POWERED BY MOMENTUM MEDIA
(November-2003) One of the big guns at Military Super
A default asset allocation geared 85 per cent towards growth would make most superannuation fund trustees positively nervous, but the Chairman of the Military Superannuation and Benefits Board of Trustees, Charles Kiefel sees it as highly appropriate for a fund in which the vast majority of members are aged under 35.
Kiefel points to the unique nature of Military Super and its age demographic as the basis for the aggressive asset allocation strategy. However, the aggressive nature of the scheme’s default option isn’t based solely on Military Super’s age demographic. It is also based on the scheme’s inherent structure and the role of the Commonwealth.
Military Super is a hybrid defined contribution and defined benefit scheme with benefits being derived from two sources — a member component, which is paid as a lump sum only (or rollover) of the member’s own contributions and an employer component, which is a defined benefit related to a member’s period of membership and final average salary that must be preserved in the fund until age 55.
The reality confronting the trustees is that of the fund’s total value of over $7 billion, only $1.1 billion is exposed to the market. This means that the Scheme’s Trustees have as a key objective ensuring that the fund is geared towards delivering high growth in the knowledge that it is dealing with a young membership for whom the consolidation phase in the superannuation cycle remains many years off.
One of the major initiatives implemented by Military Super over the past three months has been member choice which became effective from July 1, 2003, and offers members of Military Super five options ranging from conservative through to highly aggressive.
Members have the choice of cash, conservative, balanced, growth and high growth, with the default option being growth.
Kiefel says that 97 per cent of members have opted to remain in the default growth allocation while around two per cent have opted for high growth.
“Most people have tended to stay with the default setting but it is interesting to note how many have deliberately nominated high growth,” he says.
It is axiomatic of Military Super’s approach, that the fund’s default growth option is heavily skewed towards international equites (31 per cent) and domestic equities (36 per cent), but with a seven per cent allocation towards private equity and around three per cent towards other classes including hedge funds.
The high growth option is much more heavily weighted towards equities, with international representing 40 per cent while domestic represents 42 per cent.
It is also axiomatic of Military Super’s aggressive growth strategy that it was more exposed than most funds to the decline in international equities which drove many Australian superannuation funds into negative territory through 2001-02.
Military Super produced a crediting rate in 2001-02 of -8.9 per cent and the changes the board put in place as it sought to deal with the tougher environment represented the catalyst for the member choice initiative and asset allocation changes.
The board used its 2001—02 report to the Parliament to declare that it had made a number of changes to the fund to “make it more robust to the current investment environment”.
It said the key developments had been:
• The unitisation of the MSB fund from July 1, 2002. The introduction of unitisation allows the fund to offer its members a choice of investment options with different risk and return profiles.
• The restructure of the Australian equities mandates, which led to the appointment of four new managers — Schroder Investment Management, Alpha Investment Management, JB Were and Maple-Brown Abbott — and to the termination of Jardine Fleming. This restructure strengthened the manager diversification benefits with the fund’s other two Australian equities managers, Colonial First State and Barclays Global Investors.
• The appointment of a third international equities manager, Bernstein Investment Management, to complement the fund’s other two international equities managers, Wellington International Management and Dresdner RCM Global.
The report said the board had continued its ongoing strategy of increasing its investment in private equity with three new private equity managers being appointed - Pantheon USA, Sentient Global Resources and HarbourVest Partners.
Kiefel says the fund’s decisions with respect to asset classes over recent months covering small caps, private equity, hedge funds and active currency management have paid dividends and represent a validation of the fund’s choice of high quality managers.
AUTHOR
Mike Taylor
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