One on one with MLC Super: How is the fund navigating risk?

Super Review’s new one-on-one series aims to spotlight key investment insights from the superannuation sector.

This week, Steven Gamerov, head of diversified portfolios at MLC Asset Management, discusses where the fund is finding opportunities in a year of elevated volatility and slowing economic growth.   

Given the current market conditions, what strategies are you employing to manage risk in your portfolio?

The strong sharemarket performance over the financial year 2024 was driven by big gains from a handful of US technology companies, whose valuations were becoming a little stretched. This did alert us to the potential for a market correction.

Mindful of this, we had increased the defensive ballast in our MySuper portfolios by increasing the duration of our fixed income investments. The rise in interest rates over recent years has meant that fixed income assets have become more attractive sources of diversification and better able to play their traditional defensive role in portfolios.

Furthermore, the MLC MySuper portfolios’ significant deployment into alternative and unlisted assets – infrastructure, private equity, private credit, and other niche alternative assets – with their different risk and return characteristics, means that our portfolios are not simply tethered to equity risk and are able to benefit from more sources of risk and return.

In addition, with the guidance of our experienced internal derivatives team, we always monitor the potential to add protection strategies into our portfolios that are designed to cushion our members from the worst of potential future market falls.  We have successfully implemented these strategies in the past, including option protection on the US sharemarket during the worst of the market falls during the COVID-19 outbreak in early 2020.

Are there any significant changes or adjustments to your investment strategy that you plan to implement for the next year?

Our investment strategy is constantly being reviewed as part of our disciplined investment process and evolves and shifts in line with our assessment of market developments. Market volatility, of the like that has arisen over the past weeks, can present opportunities to acquire assets at more attractive valuations.

Our strategy is focused on both insulating the portfolio against the risks of a slowdown in economic growth or a derating of equity markets, while at the same time being alert to capitalising on opportunities that present in times of stress. We believe volatility is likely to continue to be elevated over the course of the next year, as economic growth decelerates and, as such, expect to be deploying actively into opportunities where risk is being well compensated.

What are the key opportunities or challenges you foresee in this new financial year?

Events like recent sharemarket ructions create opportunities for investors with genuinely long-term time horizons. For most super fund members, superannuation is a multi-year, even multi-decade commitment. Times of market volatility cause some market participants to sell good assets hurriedly and this can create buying opportunities for those with long-term time horizons.

We continue to see attractive opportunities across credit markets, particularly where these offer attractive yields coupled with strong structural and contractual protections and are supported by strong collateral.

Challenges include the potential for more bouts of market volatility. As recent events have revealed, some market participants are ‘tightly wound’ and can react abruptly to news. While inflation is moderating and central banks are expected to begin or continue cutting interest rates over the year, the risk of a re-acceleration in inflation down the track would be a significant challenge for markets.

We also see continued challenges for commercial property assets especially the office sector, as valuations adjust to higher capitalisation rates. We have been well positioned for this by being underweight in this sector and continue to focus on higher-quality assets.   

What initiatives are you pursuing to enhance member outcomes and ensure that your fund remains competitive?

We are proud to have provided our members in the MLC MySuper Growth portfolio with top-quartile performance for a number of years now. Our ongoing focus is on generating superior return outcomes for our members and building robust, well-diversified portfolios with multiple sources of returns.

As the largest provider of pensions outside of the government, we continue to look for ways to provide innovative solutions for retirement. We are focused on passing on the benefits of lower fees and costs to our members and are investing significantly in scaling help, guidance, and advice tools and services to help our members make better decisions.

What is your thought process when it comes to macro considerations like inflation, interest changes, and geopolitics? What are other key trends on the fund's radar?

Macro-economic factors like growth, inflation, and monetary policy are all key considerations in our investment process together with an assessment of consumer and corporate health and how these factors are reflected in asset pricing.

In addition to these traditional macro considerations, the longer-term trends such as digitisation, decarbonisation, and demographic shifts are also on our radar as presenting key opportunities and risks to portfolios.