Is active investing the key during market volatility?

As asset owners grapple with record inflation, an impending recession and volatile stock markets, active management of portfolios could be the answer during these challenging times.  

The A$86 billion ($59 billion) Hostplus last week announced a positive 1.57% return for its default balanced option, citing active management as the reason for its success at a time when Australian pension funds are expected to post negative returns.

Chief investment officer Sam Sicilia said that the fund made the conscious decision to reduce exposure to bonds and increase allocation to real assets even before bond yields fell to undesirable levels.

The fund is expected to continue to take this approach as it believes that the strategy has tided it over bull and bear markets through the years.

“In 2015, Hostplus made an active decision to significantly reduce its exposure to bonds in the belief bond portfolios would not provide downside protection to market volatility, during the low interest rate period,” Sicilia said.

“Equity and bond markets have, independently, delivered negative returns at a level that we have not seen since the Great Financial Crisis.  Together, they have performed at levels not seen for more than a generation.”

He added that the fund’s positive returns are the result of long-term investment decisions. Investing in property and infrastructure provided inflation protection, he said, and prevented the fund’s portfolio from being weighed down by the negative returns of bonds.

“We have a firm belief that active management will continue to be the key to managing the continued volatility we are expected to see over the coming years.  Our active management approach has seen Hostplus perform well in both bull and bear markets over our 34-year history,” chief executive officer David Elia said.

The fund’s balanced My Super option has an annual return of 8.79% since its inception in March 1988, as of June 30.

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As more volatility is forecasted for the coming years, Elia said superannuation members should understand underlying investment strategies and avoid focusing on cost alone.

“Actively managing and applying a strategic asset allocation to perform under different market conditions, enables us to smooth out returns over the longer term, as opposed to some of the lower cost, passive products in the marketplace where investors are more exposed to market movements,” he said.

Active management of its portfolio also has added environmental, social and governance (ESG) benefits. Hostplus posted a positive return of 2.36% for its Socially Responsible Investment (SRI) option.

“What this tells us is that when it comes to investing your super sustainably, it is not just what you exclude, but what you include that makes the biggest impact. We are glad to be able to let members choose what they invest their money in, while also providing a positive net return in the 2021-22 financial year,” Elia said.

It is a strategy employed by other super funds such as Active Super, which is currently exploring a merger with Vision Super, and employs active strategies to ensure ESG alignment with its portfolio companies.

“The majority of our investments are actively managed and we continually monitor the managers we engage to ensure they’re meeting our standards for performance and ESG impact,” Kyle Loades, Active Super chair, told AsianInvestor.

“We regularly engage with individual portfolio companies to ensure their business activities align with our responsible investment principles. Sometimes we work directly with company board members and executives and other times we work with our fund managers or industry groups to engage on our behalf,” he said.

The fund’s latest financial year results have not been released, but in August 2021 Active Super was named the top superannuation fund by net return for the average 30-year-old member.