability should take QSuper’s investments.
It gave us the unusual opportunity to think from a relatively
clean sheet of paper. It was also, coincidentally, in the
immediate aftermath of the Global Financial Crisis (GFC). Both
of these factored heavily in what came next.
The early Investment Committee debates were about the
impact the GFC had on QSuper’s default members. The
abstract investment outcomes, measured as time weighted
returns and compared to other superannuation funds as a
form of risk-equivalent benchmark, were very competitive. Yet
it was clear when we listened to members’ feedback through
surveys and at seminars that they were concerned and
unsure what to do. We felt we needed a different approach
with different strategies and measures of success that were
well aligned to our members’ financial wellbeing.
This was a significant undertaking but we had a lot in the
way of research into investment philosophy from around the
world to guide us. As this paper records, the work undertaken
was very much about adapting good ideas to the problem
rather than finding new solutions. We are now far enough
advanced to be cautiously optimistic that this new philosophy
will serve QSuper well. I describe it as being at the ‘end of the
beginning...’
Many people have contributed to this, from both outside
QSuper and within, and I am not going to single anyone out.
However I am very grateful that the Investment Committee
was willing to enable this debate to happen, contribute to
it constructively and then take the key decisions which
enabled it to be implemented. To complement that we had
an Investment team who was able to prepare a strategy
which withstood that scrutiny and maintain the courage of
their convictions as the implementation progressed. That is
good investment governance and the results are now on the
board for us to reflect upon.
What followed was a wide ranging debate which culminated
in two significant outcomes:
•
•
A new investment philosophy and strategy for pursuing
the absolute return objectives which were set for the
investment options which members were free to choose
amongst if setting their own strategy. This path and its
outcomes so far are the subject of this paper. We use the
Balanced option as a case study.
A new accumulation default investment option which
was constructed along asset-liability management lines
(the subject of a following paper).
Brad Holzberger
Chief Investment Officer, QSuper
5
QSuper Investment Philosophy and Strategy
Executive summary
This document traces the development of investment
philosophy at QSuper from the initiation of the internal
investment capability in early 2009. The Balanced option
is used as a case study to demonstrate how this philosophy
has been transformed into an investment strategy. However
there are several multi-asset class investment options at
QSuper, and this same philosophy is applied consistently
to all.
The two decades leading up to 2009 saw the establishment
of modern Australian superannuation funds during a
very benign period for financial markets, particularly in
Australia. Both equity and bond returns were underpinned
by a structural re-rating of inflation, interest rates and
price-earnings ratios. 70 per cent growth/30 per cent
defensive asset allocation was the dominant risk profile and
this served all stakeholders well as market retracements were
short and always followed by strong rallies.
Funds were all successful; mandated contribution flows and
investment returns combined to provide strong growth in
funds under management. Members could exercise choice
but seldom did as they were only just becoming aware
of superannuation as a personal and social asset. Trustees
followed peer focussed investment strategies, with success
measured by comparative returns reported for individual
financial years and never adjusted for risk. There seemed little
need to explore alternative philosophies.
In 2009, in the immediate aftermath of the GFC, a series of
developments – many unrelated to investment policy – saw
QSuper elect to significantly change its governance model.
This included a decision to insource a significant investment
capability. Strategy in the Balanced (Default) option was very
strongly influenced by peer relativities. In common with the
industry, risk was mainly a function of deviation from peer
returns, measured over periods as short as one year.
•The standing policy of very high allocations to equities,
which represented extremely high risk concentration, is
not suited to this environment when considered in the
context of superannuation fund members’ risk tolerances
during accumulation because:
­ – equities cannot be guaranteed to always meet
reasonable long-term absolute return objectives
­ – sequence risk is significant, particularly for default
members.
A new investment philosophy was worth considering, and
two key paths have been implemented.
1. QSuper Lifetime as the pre-retirement default.
­– Strategies vary between cohorts according to age and
account balance.
­– Strategy is defined by the mix between growth assets
and risk-free assets, with risk defined in terms of
retirement incomes.
2.A new method of seeking long -term risk-adjusted asset
only returns (the subject of this paper).
­
– Risk parity principles underpin the key structure.
­
– In particular this requires a new form of bonds to be
adopted.
These paths are still being debated across QSuper, because:
•Industry confidence in long-term equity returns is high,
with the implication that investing in bonds will incur
unnecessary opportunity cost.
•Many commentators contend that future bond returns
will be very low because bond yields are low compared
to more recent history. So even if the strategic policy is
sound we should perhaps not implement it now.
When invited to identify the major investment opportunities
and risks facing the Fund, the new management team
nominated the following, which essentially remain
unchanged to the present:
•DAA1 may enable us to navigate and even exploit these
timing challenges. However DAA and alpha programs are
not likely to be successful, in isolation, given the scale of
the challenge.
•The GFC signalled a major transition point in return and
risk. It affected economies, financial markets, government,
regulatory policies and financial institutions in a material
and permanent way.
This debate is healthy and productive. Fiduciaries are
demanding strong evidence to support recommendations,
devoting a significant part of the investment agenda to the
ongoing discussion and considering input from external
parties. This is what members would expect their Trustee
to be doing in such uncertain times, and when long-term
strategies are being materially changed. While the Board and
Investment Committee have approved the general direction
management has been recommending, they have also
chosen to modify recommendations in several instances.
•Its aftermath would take a very long time to repair and
require unconventional policies to be held for longer than
anticipated.
•This would eventually give rise to low long-term returns
from all financial assets, along with heightened volatility.
Future scenarios would be extremely difficult to identify
and quantify.
1 Dynamic asset allocation or tactical moves between asset classes within strategic ranges.
6
QSuper Investment Philosophy and Strategy
This paper documents the main elements of QSuper’s new
strategy and the outcomes which have flowed from it so far
using the Balanced option as the case study. Its objectives
are codified in a scorecard and include an absolute return
objective, an MER objective and an avoidance of downside
risk. Before mid-2010, the Balanced option had objectives
related in part to peer funds, which it had met successfully
over shorter and longer timeframes.
The new strategy was implemented progressively from
mid-2011. The main differences between the current and
previous strategies are:
•less concentration in a single risky asset class (equities)
•the introduction of a new risky asset class, high return
seeking sovereign bonds (or high duration bonds (HD
Bonds)) which have volatility that matches equities and
return drivers partially uncorrelated to equities
• more unlisted equity
• more real and alternative assets.
The most material change in the portfolio, the introduction
of HD bonds, has provided the portfolio with a more effective
way to trade off risk and return.
•
Portfolio structuring within the bond asset class has
increased its risk/volatility to be similar to the risk of
equities.
•Some equity risk has then been replaced with roughly
equivalent bond risk. If bonds and equities were perfectly
correlated this would see no change in portfolio risk, but
as these asset classes have tended to have low or even
negative correlations, portfolio risk is significantly reduced
via this approach.
The new strategy has now been in place for about four years,
during a very unusual market environment, and the future
remains clouded. It is too early to draw definitive conclusions,
but the outcomes show:
•The strategy has met the multiple and challenging return
and risk goals which were set. Relative performance has
been as good as or better than what could have been
delivered by traditional portfolios (those concentrated in
equity risk).
•
The strategic reasons for this have been largely in
the form for which the strategy is designed. Absolute
performance has been more equally driven by a balance
of risk factors. Markets have proved difficult to forecast,
and diversification has seen robust portfolio outcomes
despite volatile returns from individual asset classes.
•The outcomes have been achieved while keeping fees
very low comparatively.
•
The strategy therefore appears successful, not solely
because of strong relative return outcomes, but because it
has performed as hoped to produce strong stable returns,
despite the relatively random outcomes of markets.
7
QSuper Investment Philosophy and Strategy
Background
In the 1990s and 2000s modern Australian superannuation
funds were established, grew to significant scale and
established their investment beliefs, objectives and strategies.
This was a period in which inflation was continually falling and
then stabilising at low levels. The consequence of this was that
interest rates (short and long) were constantly falling, profit
growth was stable and price-earnings ratios were structurally
expanding. This produced a long period of strong equity and
bond returns, in which market retracements were brief and
always followed by strong rallies.
Coincidentally QSuper started the current round of strategy
debates in early 2009. The prevailing situation was:
Funds grew quickly, through a combination of mandatory
contribution inflows and strong returns. Members, despite
having choice of fund and investment strategy, rarely
exercised it. This gave rise to a pervasive industry culture
of comparative returns where the primary objective of
funds became to outperform a peer average annual return,
quoted in financial year returns. Risk was not a focus of any
commentary or debate and it was assumed it would always
be rewarded.
•Peer returns were still a strong influence on strategy. It
was indirectly the main determinant of Balanced (Default)
option strategy.
This environment reinforced with Trustees that 70 per
cent growth/30 per cent defensive strategies were sound.
Asset consultants warned that they really represented very
concentrated equity risks but the discussion never resonated.
Then, when the GFC struck, three things appeared to be
different.
•
The retracement was severe and impacted Australian
equities (more recent previous retracements had not).
•It was extended and gave rise to discussions of whether
the prevailing paradigm was stable.
•
Government fiscal policy, monetary policy, financial
market regulations and the financial actions and risk
preferences of households changed structurally. There
is wide recognition of the risk that these changes are
permanent and will affect investment returns into the
very long-term future.
Members voted with their assets and the trend to establish
SMSFs grew rapidly. This was evident at QSuper, albeit at rates
well below industry norms.
•
The industry was in the midst of the GFC, although
hindsight shows equity markets were at a strategic
bottom. It did not feel like it then.
•QSuper had undertaken DAA for some years and, while
it was successfully implemented around the GFC, the
impact on total returns was very modest. It became clear
that DAA was not a way to manage risk in a material way.
•Correlations of all listed and unlisted risky assets, hedge
funds and alpha tended to one. Sovereign bonds were
the only safe harbour for investors.
•Significant disenchantment with alpha seeking in listed
markets prevailed. Alpha outcomes were strongly
negative across the GFC despite the expectations set by
active managers that alpha would in fact cushion funds
from downside market risk.
It was recognised within QSuper, after quantification and
debate, that the inherent risk (both annual volatility and
the probability of large drawdowns which gives rise to
sequencing risk for members who have accrued large
balances) in the Balanced (Default) Option was not a good
match for members:
­•the Board reviewed the impact of GFC outcomes on
member balances and saw the disproportionate effects
of sequencing risk for the first time
•
­
anecdotal evidence from members suggested great
disquiet, with some members delaying retirement or
returning to work
•the first signs of the significant flows to SMSFs (across the
industry and QSuper) were noticed.
There was a general willingness to explore new directions
in investment philosophy. The timeline of decisions which
followed is in Attachment 1. The rationale for these decisions
is set out below roughly in the chronological order in
which they were debated, although many of the debates
overlapped. The Balanced option is used as a case study to
demonstrate these changes.
8
QSuper Investment Philosophy and Strategy
The new investment
environment
Investment principles
and philosophy
An extended debate across 2009 and 2010 concluded that
we faced a structural change in investment markets. The
implications were that the future would encompass an
extended period (perhaps decades) of sub-par long term
returns (mid-single digits after fees and tax) to risky assets and
by extension diversified multi-asset portfolios. As an example,
for the Balanced option there was a strong probability
of returns below our CPI+4 per cent p.a. after fees and tax
objectives. The rationale is in Attachment 2.
Investment principles
An outworking of these views was a decision by the Board and
Investment Committee to influence member expectations by
reducing the investment objective of the Balanced (Default)
option:
It was reduced from CPI + 4% pa to, after fees and tax, over
rolling 5 year periods to:
CPI + 3.5% p.a., after fees and tax,
over rolling 10 year periods.
Other MIC options were adjusted accordingly. This decision
was not implemented until mid-2012 after ongoing debates
and consideration of member communications and
relationship management with financial advisers and other
stakeholders.
A precursor to debate on investment strategy was setting
investment principles. These are regularly revisited and the
current set are listed below:
1Sound investment governance should dictate investment
policies and activities from the fiduciaries through fund
investment staff to external managers.
2 Fund strategies should be related to risk.
3Net long-term returns are the focus of objectives. Taxes
and fees should be closely managed. Tax management
can be used as an opportunity to add value across asset
classes and investment strategies.
4The Board recognises that managing ESG factors supports
broader investment strategy by reducing risk for a given
return or increasing return for a given level of risk.
5Assets with similar risk have similar long term expected
returns when valuations are around normal levels.
However, the valuations of assets fluctuate over time and
this principle may not hold even over long time periods.
Strategies should change dynamically to reflect this
impact when it is material.
6
Diversification should be achieved by seeking an
appropriate balance of risk factors. These are not always
fully described by simple asset class groupings.
7
Diversification should be employed as a strategy for
reducing risk without sacrificing expected return. It
should not be used solely as a means of reducing risk at
the expense of expected return.
8Overall fund level return and risk will be improved by
holding significant exposures to international assets.
9Various non-cap weighted equity and bond structures
exhibit superior risk-adjusted returns to cap-weighted
portfolios.
10Traditional sectors of fixed interest (inflation, sovereign
and credit) offer very different risk factors in a diversified
portfolio and should not be seen as substitutes for
accessing interest rate risk.
11Illiquid assets enhance risk-adjusted returns and they can
be effectively accessed when investment time horizons
are sufficiently long.
12Foreign currency introduces uncertain returns and risks.
On balance it is not a rewarding exposure in multi-asset
portfolios.
13External agents/managers should be used in areas where
they can add value.
14Alpha is accessible but not reliably across the board for all
asset classes. This is a two stage principle:
­ – is alpha theoretically and empirically observable?
­ – if so can we find a means to reliably embed it in our fund?
9
QSuper Investment Philosophy and Strategy
Alternative philosophies
Alternative 2: Increase equity allocations.
The goal in evaluating potential new philosophies was to
keep expected returns up but also respect that we would face
heightened risks from a range of possible scenarios because
we were in uncharted waters. We evaluated several paths to
adapt philosophy to the new environment.
The supporting arguments for increasing equity allocations
were:
In summary the four alternative strategies were:
•The conventional rationale that equities are the assets
with highest expected long-term returns.
•Default members do not change strategies in any event.
1. Break the nexus with peer related objectives in the default
option.
•
Choice members could be counselled that patience
was necessary and encouraged not to switch assets
pro-cyclically.
2. Increase equity allocations.
The opposing arguments were:
3. Use alpha to improve strategic outcomes.
•Historic evidence shows that equities could underperform
for long periods. Australia was a recent honourable
exception but largely because of a coincidence of good
fortune – there was no structural safety net.
4. Other institutional philosophies.
More detail on each is set out below.
Alternative 1: Break nexus with peer related objectives in
the default option.
The arguments supporting retention of a peer relative
objective were:
•It was a widely followed path and initially post-GFC there
was little movement by superannuation funds to respond
to a changed environment.
•Few in the industry, including consultants, openly criticised
the strategy.
•In Australia the strategy of high risk taking had been
reasonably successful up to the GFC.
•It made relationship management with ratings agencies,
media and other stakeholders easy and QSuper had
established a strong long-term comparative track record.
The arguments opposing retention of a peer relative objective
were:
•Peer returns were a strong pervasive behavioural impact
on decision making.
•There was no evidence that the strategies were responsive
to changing economic conditions or member risk
tolerances. Their main characteristic was inertia.
•
QSuper has somewhat different default membership
(high contributions and account balances).
•
The feedback from members through the GFC was
significant.
•Sequence risk would fall disproportionately on default
members at the wrong time and we could not control it
through DAA or other actions to avoid peaks of risk.
•
Even if economically manageable, sequence risk had
major behavioural impacts on members well outside their
risk tolerances.
•The Balanced (Default) option was already very exposed
to equity risk.
­ – The equity asset allocation was high, but equities
contribution to risk was even higher because the
offsetting asset (bonds) was held at low allocations,
with low duration and with a sizeable corporate bond
exposure. None of these help real diversification.
– Superficially the bonds appeared to diversify but all they
really did was minimally reduce short-term volatility
because they had low duration.
– Bond returns had been high due to yields falling so the
lack of true diversification was not seen as a problem
historically, but it would be in future when returns
needed to stay high even as diversification was being
sought.
10
QSuper Investment Philosophy and Strategy
Alternative 3: Use alpha to improve strategic outcomes.
The supporting arguments for increasing alpha were:
•It reflected a commonly held view in the industry that
alpha strategies add value in the long term and can be
used to add material risk adjusted return (even at total
fund level) and diversify dominant equity beta, including
during drawdowns.
•There were many alternative paths using asset consultants
who all claimed attractive outcomes.
The opposing arguments applicable to listed markets were:
•It is not likely to actually cause much real impact, good
or bad. Funds typically have many managers, turnover is
very high and so the most likely result is neither a plus or
minus. Turnover is much higher than would be expected
if skill was actually persistent and identifiable.
•The major negative impact is the opportunity cost of the
huge amount of governance time and effort it can absorb.
This was particularly relevant to QSuper as the strategic
agenda was so full.
•Fees are high, and while this has no material economic
impact on objectives, it is not efficient.
•In summary it is impossible to know if it will be good or
bad. It is unlikely to matter and it is just not worth the time
or risk budget to pursue it.
We continue to pursue alpha in unlisted markets because
it cannot be disassociated from the beta portfolios and
private markets offer the best prospects for a persistent alpha
premium.
Alternative 4: Other institutional philosophies.
We considered a range of institutional practices which had
long standing support or had emerged in response to the
GFC. Examples included:
•Endowments. These were not deemed particularly useful
because they are very equity heavy with emphasis on
unlisted and illiquid assets. Drawdown goals were not
met during the GFC. It was not suitable for the QSuper
member risk profile.
•
Aggressive DAA. While gaining support across the
industry, often called Absolute Return Funds, these were
not seen as a good basis for a default strategy. They are
young and unproven and QSuper’s experience with DAA
over many years does not give us confidence it could be
extrapolated to be a major driver of outcomes.
11
QSuper Investment Philosophy and Strategy
Investment strategy
We were seeking a new, more robust, strategy. Drawn from
the various issues above, a debate in 2010 culminated
progressively in the following decisions.
4.Adopted intra-asset class policies which complement this
strategy. In some cases they are quite different to normal
industry strategies.
1.Revoked peer relative objectives for the default fund in
particular.
– Moved well
benchmarks.
2.Implemented QSuper Lifetime1 as the MySuper default
pre-retirement option.
­
– It seeks to fund retirement income related objectives for
eight cohorts split by age and account balance. Account
balance is relevant because it impacts adequacy of
retirement income funding, in part because Australia
has a means tested social security system.
– Strategies are set for each cohort using forward looking
ALM techniques based on scenario analysis.
– There is nothing inherently conservative about strategy
setting. Some strategies are defensive but that is the
nature of the risks facing these members. The majority of
members have risk profiles much higher than traditional
default strategies.
3.Adopted a different more diversified strategy to seek
long-term risk adjusted returns in asset only portfolios.2
– It is an alternative to simply holding more equities.
We introduced a second risky asset constructed from
sovereign bonds. The low correlation between this
asset and equities is a major contributor to overall fund
diversification.
– The goal is to achieve approximately equal long term
returns to traditional ‘balanced’ portfolios but with
reduced volatility and better outcomes in significant
downside events.
–
It draws from a range of other approaches, but
particularly the philosophy of risk parity which is a
key part of the underlying principles. The supporting
rationale is in Attachment 5.
away
from
market-capitalisation
– No traditional active stock selection.
– Use of several ‘smart beta’ strategies.
­
– Bonds:
– All sovereign exposure.
– Duration is extended to approximate the duration (risk)
of equities. Returns are generated from four distinct
risk premia, which provides the opportunity for higher
returns even when long bond yields are comparatively
low. These are coupons, change in yields, yield rolldown and currency hedging for international bonds.
­ – Risk is failure to meet the objective of adequate
retirement income, with downside bias.
– Listed equities:
– Diversification and risk reduction is achieved by the
low correlations between equities and bonds. This
is more prevalent in some risk scenarios than others,
but on balance it provides a strong risk control which
is particularly suitable to the current medium to
long-term environment.
­
– Unlisted equity assets:
– ­Includes significant idiosyncratic active risk due to the
nature of the asset class.
­– Primary focus is on larger, strategic core assets to
this point but in time we expect to extend to more
opportunistic assets as well.
5.Segregated assets into accumulation and pension pools
so that differentiated tax-effective strategies could be
adopted. Research is ongoing but some early decisions
have been made with Australian equities a focus. We are
already exploiting many of the available strategies in most
asset classes.
6.While not seeking low fees as an end in itself, ensured
fees are closely managed and efficient to reap all available
gains.
1 The strategy for QSuper Lifetime is set out in a separate paper.
2 This is applicable to all multi-asset investment options but the case study in this paper uses the Balanced Option as an example.
12
QSuper Investment Philosophy and Strategy
Risk management
The decision in late 2010 to remove the influence of a peer
focussed strategy for the default option was fully implemented
in October 2011 after a communication program to members.
After that, debates about investment strategy and risk
became more sophisticated and demanding. Self-evidently,
if being similar to peers is the basis of strategy, views about
future investment returns and risks are not actually too
relevant apart from adding a little value to relative returns at
the margin.
In response to this, strategy debates became more forward
looking. Scenario analysis (as opposed to deviation from
peer returns) has become our most important tool to assess
risk. The risk management framework which is progressively
emerging from this is set out below. We are continuously
attempting to quantify:
• Risk environment
– The unprecedented set of macro-economic challenges
and policy settings we are facing. Policy makers are
clearly experimenting and can have little idea of what
might transpire.
– How wide the range of future possible scenarios is and
how portfolios should be set to cope with a wide range
of possible short, medium and long-term outcomes.
– How feasible it is to expect that we can accurately
forecast what regimes may come or when and for how
long.
• Measuring risk
– Risk is a failure to meet retirement income goals for
default members or absolute return objectives for
choice members, with a downside bias to reflect the risk
tolerances of QSuper members.
– Sequencing risk matters because members are accruing
and then drawing down. This is most directly relevant in
the default option but it is broadly applicable to choice
members as well.
– Short and long-term divergence from peer fund returns
is not a relevant risk measure.
– Volatility alone (short or long-term) does not reflect the
most material risk to members.
• Controlling risk
The following questions were debated:
–
Should this confluence of factors lead us to prize
diversification more than we have in the past? If it is
imprudent to place great confidence in any single
expectation or scenario, to what extent should strategies
be concentrated into dominant risks of any form?
–
We have quantified scenarios and shown that truly
diversified portfolios offer better outcomes across a
range of possible scenarios. What potential opportunity
costs, if any, should we accept (short or long-term) to
narrow the distribution of future returns around the
objective?
–
Diversification is not foolproof. Are there still some
scenarios when certain assets, held in any allocations,
will not be able to meet fund objectives?
– Despite the potential of risk parity principles to provide
diversification, is it feasible to conclude that we should
not have to forego material long-term return to achieve
this preferred risk management setting?
13
QSuper Investment Philosophy and Strategy
Balanced option as a case study
The Balanced option provides a useful case study to observe how this change in philosophy was progressively reflected in real
portfolios. Up until 2011 the Balanced option had been managed with a scorecard that contained an objective related to peer
fund comparisons. The table below shows the Balanced option returns against the SuperRatings SR50, up to 30 September
2011. It confirms that before the strategy change, the Balanced option was performing very creditably against its previous
scorecard. QSuper did not choose to withdraw the Balanced option from peer surveys simply because comparative outcomes
were poor. It was driven by a search for a better philosophy.
Balanced option
30 September 2011
1 Year
3 Years
5 Years
7 Years
10 Years
QSuper
1.22%
2.40%
1.89%
5.49%
5.56%
Median
-0.27%
1.10%
0.92%
4.56%
5.16%
Quartile
QSuper Ranking
Investment returns and rankings
1
1
1
1
2
7/46
11/46
10/46
9/43
13/35
Transition plan
Changes did not happen instantaneously; rather they
followed a methodical course which took market realities
and member communications into account. Around the end
of 2011 we documented the portfolio-construction plans as
follows.
•To acquire as many illiquid assets as prudent and practical
– predominantly real estate and infrastructure. These
assets tend to be less volatile than listed assets over the
short term and to have longer-term inflation-matching
characteristics.
•To more equally weight listed equity and bond risk, but
retain a skew towards listed equities. The suggested
proportion of equity and bond risk targeted was 58 per
cent and 28 per cent, compared to 84 per cent and 2 per
cent in a traditional portfolio. A further 14 per cent of the
risk was in unlisted assets – infrastructure, real estate and
private equity.
•
To diversify the sub-asset class risk in listed equities
and bonds. In particular this meant a move away from
inefficient capitalisation-weighted portfolios in equity
and bonds.
By December 2012 the portfolio transitioning had progressed
but was still not fully implemented, and we assessed the
positioning this way:
•Equities
­
– Allocations were at levels which are probably a little
lower than would be normal, albeit not at the lower end
of ranges, and this reflected our investment outlook.
­ – We were still holding Australian equities above
international weights. This was not consistent with
long-term principles and was a straight reflection of the
current pricing.
­ – We had progressed with equity intra-asset class
diversification but cap-weighted (passive) exposure still
dominated. We had two diversifying non-cap weighted
portfolios which we believed would produce material
improvements in both return and risk. Increasing this
was a key part of our forward agenda.
• Fixed interest
­ – Allocations were at approximately the exposure we
were seeking.
­ – The impact on portfolio outcomes was increased
because the duration was longer than bond portfolios
typically held by superannuation funds. The high cash
allocations mitigated direct interest rate risk as well.
­
– The bond portfolio remained totally sovereign without
any inflation or credit exposure. As noted in the principles
we could have expanded these other sectors, but we
did not feel valuations warranted that at the time.
•Real estate and infrastructure allocations were both below
desired weights and we were progressively building them
up, funded from excess cash. The pace of asset acquisition
needed to both build long-term allocations and keep
them stable in the face of growing FUM was challenging.
•Alternative asset allocations were reasonably positioned.
14
QSuper Investment Philosophy and Strategy
•Cash allocations were much higher than we would like.
This was mainly due to maintaining cash to fund future
opportunistic and hence unpredictable real asset class
purchases. Yields were well below our target hurdle rates
but we accepted the compromise.
The current strategy
•
Progress had been made to reduce the home bias
inherent in the portfolio. The exposure of Australian assets
was around 50 per cent which we still considered high.
In part this was dictated by relative value and expected
risk-adjusted returns.
The differences between the current strategy and that held
before 2011 are:
•
Foreign currency allocations remained much higher
than would be consistent with our principles. This was
a function of current valuations/markets, and the most
significant example of tactical views influencing us to be
different to strategic allocations.
The asset allocation of the Balanced option has moved,
as shown below. It reflects the scale of the changes made
since 2011.
• A decrease in equity exposure.
­ – While reflecting a desire to reduce the near total
dominance of equity risk in the portfolio, equities still
remain the dominant risk asset.
­
– A reduction in Australian equities as a percentage of
total equities. While Australian equities are potentially
one of the best assets in the portfolio, an exposure to
any one relatively concentrated stock market should not
dictate risk. Australian equities risk remains well above
what would be seen objectively as a natural allocation.
­ – Equity portfolios are much more diversified than
capitalisation-weighted benchmarks.
Asset allocation – Balanced option
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Jul 06 July 07 July 08 Jul 09 Jul 10 Jul 11 Jul 12
Jul 13 Jul 14 Jul 15
Cash
Low duration bonds
High duration bonds
Alternatives
Infrastructure
Real estate
International equities
Australian equities
15
QSuper Investment Philosophy and Strategy
•An increase in bond exposure, and a transition from low
duration to high duration bonds. This introduces another
risky asset and allocates a material amount of risk to it.
•An increase in real estate and infrastructure.
­
– This reflected an appreciation of the potential return
properties of these asset classes, which we anticipate to
be partially linked to inflation over the long term.
­ – Measured short-term price volatility is moderated by
the infrequent valuation process, and this should not be
mistaken for true diversification.
­
These absolute and comparative return and risk outcomes
are dependent on the scenarios which unfold over time.
For example, we would not expect the diversified strategy
to outperform a traditional strategy if equities have above
average returns for an extended period. The strength of the
strategy is that it provides a very good balance of risks across
a wide range of scenarios when compared to the objective
scorecard. The implications of holding a well-diversified
portfolio across a range of medium to long-term scenarios
are outlined below.
If equity markets are strong:
– These allocations are now close to desirable long-term
levels due to the illiquidity of these asset classes.
­
– Absolute returns will be good and exceed objectives
probably.
•An increase in other alternative assets. A range of smaller
exposures are held to boost returns and add diversification.
­
– Risk to members is the opportunity cost of even higher
returns because equities remain the largest single, but
no longer dominating, exposure.
•No material changes to foreign currency exposures. The
long-term plan remains to reduce these but abnormal
foreign currency levels since 2011 have caused us to
tactically delay this strategic change. Allocations have
been reduced to around 10 per cent.
The chart demonstrates why we sought to remove QSuper
from peer ranking surveys in 2011. The current Balanced
option strategy represents a major departure from traditional
default strategies, and it is erroneous to compare them over
short-term periods.
Calibrating risk tolerance
The new strategy has several goals against which we measure
its success and risks.
Returns
•To achieve CPI+3.5 per cent p.a. after fees and tax over
rolling ten-year periods.
•To achieve at least equivalent returns to the previous
more conventional industry strategy if equity returns are
similar to central forecasts (say 6 per cent to 10 per cent).
­ – Bonds returns will probably be lower than median
forecasts. They may reduce absolute returns a little
but not enough to breach objectives, which we would
expect to outperform in this scenario.
­ – Even if bonds are notably weak they are still not
dominant (per cent allocations or impact on total
returns) to equities so outcomes should be fine.
If equity markets are weak:
­
­ – Bond exposures will diversify and materially improve
absolute return outcomes.
­ – ­
The outcome for members will be tolerable as a
diversified portfolio will temper the dominant risk to
members of falling well short of objectives.
If both equity and bond markets are weak:
­
Risk
•
To improve on the two risk dimensions of short to
medium-term volatility and severity of downside
outcomes compared to the previous more conventional
strategy.
– Absolute returns will be weak and probably at or below
objectives, but stronger than the traditional approach in
all but the rare case where bond returns are also weak.
– Absolute returns will be poor and probably well below
objectives.
­ – They are unlikely to be worse than the traditional
approach.
­
– Very little can be done to protect members from this
scenario.
16
QSuper Investment Philosophy and Strategy
Bond allocations
A key part of the philosophy centres on the amount of bond
risk in the portfolio. This represented the largest single change
to risk profile. To achieve the increase in bond risk we:
• restrict the exposure to only sovereign bonds
• extend the duration significantly.
The combined aim is to achieve bond volatility similar to
equities. We refer to them as high duration bonds (HD bonds).
Typical Australian superannuation funds often have around
15 per cent invested in bonds. This standard bond allocation
is restricted in its risk reducing potential because it is relatively
low duration (which reduces both return and volatility) and
it includes a material allocation to credit risk which does not
diversify equity risk very well, particularly in downturns.
Reducing risk while increasing the weight to
risky assets
The flaw in the traditional strategies on which we are seeking
to improve, is that risk closely matches equities but the
defensive assets (cash and low duration bonds) which are
used to reduce risk also strategically reduce the return over
time. Those strategies will produce outcomes that have the
risk of equities but returns below equities. The current strategy
substitutes some of the dominant equity risk with bond risk
of similar volatility.
If our investment principles hold, our equity and bond
exposures will have similar risk and therefore similar returns
over the long run. The decrease in risk comes from low
correlations between two risky assets with similar allocations
rather than a dominance of one risky asset offset by a smaller
allocation to a lower risk asset.
What may not be apparent from asset allocation tables alone
is that we have increased the total allocation to risky assets
in the portfolio. Low duration bonds are not risky but HD
bonds are. However a core part of the whole strategy and a
fundamental principle of investment management is that the
significantly increased diversification actually decreases the
total risk in the portfolio. The pie charts on the following page
show this impact.
17
QSuper Investment Philosophy and Strategy
Traditional vs. diversified portfolios – asset allocations
Traditional
Diversified
Equities
Infrastructure
Equities
Infrastructure
Low duration bonds
Alternatives
High duration bonds
Alternatives
Real estate
Cash
Real estate
Cash
The risk allocation (narrowly defined as contribution to volatility) moves as shown below. While equity risk is still the primary
risk exposure, at just over 50 per cent, this is well down from its dominant levels of 80 per cent.
Traditional vs. diversified portfolios, asset class contributions to total volatility
Traditional
Diversified
Equities
Infrastructure
Equities
Infrastructure
Low duration bonds
Alternatives
High duration bonds
Alternatives
Real estate
Cash
Real estate
Cash
18
QSuper Investment Philosophy and Strategy
Correlations do not need to be negative to reduce the risk in
the portfolio, just less than one, particularly during times of
equity stress. The following chart shows the rolling correlation
of 10-year monthly returns between equities and bonds over
the last 114 years. With correlations averaging below 0.5, and
sometimes even negative, bonds and equities have been
very diversifying historically.
Correlation between HD bonds and equities
0.50
0.25
Balanced option risk-adjusted returns
Outcomes of the strategy over short and medium terms
are presented below. No definitive long term outcomes are
available yet. To provide context, the chart below compares
the returns from the Balanced option with the SR50 median.1
This represents a real world proxy, typical of what QSuper
would have received over the period if we had maintained
the previous strategy. The chart shows the cumulative
returns against both the scorecard return objective and for
the two comparative strategies since 2010. Initially the two
portfolios tracked together until the full effect of the change
in 2011.
Cumulative returns for traditional vs.
diversified portfolio strategies
0.00
90%
-0.25
80%
70%
40%
30%
• hedged over the full period, net of fees and taxes
20%
• equally-weighted across Australia, US, Germany, UK and Japan.
10%
However we see this scenario as a relatively low probability
at present, with even lower probability that the conditions
would exist for a strategic period (such as a decade). Hence
a view that a diversified portfolio is lower risk does not imply
such a portfolio will always do better in a drawdown, but
simply that in the majority of plausible future scenarios it
should do better or no worse.
The benefits of diversification are not just about smoothing
shorter term outcomes, but also about reducing the
possibility of negative returns over a strategic period. We
have seen that equities and HD bonds can have poor returns
for a decade or more, but diversification helps mitigate bad
outcomes in such instances.
1 Median of SuperRatings survey of 50 largest Australian superannuation funds’ Balanced (or equivalent) option after fees and tax.
Traditional
QSuper
Jun 15
Mar 15
Dec 14
Jun 14
Sep 14
Mar 14
Dec 13
Jun 13
Sep 13
Mar 13
Dec 12
Jun 12
Sep 12
Mar 12
Dec 11
Jun 11
CPI + 3.5%
Sep 11
Mar 11
Dec 10
Jun 10
While we suggest that bonds and equities will tend to be
negatively correlated during most significant negative equity
events, this need not always be the case. A strong central
bank response to high inflation, or even expectations for
such a response, can be bad for most asset classes, including
equities and bonds. In this case we would expect that a more
diversified portfolio could perform equally as badly, or even
somewhat worse, than a more traditional portfolio.
0%
Sep 10
AU equities include franking from July 1987 onward, not before.
Mar 10
Bonds and equities are:
50%
Dec 09
It shows rolling 10-year correlations on monthly returns for bonds and equities.
60%
Jun 09
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Sep 09
-0.50
19
QSuper Investment Philosophy and Strategy
Next we show annual returns to demonstrate risk outcomes
over shorter periods.
Return
and
distribution
outcomes:
QSuper balanced vs. median peers portfolio
QSuper
Balanced
Traditional
(Average
Peers)
Difference
2009/2010
10.8%
9.8%
1.0%
2010/2011
10.0%
8.7%
1.3%
2011/2012
6.3%
0.4%
5.9%
2012/2013
9.9%
14.7%
-4.8%
2013/2014
12.6%
12.7%
0.0%
2014/2015
12.0%
9.6%
2.4%
Standard Dev
2.2%
4.9%
Notes: Peers are SuperRatings SR50, median outcomes shown.
The standard deviation is of the figures shown (not for example of the underlying
monthly data).
The table shows that while returns over the period have been
similar between the two approaches, the new strategy has
been more stable. In summary these tables show:
•
Most importantly, the strategy has met its absolute
scorecard return objective over the period since its
inception.
•It has also met the secondary expectation of at least
matching the traditional strategy return, even though this
was a period of strong equity returns.
•From a risk perspective it has also met the dual objectives:
­ – it has lower short term volatility than a traditional
strategy
­
– it had better performance during the single drawdown
period in the second half of 2011.
In the following sections we analyse the sources of return and
risk which have contributed to these successful outcomes.
Asset class returns
The charts opposite show asset class returns for each of the
last four financial years and the contribution of asset classes
to the total return respectively.
The charts show contributions from different asset classes
dominating returns at different times. During the 2011/2012
year when equities had a negative return, bonds had a
strong positive return. When bonds had a negative return
(2012/2013), equities did very well. In other years all asset
classes have been positive. We can see that there are
similarities in the quantum and distribution of the returns of
the three liquid risk asset classes (AE, IE and HD bonds).The
risky bonds are producing equity like risk and returns as they
are designed to do.
Equity like risk can mean equity like losses. In isolation, either
a HD bond portfolio or an equity dominated portfolio has the
potential to produce decent returns over the very long run,
but with a very large range of outcomes. Historically either
asset class can produce negative real returns for strategic
periods (decades or two). We cannot be sure that this will not
be the case for any period going forward.
A decision to diversify takes fortuitous upside outcomes out
of play, but also reduces the probability that we are making a
strategically poor decision for members.
20
QSuper Investment Philosophy and Strategy
Asset class returns, by financial year (including year to date)1
40%
30%
20%
10%
0%
-10%
-20%
-30%
Australian International High
Equities
Equities Duration
Bonds
2010 – 2011
Real
Estate
Private
Equity
2011 – 2012
InfraDiversified
structure Alternatives
2012 – 2013
Cash
2013 – 2014
FX
Total
2014 – 2015
Balanced option financial year returns, by asset class contributions
20%
15%
10%
5%
0%
-5%
2010-2011
2011-2012
2012-2013
2013-2014
2014-2015
Australian Equity
International Equity
High Duration Bonds
Real Estate
Infrastructure
Diversified Alternatives
Cash
Foreign Exchange
Total net
1 Asset class returns are gross of fees and taxes. Total net returns are net of fees and taxes. HD Bond returns also include small contributions from swap strategies – inconsequential for these discussions.
21
QSuper Investment Philosophy and Strategy
Fees
Efficient investment fees are one of QSuper’s Investment
Principles. The focus of strategy is to meet objectives in risk
adjusted terms after fees and tax, not to seek low fees as an
end in itself. However every basis point of fee saved is a gain for
members with very high certainty. Much management effort
has been put into fee efficiency and it is closely monitored.
QSuper has very low investment fees. For all seven MIC options
(SRI is excluded) for which reasonable benchmarks exist, the
investment fee sits in the lowest quartile for industry, not for
profits and retail master trusts. The following graph shows
the QSuper investment fee against peer medians for those
seven options rated in the SuperRatings Benchmark survey.
These fees are also shown on a full look through basis, which
is beyond what current industry standards require.
There are a range of contributing factors:
•
no active management in traditional listed market
mandates
•use of very cost efficient internal management in setting
strategy and non-risk taking implementation mandates
•strongly negotiated base and performance fees in private
market mandates
•constant rigorous emphasis on cost efficiency across all
investment activities of the fund.
QSuper investment fees vs peer group medians
2014
1.00%
0.90%
0.80%
0.70%
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
Aggressive
Balanced
Moderate
Australian
Shares
International
Shares
Diversified
Bonds
Cash
QSuper
0.51%
0.42%
0.24%
0.08%
0.08%
0.27%
0.07%
Not for profit
0.70%
0.64%
0.43%
0.54%
0.67%
0.30%
0.10%
All Funds
0.76%
0.69%
0.50%
0.70%
0.78%
0.43%
0.10%
Retail master trust
0.90%
0.72%
0.65%
0.94%
0.95%
0.55%
0.32%
Source: SuperRatings
Summary of case study
The new strategy has been operational for about five years. It has been a very unusual market environment and the future
remains clouded. It is too early to draw definitive conclusions but the strategy which was debated and started in 2010 has
been progressively implemented and has produced outcomes which so far have met the multiple and challenging return
and risk goals which were set.
The strategic reasons for this have been in the form for which the strategy is designed – markets have proved difficult to
forecast, and diversification has seen robust portfolio outcomes despite volatile returns from individual asset classes.
The strategy has performed as hoped for, producing strong stable after fee and tax returns, despite the relatively random
outcomes of markets.
22
QSuper Investment Philosophy and Strategy
Conclusions
This paper shows the scale of change (using the Balanced
option as a proxy) which has occurred at QSuper as we
implemented a new philosophy to achieve long term risk
adjusted absolute returns. The debate continues however.
Our central case scenario is that asset returns will be positive
but modest by historic standards. The key to the debate lies
in the assessment of the balance of risks and the degree to
which this balance should impact strategy.
•So to summarise, one side of the strategy debate.
­
– There is a strong belief that equities will produce good
returns with very high confidence.
­
– There is also a corresponding strong view of very poor
future bond returns.
­ – Judgements can be made that members will have
significant regret of opportunity cost when, in the face
of good equity outcomes, a diversified strategy is seen
to dissipate what could have been.
­
– Members would regret poor outcomes from an equity
dominant strategy if equities post an extended period
of poor returns. However this can be deemed an
acceptable risk if combined with a belief that there is
low likelihood of this actually happening.
•
The alternative
strategy is:
view,
which
underpins
QSuper’s
­
– Bonds and equities are both at reasonable valuations
given plausible future economic scenarios.
­
– It is possible that both could produce good and/or poor
returns depending on which of the several plausible
scenarios eventuates. We have limited ability to forecast
timing around these, but qualified confidence that
correlations will be low and so diversification benefits
high.
­ – Members have asymmetric risk tolerances biased to
downside. They will regret extended low returns more
than they will prize above expected returns.
­ – Members have modest account balances when
compared to retirement liabilities. Sequence risk,
unfamiliarity with investment theory and normal
behavioural tendencies mean members do not have
long-term risk tolerance or patience to simply ignore
extended market setbacks in full confidence that the
retracement will be certain and beneficial.
The strategy debate collapses to the question of which
strategy is best suited to the interest of members and their
actual risk preferences? There is a strong emphasis within the
QSuper investment philosophy on a primary principle that
success should be measured in terms of member outcomes
not comparative performance between superannuation
funds.
Investment strategy and risk management are still being
developed. The decisions already taken will take time to
be validated and the reactions by markets to the path of
monetary and fiscal policy normalisation, which could take
many more years yet, is unpredictable. We will have to be
ready and willing to respond consistently and ensure the
strategy matches the balance of risks as they evolve.
23
QSuper Investment Philosophy and Strategy
Attachment 1:
Timeline of investment policy decisions
March 2009Established Investment Committee and management delegations
Early 2009Reviewed the investment backdrop post GFC
July 2009Initial investment beliefs settled
September 2010Baseline investment philosophy conclusions settled after wide review:
• move equities away from cap-weighted benchmarks
• move away from majority Australian exposure within equities
• bonds should have core of long duration sovereign exposure
• core currency position fully hedged
• seek some alpha in listed and unlisted markets.
November 2010 Started debate on risk parity principles for Balanced (Default) option
2011Debated QSuper Lifetime as default option (MySuper) for pre-retirement
October 2011Balanced (Default) option strategy changed. Removal from peer surveys
June 2012Reduced Balanced (Default) option objective to CPI + 3.5 per cent after fees and tax
April 2013
Funded first QSuper Lifetime cohort
2013Debated application of philosophy and principles to high risk seeking portfolios for QSuper Lifetime.
December 2013Funded three cohorts to launch QSuper Lifetime as MySuper default.
February 2014:Workshop to review key Investment Principles:
• application of risk parity principles (high duration bonds)
• diversification
• risk budget of DAA.
March 2014Endorsed QSuper Lifetime high risk seeking strategy
March 2014Segregated accumulation and pension assets to enable differentiated tax-effective strategies
May 2014Funded full eight cohort structure of QSuper Lifetime
June 2014Initiated tax-effective strategy debate encompassing to date:
• Asset allocation (ongoing)
• Rebalancing policy in Australian equities (decided)
• Passive implementation in Australian equities (ongoing)
• Tax effective benchmarks (policy approved, implementation ongoing)
July 2014
Strategic equities policy approved
August 2014
Strategic fixed interest policy approved
24
QSuper Investment Philosophy and Strategy
Attachment 2:
The investment environment post GFC
The past we were used to (strong equity and bond returns
with quick recovery from any retracement) was based on
a systemic re-rating of inflation and consequently steadily
falling interest rates. That is over. That precipitated excesses
in financial markets which in turn gave governments and
households great confidence, allowed consumption to
exceed revenue and built up excessive debts and other
liabilities. These were at either governments and/or
households in various countries.
The GFC was the ringing of the debt bell and different
countries approached the resultant dislocation and its
aftermath in different ways. The developed world faces
crushing debt loads. Post GFC policy has moved these
between governments and households in various countries
but the overall stock of debt has not diminished.
There is no credible long term plan to deal with this. It has
actually not even stopped getting worse. A key plank is
quantitative easing which enables monetary policy to remain
stimulatory even with short-term nominal rates at zero. This is
designed to force asset prices up, and to rely on that to kick
start economic growth. As social policy this is defensible; for
long-term investors it is very concerning because it dissociates
prices from fundamentals.
Immediate economic activity is at reasonable levels in US
and Australia, and still very low in other countries. That is on
the back of astonishing levels of monetary stimulus and still
strong fiscal stimulus that only a few years ago would have
been unthinkable. There is a broad consensus that this will
just go on for as long as it takes. There is little discussion of
how it will end.
An outworking of this is that the widely accepted central
case of ‘muddling through’ is reasonable; but risks to that are
imbalanced:
•if growth disappoints and deflation fears arise, policy
makers have no means to respond, while
•if growth is stronger and inflation fears arise they have
ample policy tools to respond.
This in turn implies an imbalance of risks to absolute returns
from an investment perspective which should be taken into
account when setting strategy.
Yield curves are steep in developed countries. Equity markets
have recovered, with prices above pre GFC levels. This is
predominantly on the back of valuation expansion driven by
falling cash rates and bond yields. Profit growth, reflecting
economic activity, has been tepid and patchy.
These two things; soft economic growth because stimulus will
have to be wound back at some point, and high valuations,
combine to portend an extended period of modest returns
from all financial assets. Unlisted assets (infrastructure and
real estate) have followed the same pattern. Outsized gains
are predominantly from valuation re-rating, partly to reflect a
safe-haven status, not sustainable growth in operating profits.
This gives rise to all sorts of economic and investment risk
which cannot be defined or quantified. A very wide range of
possible future outcomes must be contemplated.
25
QSuper Investment Philosophy and Strategy
Attachment 3:
Risk parity
This is a widely used term which has no direct definition, but
we advocate the general principles based on:
•
sound theory which has been applied successfully
elsewhere
•strong historical outcomes
•good results under our forward looking scenario analysis
•characteristics which suit the risk profile we are seeking.
The key premises are:
•assets with equal risk have equal expected returns
•portfolios should adopt broadly equal weights between
risk sources (not asset classes).
T his is mainly applied to equities and bonds so far because
their risk exposures can be scaled up and down. It requires
acceptance of a new asset class/risk exposure – high duration
bonds.
•All sovereign exposure to ensure good diversification to
equities, particularly in stressed markets.
•Duration is extended to ensure risk levels roughly equate
to equities.
•
This ensures diversification works because effective
exposure of the bond risk is roughly equivalent to equity
risk.
•Accessed through derivatives (bond futures) because this
is the most effective way to access. This is not a defining or
even important part of the philosophy. It could be done
with physical bonds – it would just be inefficient and
limiting to do so.
It is eliciting caution across the industry because the debate
coincides with a point in time when bond yields are lower
than medium-term past. They are low but are consistent with
where they have been for long periods historically. This does
not warrant major departure from philosophy or delay in
implementing because:
•Bond yields are roughly fair value and not irrationally
low given macro-economic backdrop and likely path of
monetary policy. Return and risk of these assets is driven
in large part by the slope of the yield curve than absolute
level of yields. This can be quantified through future
scenario analysis and stress tests.
•They have been at these levels before and there is no
irrefutable cause that they must rise materially. That is one
scenario but the opposite could be true also.
•Commentary is negative (and addresses normal, not HD
bonds) but actual market consensus priced in is for only
modest rises in long term bond yields. Scenario analysis
supports risk management is improved on balance.
26
QSuper Investment Philosophy and Strategy
27
QSuper Investment Philosophy and Strategy
And so you know, this information is provided by QInvest Limited (ABN 35 063 511 580 AFSL and Australian Credit Licence Number
238274) which is ultimately owned by the QSuper Board (ABN 32 125 059 006) as trustee for the QSuper Fund (ABN 60 905 115 063).
All products are issued by the QSuper Board as trustee for the QSuper Fund. When we say ‘QSuper’, we’re talking about the QSuper
Board, the QSuper Fund, QSuper Limited or QInvest Limited, unless the context we’re using it in suggests otherwise. We’ve put this
information together as general information only so keep in mind that it doesn’t take into account your personal objectives, financial
situation or needs, it shouldn’t be relied on as legal or taxation advice and doesn’t take the place of this type of advice. What we
say about law or proposals is based on our interpretation of the law or proposals at the time we printed this document. You should
consider whether the product is appropriate for you by reading a copy of the product disclosure statement before making a
decision – you can do this by downloading a copy from our website at qsuper.qld.gov.au or call us on 1300 360 750.
© QSuper Board of Trustees 2015. 08/15 9073.