Following a brief experiment with outsourcing a large portion of ANU’s investment functions almost thirty years ago, senior management decided that the University could do better managing their assets in-house.
ANU has A$1.1bn ($1.2bn) of assets under management, including a balanced portfolio of approximately A$750m known as the Long Term Investment Pool (LTIP). About 80% of the LTIP’s assets are managed in-house and there are plans to further increase the level of in-house management, according to Mark Waldron, Investment Director at ANU Investment Office. “The fund is active at all levels, including asset allocation, country, sector and stock selection.”
“In comparison to most other Australian balanced funds, the LTIP is significantly overweight Australian equities and underweight global equities. The exposure to global equities is about half the portfolio weight of most balanced funds”.
Waldron says this position is partly due to “the Australian share market being one of the best performing markets over the long term - with the exception of the last two years”.
In addition, the ANU and most other Australian based investors derive a considerable benefit from dividend imputation, Waldron says. “The withholding tax payable on global shares creates a performance drag as opposed to Australian shares where the fund receives the benefit of fully franked dividends.
The LTIP runs concentrated portfolios and is benchmark unaware. Waldron says the investment team of six begin by “looking at the macro picture to determine which areas should do better”. These views are developed in-house and without the aid of an asset consultant.
When it comes to stock selection, Waldron considers the LTIP’s approach to be “fundamental, not value, growth or any other style”. The ANU places a lot of emphasis on valuation, but at the same time growth is also important as Waldron and his team seek to avoid “cheap companies with static or declining earnings”. Company management is also an area of focus, especially with small cap stocks where the ANU will often do its own research and meet with management.
The LTIP has outperformed the median SuperRatings pension survey - balanced option (5.9% after fees versus 4.9%) in 2010. In the same survey, the LTIP was ranked top out of 19 funds over 10 years. Even more impressive is the LTIP‘s enviably low management expense ratio of 0.20%.
Recently, the LTIP has begun to use ETFs to easily and cost-effectively implement its asset allocation views. ANU took the view that “the economic situation in the US wouldn’t be as bad as a lot of people had feared it would be.”
The LTIP’s global equity managers - one of the few areas where the ANU employ external fund managers - were all underweight the US. So the ANU decided to implement its asset allocation view by purchasing S&P 500 ETFs.
Waldron highlights the importance of being “selective and doing a lot of research into how the ETF replicates the index, its track record and management fees” when choosing an ETF provider. For this reason, the ANU prefers physically-backed ETFs, over synthetic ETFs. The ANU is currently considering other ETFs which it may also use as part of its asset allocation strategy.
Waldron puts a large part of the LTIP’s success down to the “trust that has been built up over a long period of time” between the investment team, the Investment Advisory Committee (IAC) and the Finance Committee.
The IAC is made up of seven persons with expertise in finance and investments appointed by the Finance Committee. IAC membership also includes the Vice-Chancellor, the University CFO and the Chair of Finance Committee. At each meeting the IAC reviews the investment strategy, the asset allocation and the performance of the fund.
An independent report including comparisons with balanced fund manager peers is commissioned once a year to ensure the ANU investment management model is achieving the University’s investment objectives.
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