Inside Colonial First State's fund manager selection overhaul

Colonial First State (CFS) managed the two best-performing MySuper options over the year to March 31. The wealth management and superannuation provider's head of equities Ben Lam explains the “art and science” behind its recently evolved manager selection process.

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CFS, which manages all equity exposures externally, assessed what it believed is the best way to manage portfolio risk around three years ago - about the same time its chief investment officer Jonathan Armitage joined and roughly a year after one of its funds failed the inaugural Your Future, Your Super performance test.

Lam told Financial Standard that the team identified “a lot of unintended risk” from concentrated, very benchmark-agnostic approaches, prompting what he described as a “clipping of the wings.”

CFS previously had managers who invested in narrow parts of the market and didn't use the full opportunity set available, he said.

Now, it has more managers who assess the market in its totality, at least from a risk management perspective, and are more open to investing in all types of stocks.

For example, he cited a deep value manager, previously in the portfolio, whose performance profile was one where “when they perform well, they perform extremely well,” however, its returns were “very sporadic” and extremely dependent on market conditions.

“They might have one in five years or one in seven years of outperformance,” he said.

“All their outperformance came from a single year. To us that wasn't a desirable alignment to our own objectives of delivering consistent performance over rolling three-year periods.”

He said that many of CFS's current managers have “a few more degrees of freedom” than those it's used in the past, whose fishing pond was in very narrow segments of the market, whether on the value or growth side.

“The ability of our managers to fish across the market spectrum gives additional flexibility,” he said.

While Lam doesn't believe there's a perfect model for assessing managers, he explained CFS has always considered a range of factors that, when listed, seem like common sense.

But CFS now assesses these factors within a framework to ensure a level of repeatability.