A default asset allocation geared 85 per cent towards growth would make most super 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 government.
Military Super is a hybrid 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’ key objective is to ensure 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 super cycle remains many years off.
One of the major initiatives implemented by Military Super over the past three months has been member investment choice which became effective from July 2003, and offers members 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 notes that 98 per cent of members have opted to remain in the default 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 represent 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 super 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 fund has also restructured its Australian equities mandates, a move 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.
It has also appointed a third international equities manager, Bernstein Investment Management, to complement its other two overseas share managers, Wellington International Management and Dresdner RCM Global.
In line with the board’s ongoing strategy to boost the fund’s investment in private equity, three new private equity managers were appointed — Pantheon USA, Sentient Global Resources and HarbourVest Partners.
Kiefel says the fund’s asset class decisions over recent months covering small caps, private equity, hedge funds and active currency management have also paid dividends.
