During the year, TCorp continued to develop its asset management services, which comprise two components: the internally managed cash and bond portfolios, utilising TCorp’s comparative advantage in managing fixed interest risk; and the investment facilities, where TCorp outsources the management of funds and actsas manager of managers.
Strong growth of Hour-Glass Investment Facilities
TCorp’s Hour-Glass Investment Facility activities recorded significant growth through the year, with funds under management increasing by $1.4 billion (net) to $11.9 billion at year end. The number of clients increased to 140.
Positive investment flows were recorded in the Cash Facility, the Medium Term Growth Facility and the Long Term Growth Facility as clients allocated additional funds to these strategies. Additional funds were also received from some Local Government councils.
Within the flagship Cash Facility, TCorp was appointed as a liquidity manager to take advantage of our expertise in high quality short dated securities as well as our ability to manage cash flows across public agencies.
Some large redemptions were undertaken during the year, with reallocation of funds to other activities. These transactions (mainly equity) were executed by TCorp in a manner which optimised investor returns.
During the year, a complete review of the Australian shares sector resulted in a number of manager changes as well as modification of existing manager allocations. This review also saw the introduction of a long/short manager.
TCorp also reallocated exposure from Australian Listed Property Trusts to Global Listed Property Trusts over this period. Globally, equity markets again were very strong, with Australian shares and listed property recording another year of excellent outright returns; indeed, the Australian market delivered the highest absolute return in almost 20 years. A five year commodity boom continued to drive the market, as did intense corporate activity, both in terms of mergers and acquisitions and private equity transactions.
A continued healthy outlook for the global economy, relatively low interest rates and high levels of liquidity underpinned continued consumer confidence. This, coupled with record profitability in corporate Australia, resulted in the best four year equity run in 20 years; however, this buoyant environment generated speculative-like returns in lower quality assets, with investors at times having scant regard to risk. TCorp’s Australian share managers performed solidly, even given their defensive characteristics and quality holdings. Not surprisingly, TCorp’s Australian share managers underperformed the benchmark over the one year period, but they are well placed to deliver strongly in any market rerating. This downside risk protection is an intentional outcome of product design. TCorp’s Australian shares sector performance over longer timeframes remains very strong.
International shares performed similarly, delivering strong absolute returns but underperforming against benchmark. This experience was similar to that of many active managers who underperformed the benchmark, largely as a consequence of activity at the speculative end of the market, with quality holdings not being rewarded. As with the Australian market, we expect to benefit significantly from any rerating of quality stocks.
TCorp’s Medium Term Growth Facility and Long Term Growth Facility, which cater to clients’ longer term investment horizons, benefited also from strong equity markets globally, achieving good absolute returns.
The specialist Alpha International Managers Trust (AIM) and Emerging Managers Trust (EMT) products delivered strong absolute returns, driven by the robust international and Australian equity markets. The EMT delivered slight underperformance against benchmark over the financial year but is ahead of benchmark on three year and since inception bases. In particular, the blending of managers with complementary styles added value against a backdrop of volatility, particularly during down months, and the EMT is very competitively placed against peers in terms of outright performance.
While the AIM delivered strong outright performance, it is slightly behind its benchmark hurdle on an after-fees basis over the financial year and since inception periods. With the Trust still in its early phase (less than three years) and with a five year return objective, this result is consistent with a short since inception time horizon and bull market conditions.
Internally managed cash and bond portfolios
As part of a pre-determined investment strategy, funds in the internally managed portfolios declined during the year from $10.8 billion to $5.1 billion, with the transfer of General Government Liability Management Fund (LMF) assets and withdrawal of capital from the Treasury Managed Fund (TMF). The decrease was partially offset by TCorp’s appointment as liquidity manager of the Cash Facility. As detailed in the NSW Budget, there was a large outflow from the asset management business as assets in the General Government LMF were transferred to SAS Trustee Corporation. NSW Treasury also withdrew overfunding in the TMF which had arisen largely from stronger than forecast investment returns. However, flowing from the review of the Cash Facility and classification of the Facility’s management into ‘passive enhanced’ and ‘active’ segments, TCorp was appointed as manager of the short term liquidity requirements of the Facility, given TCorp’s understanding of public sector cash-flows.
The largest fixed interest management client remains the TMF, the NSW Government’s self insurance pool, which provides insurance for all General Government budget dependent agencies and those non budget dependent agencies which have chosen to join TMF. The Fund holds financial assets to offset the insurance liabilities. Fixed income investments totalled $2.1 billion at year end, with a further $2.6 billion of investments in the Hour Glass Investment Facilities.
TCorp adopts a conservative approach to credit risk for managed portfolios, which is consistent with the risk profile of client mandates. TCorp’s ability to add value for clients arises from its flexibility to make judgements about portfolio construction, the timing of investments and security selection. Investment returns on managed portfolios were close to targeted benchmarks.