TCorp continued during the year to develop its asset management services, which comprise two components: the investment facilities, through which TCorp outsources the management of funds and acts as manager of managers; and the internally managed cash and bond portfolios, using TCorp’s comparative advantage in managing fixed interest risk.
Hour-Glass products and globalmarket dislocation
The number of clients investing in Hour-Glass products rose to 147 during a turbulent period in which most asset classes delivered outright negative returns for the first time in a number of years. This retreat in markets, after a long bull run, resulted in an overall reduction in funds under management from $11.6 billion to $10.4 billion at year end.
TCorp continued to partner clients in a variety of significant transactions. We were able to optimise outcomes for these clients by providing sound advice from our Client Services team as well as cost effective market implementation. Further, additional funds were received from local government councils as well as agencies such as WorkCover Authority of NSW.
During the year, a complete review of the International Equities sector saw the adoption of a core-and-satellite investment configuration. The review included a number of manager changes, the modification of existing manager allocations and the introduction of a long/short manager.
Working with clients, TCorp replaced the Bond Market Facility with the Strategic Cash Facility. The Strategic Cash Facility is designed for clients which seek higher than bank bill returns and can tolerate modest volatility, or which have an investment time horizon of 1.5 years or greater. While this product is conservatively positioned, it takes advantage of some of the value opportunities available following the recent blow-out in credit spreads, and is expected to provide very strong investment performance whilst maintaining an extremely high credit quality.
TCorp’s continued stance of conservatively positioning its products was especially rewarded in terms of its flagship Cash Facility, which outperformed many of its peers in the market and, importantly, maintained daily liquidity for its clients (notwithstanding benchmark underperformance in the short term). The features of this product ensured that there were no underlying defaults in any securities and there were no exposures to structured products such as CDOs. It is expected that the benchmark underperformance of the facility will be written back over the next 12 months as investments mature.
In the broader context, problems which started with sub prime lending in the US caused the worst decline in equity markets for a decade and reignited investors’ awareness of risk. This led to a sharp increase in the interest rates at which companies could borrow money, if indeed they could borrow money at all. The banking system faced a shortage of cash to borrow – that is, a liquidity crisis. US banks were announcing large losses and the liquidity issues disrupted company earnings outlooks more broadly, contributing to the fall in the sharemarket. As capital became scarce, and with mounting aversion to any structured, leveraged or non-transparent investments, unwinding these positions, and indeed valuing these instruments, became challenging. The ensuing indiscriminate mark-down of all financial assets saw the International Equities sector, (as represented by the MSCI World ex-Australia $A (with net dividends reinvested)), decline by 21.26 per cent during the financial year and the Australian Equities sector, as represented by the S&P/ASX 300, finish the financial year down by 13.7 per cent.
This market event, centred on the financial sector, caused an anomalous outcome, with traditional safe-harbour investment in the banking sector retreating substantially. This was at odds with historical market behaviour, which has seen such market events focused on more cyclical investments such as resource stocks. This discrepancy in returns between financial and resources stocks of more than 45 per cent created a significant “headwind” for portfolio styles such as those implemented by TCorp, which adopt a value or defensive stance and are typically overweight in the traditional safe-harbour stocks.
The result was moderate underperformance by our equities products. However, these products remain well within expected volatility levels and continue to outperform their benchmarks over the longer term.
Despite these volatile market conditions, TCorp’s Medium Term Growth Facility and Long Term Growth Facility, which cater to clients’ longer-term investment needs, outperformed their benchmarks. This was achieved through active asset allocation to cash and the introduction of a currency hedge to mitigate the negative effects of a rising Australian dollar.
The Hour-Glass products remain constructed in a way which targets investments in quality companies with sustainable longer term earnings which are expected to generate strong performance over the full economic cycle.
Internally managed cash and bond portfolios
TCorp continued to add value for clients through internal management of specific cash and bond portfolios for NSW Treasury and other agencies. In addition, TCorp is one of the fund managers for the Hour-Glass Cash Sector (including managing the sector’s day-to-day liquidity) and in June 2008 became the fund manager for the new Hour-Glass Strategic Cash Facility. In carrying out these assignments for the Hour-Glass Investment Facilities, TCorp draws on its long experience in cash and fixed interest markets and its understanding of public sector cash flows.
TCorp’s largest fixed interest management client remains SICorp’s Treasury Managed Fund (TMF), which is the NSW Government’s self-insurance pool, providing insurance for all general government budget-dependent agencies and those non-budget-dependent agencies that have chosen to use its services. The TMF holds a diversified combination of financial assets to offset its insurance liabilities. TMF fixed interest investments directly managed by TCorp totalled $1.5 billion at year end, and a further $2.5 billion of investments was held in the Hour-Glass Investment Facilities.
Other major agencies whose portfolios have been managed by TCorp for a number of years include the Public Trustee, the Office of Fair Trading and NSW Lotteries.
In June 2008, TCorp began directly managing cash and long term bond investments for the Lifetime Care and Support Authority (funds had previously been accumulating in the Hour-Glass facilities). The authority’s funds are expected to increase significantly in future years.
Despite an adjustment of TMF funds volume from the internally managed bond portfolio to the Hour-Glass facilities, the total volume of investment funds managed internally by TCorp rose slightly from $4.9 billion at 30 June 2007 to $5.2 billion at 30 June 2008.
TCorp adopts a conservative approach to credit risk for managed portfolios, which is consistent with the risk profile of client mandates. Thus, TCorp has never invested in highly structured instruments such as CDOs which fell sharply in value in the recent credit crisis.
TCorp’s ability to add value for clients arises from its flexibility to make judgments about portfolio construction, the timing of investments and security selection. Over the year, investment returns on managed portfolios were close to targeted benchmarks, and consistent with outperforming the broader universe of cash and fixed income fund managers.