The Interview – Susan Buckley, QIC: “The ability to explain investment strategies clearly and regularly is crucial”
QIC Global Fixed Interest, part of the investment business originally set up by Australia’s Queensland state government to manage its long-term liabilities and pension obligations, saw its assets under management grow from around USD23bn to USD35bn between mid-2007 and the end of last year. According to managing director Susan Buckley, the key competitive advantage of the business is the strength and quality of its investment research and process.
GFM: What is the background to your company and funds?
SB: QIC is a government-owned corporation formed by the Queensland state government with the original purpose of managing both the long-term liabilities of the state and the pension obligations of the state government.
The structure and size of QIC has changed remarkably since then, with funds under management growing to AUD65bn and our client base increasing significantly to include both public sector and private clients. QIC has a boutique operating model that facilitates further growth in the Australian market and the expansion of our global presence, with particular focus on Asia and Europe.
QIC Global Fixed Interest, which I run, operates as a stand-alone boutique. It has also grown dramatically in the past eight years due to a combination of a disciplined and rigorous research-based investment process and a focus on innovation and client engagement. The Global Fixed Interest business manages approximately USD35bn in exposures across traditional fixed interest as well as long/short absolute return.
The QIC Global Fixed Interest Alpha Fund was launched in Australia in July 2005. Unconstrained by benchmarks and targeting an absolute return, the fund is a portfolio of the best ideas of the Global Fixed Interest business, based on fundamental macroeconomic research and bottom-up micro credit research. This enables outright long or short positions to be taken across a very broad fixed-interest spectrum.
The ability to take scaled positions has allowed the fund to perform very strongly regardless of market direction, with the fund delivering an annual return exceeding 13 per cent since launch. To expand the investor base globally, a US dollar fund was established in May last year that replicates the strategies of the very successful Australian dollar fund and has attracted USD115m in capital.
GFM: What is the structure of your funds?
SB: QIC Global Funds is an Irish- domiciled umbrella unit trust authorised by the Irish Financial Services Regulatory Authority. QIC is the promoter, investment manager and distributor having been appointed by the manager, Carne Global Fund Services, whose principal business is the provision of fund management services to collective investment schemes.
The assets of each sub-fund are invested separately as set out in the supplement to the prospectus. One of the sub-funds of QIC Global Funds is the QIC GFI Alpha Fund, which was launched in May 2009.
GFM: Who are your key service providers?
SB: The fund’s trustee is State Street Custodial Services (Ireland) and its administrator is State Street Fund Services (Ireland). The legal adviser in Ireland is Dillon Eustace, the auditor is KPMG Chartered Accountants and the tax adviser is PricewaterhouseCoopers.
GFM: Have there been any recent changes to the management team?
SB: Last July, Rob Jewell, who was head of the Global Fixed Interest global macro team and reported directly to me, left QIC, since when I have led the team in addition to maintaining overall responsibility for management of the QIC Global Alpha Fund. Max Bulloch, a former partner at Cheyne Capital, joined the credit team as a senior portfolio manager in September. At the same time Andrew Ticehurst, former proprietary trader at NAB and head of fixed income at Suncorp, joined the macro team as a senior portfolio manager.
GFM: How and where do you distribute the funds? What is the profile of your current and targeted client base?
SB: QIC Global Fixed Interest’s current client base consists of Australian institutional investors. While Australia is a large market for institutional investment, we are seeking to diversify our business by actively seeking to engage with clients in Asia and Europe. The fund is also available to US investors. The QIC GFI Alpha Fund (USD) has attracted investment from an Australian-based institution and pension fund, with the intention of attracting clients in Europe and Asia.
GFM: What has been the impact of the recent global financial crisis and economic downturn on your business?
SB: While not discounting the challenges presented by the crisis, the QIC Global Fixed Interest team has emerged stronger from the crisis. Throughout the crisis we have maintained liquidity in our funds and worked closely with our clients to provide a clear understanding of the market and our positioning. Being a provider of liquidity meant we did suffer some redemptions from funds that had performed extremely well, but our strong performance and engagement with clients has left our business in a robust position as markets and investors recover.
Since mid-2007 the assets managed by the Global Fixed Interest business have risen from some USD23bn to USD35bn. The team has increased in size by about 30 per cent, reflecting the growth in our client base.
As an investment manager of long and long/short global fixed-interest products, the environment has changed significantly. We believe investors will value demonstrable performance in difficult environments, transparency and alignment of fee structures. As through the crisis, the Global Fixed Interest team will continue to apply a proactive approach to working with investors and seek to provide investment strategies that deliver. This approach has provided the business with a measure of stability, and has allowed us to grow our business through the crisis.
GFM: What is your investment process?
SB: QIC’s Global Fixed Interest investment philosophy is predicated on the belief that fundamental factors drive fixed-interest markets over medium- to longer-term timeframes. Over shorter timeframes other influences cause markets to deviate from a fundamental ‘fair value’. When this occurs, the opportunity exists to take scaled positions within fixed-interest portfolios.
The next tenet of our philosophy is to construct diversified portfolios with strategies across the broadest possible global interest rate and credit market opportunity set. We acknowledge that opportunity sets will vary dramatically through the cycle and active interest rate and credit decisions are not expected to equally contribute in any short-term period.
QIC’s recommended approach to fixed interest is to give investment managers with the appropriate skills broad mandates across credit and interest rate markets that enable active decision-making within and across sectors.
Research is the cornerstone of the investment process. Our research-based scorecards pull together this research in a transparent framework that measures the ‘strength of our view’, based on valuation and transitory influences, which underpin active positioning across portfolios.
The Global Fixed Interest Alpha Fund allows clients to scale their active return targets by purchasing a certain number of units in the fund. It targets an absolute return of 12 per cent (after fees) with a risk of approximately 10 per cent by exploiting a broad set of fixed interest-related sources of return.
GFM: How do you generate ideas for your funds?
SB: The Global Fixed Interest team has a rigorous, repeatable and disciplined process for identifying alpha opportunities and whole of fund investment management. The team applies a focused, independent and proprietary research process reflected through a scorecard approach. Fundamentals-based research includes macro forecasting on measures such as GDP and inflation across G10 countries, macro credit industry research and bottom-up due diligence on every credit we invest in. Analysis is enhanced through consultation with leading strategists and by research of economic and political events.
GFM: What is your approach to managing risk?
SB: We have a strong focus on risk management and have invested significantly in the best risk and portfolio management systems. GFI uses the BlackRock Solutions Aladdin outsourced solution, which taps into the risk management and quantitative skills of a global systems provider. Portfolio risk is measured through a hierarchy of layers and broken down on a factor basis as well as by strategy, such as country spreads, micro credit, long/short and volatility strategies.
Risk management and portfolio construction is the fourth step of the investment process. We have weekly meetings attended by the senior management group and the portfolio managers to discuss formally all portfolio construction and risk management issues across the portfolios. Individual portfolio managers monitor risks on a daily basis in line with the portfolio recommendations.
In terms of managing investment risk, Global Fixed Interest follows a layered approach. At the top level, risk management covers tracking error, VaR, duration, credit spread duration, active running yield and yield curve.
At the next level, we monitor deviations from benchmark at the sector level (government versus credit, inflation versus nominal), then the credit industry level (such as financials versus industrials), and then down to the individual issuer and security level. At the security level, default and migration risk are paramount.
Critical to the investment risk management process, portfolio managers conduct regular stress, scenario-testing and profit and loss horizon analysis to be best prepared for volatile market conditions. Portfolios are monitored daily to ensure adherence with compliance limits reflected in client mandates.
GFM: How has your recent performance compared with your expectations and track record?
SB: Recent performance in our -based fund has been particularly strong. The one-year gross return was above 17 per cent in 2009, and the average annual return has exceeded 13 per cent. We currently manage the recently-launched US dollar product with approximately 1.5 times the risk of the Australian dollar vehicle.
GFM: What opportunities are you looking at right now?
SB: The unprecedented volatility and turbulence of the past two years saw global central banks lower official cash rates to emergency settings alongside significant fiscal stimulus, the size of which has never been previously experienced. Investors should not underestimate the impact of this excess liquidity and accommodative policy settings in global markets.
Moreover, the potential for an environment of rising inflation could have significant impact on asset values. We believe that these risks should not be discounted, given the significant impacts attached to exit strategy policy mistakes. Investment managers that specialise in inflation protection can offer clients the ability to protect their portfolios in an environment of potentially rising inflation and interest rates.
We believe significant opportunities continue to exist in the credit sector. Security selection will be tantamount as the year progresses, and the ability for investment managers to analyse issues based on underlying fundamentals will be key. The ability to access selected opportunities in the loan market will continue to provide investors with strong risk-adjusted returns.
GFM: What events do you expect to see in your sector in the coming year?
SB: As global economies enter a phase of rebuilding and recovery, it is anticipated that global cash rates will be lifted from current emergency levels, as they have in Australia. Economic activity is anticipated to recover strongly in countries such as the US and UK, following immense government support. Government debt burdens will be a theme that will closely monitored, following recent downgrades of sovereign ratings. The ability for governments to repay their increased obligations will come under scrutiny from investors.
GFM: How will these developments affect your own portfolio?
SB: We continue to believe that the US and UK are well positioned to recover from the crisis. The scorecard process is signalling strongly that the front ends of global yield curves in the UK and US are expensive. The fund’s ability to take directional positions in the event of sovereign ratings downgrades will allow investors to be protected in any such event. We continue to monitor global inflation outlooks. With the ability to access capital-efficient inflation protection, the portfolio is well positioned should policy mistakes ensue.
In credit, while the beta rally in credit spreads might be 80 per cent of the way through, we see ahead an environment of heightened idiosyncratic risk at country, industry and individual levels that creates a rich opportunity set to add value. For example, our research indicates value in being long a basket of financials versus more expensive industrials.
GFM: How do you assess investors’ current expectations?
SB: Investors have higher expectations of the transparency and liquidity of investment strategies. The ability to explain investment strategies clearly and regularly is crucial. Our strategy-based performance attribution process, which cumulates daily returns from each active strategy, underpins the transparency with which we provide our clients.
GFM: What differentiates you from other managers in your sector?
SB: We offer a combination of traditional fund manager rigour – robust risk and performance management and governance structures – with the greater flexibility of a hedge fund business. Our key competitive advantage is the strength and quality of our investment research and process.
Our research-based scorecards pulling together the team’s research into a transparent framework and measuring our strength of views is unique. Combined with the ability to generate alpha for the broadest possible fixed interest opportunity set, this underpins our best ideas. The capacity to understand and trade both rates and credit markets has ensured that we performed strongly through the crisis.
GFM: How do you view the environment for fundraising over the coming 12 months?
SB: We consider that the environment for fundraising has improved significantly compared with that experienced in the past two years.
GFM: Are you considering any mergers or acquisitions in the foreseeable future?
SB: We are not considering any mergers or acquisitions. QIC Global Fixed Interest has a long history of driving growth organically that we expect to continue, for instance with our current broadened focus on Asian bond markets.
GFM: Do you have any firm plans for further product launches?
SB: While we do not have plans to launch further products in the foreseeable future, we would consider the creation of new unit currency classes for the QIC GFI Alpha Fund should investors demand this. We continue to manage a range of alpha and beta portfolios for larger clients across cash, interest rates, credit and inflation.
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