At the recent Conference of Major Superannuation Funds in Brisbane, QSuper chief investment officer Brad Holzberger pointed out that peer risk had caused investment portfolios to be largely identical between super funds, while the asset allocation had changed marginally.
After an audience poll, it became clear that the majority of trustees agreed with his view on the influence of peer risk.
About 50 per cent of delegates said that peer group considerations had affected decisions about asset allocation 'significantly', while only 18 per cent said it had not affected their decisions at all.
But with the current volatility in global markets and the outlook for more to come, the question is whether not only asset allocation should change, but also whether investment managers should be given more flexibility in acting on opportunities they see in the market.
Cadence Capital chief investment officer Karl Siegling says there is a fundamental problem with the institutional approach to investing, which is largely build on modern portfolio theory.
He is especially critical about the practice of frequent rebalancing portfolio weights.
Over the seven years the fund has been in existence, he has delivered a return of 17 per cent per annum as at 31 December 2011.
But he has done so with a large concentration of the portfolio in RHG, the former Rams home loan book.
Siegling is unapologetic: "One of the best things you can do in finance is let your profits run," Siegling says.
"Modern portfolio theory is so bad that if a stock goes down in value institutions will add to it. They will add to a falling stock to bring its weighting up. They will add to losing positions. It's insane. You never ever add to losing positions," he says.
He rejects the idea that the concentration in the fund means it is taking excessive risks. Siegling says concentration is merely the result of an investment paying off.
"We never risk more than five per cent of our portfolio at cost on any one idea and we only risk one per cent at a time to five per cent," he says.
"[RHG] went to 14 cents and then we started to have a look at it. At 18 cents we started buying it, and it earned 28 cent for the year.
"It was trading at half a P/E, someone was paying us 10 cents of their own money to take it off their hands.
"RHG have a 1 per cent position at 18 cents and it goes to 22 and you add another one [per cent] at 24 another one, at 28 another one and 34 another one per cent," he said.
"That is a five per cent position at cost. The stock then proceeds to double and becomes 10 per cent of your portfolio, it doubles again and becomes 20 per cent of your portfolio."
"Most institutions are not allowed to do that. You work anywhere in Australia; you are fired," he said.
Crossing asset classes
AllianceBernstein senior portfolio manager Morgan Harting is also critical about current investment practices, in particular about the strict distinctions between asset classes.
He runs an emerging markets fund invests in both equity and debt, but takes a rather wide approach to what it considers an emerging market security.
For example, the fund holds shares in Sumitomo Rubber in an effort to benefit from the booming but hard-to-access Chinese automobile industry.
Although Sumitomo derives a large percentage of its revenue from selling tires in emerging markets, it is listed on the Tokyo Stock Exchange.
But in contrast to Siegling, Harting hopes the current rigidness in investment mentality does not change, because it provides him with the opportunities to make money.
"I hope those people continue to exist for a long time, because it is that mentality that creates the mispricings between the asset classes, or between different regions, because people are so narrowly focussed on just one sliver that they won't be able to see how prices elsewhere change the relative attractiveness," he said.
"In a sense, I rely partly on that thinking," he said.
But Harting is clear that this has not benefited clients overall.
"I'm not sure if we have done our clients such a great service by putting such a rigid distinction between buckets."
"You can take advantage of them if you ease that constraint," he said.
Flexibility is the key
But asset consultants are less sure about the merits of giving investment manager free rein.
"It is not so much about wider mandates; it is about smarter mandates," Frontier Investment Consulting deputy director of consulting Kristian Fok says.
"You need to build in flexibility, for example, where you reserve the right to cancel some of the outstanding money."
"For example, the credit opportunity disappeared relatively quickly and then reappeared, but in a slightly different form. The act upon those opportunities you need some flexibility," he says.
His colleague, Frontier senior consultant, Allison Hill says this can be achieved by building long term relationships with managers.
"There has to be a good relationship with the manager, an open communication."
"Frontiers clients have always looked for long term relationships, not a quick hiring and firing of managers. There is still close scrutiny of the managers, but with some managers our clients have been with for ten years," she says.
With the current consolidation in the superannuation industry and the emergence of more nationwide super funds, in is important to make sure funds continue to be flexible and able to act fast, Fok adds.
"That also comes back to how a fund resources itself. To have a good dialogue with managers you need a good team. Building your in-house capabilities is of tremendous assistance with that," he says.
