Aware Super dashboard not flashing red just yet

Aware Super chief investment officer Simon Warner said the $200 billion super fund will only reposition its portfolio if it sees a higher probability of some of the worst-case scenarios playing out in the Middle East conflict.

Speaking at the Bloomberg Forum for Investment Managers event in Sydney, Warner said as a long-term asset owner time horizon and breadth of the portfolio has worked in Aware Super's favour.

"I'll confess I'm quite surprised that the breadth has worked quite so well," he said.

"We've done nothing, we might do things, but we're going to have to try to see a higher probability of some of these scenarios panning out before we want to move."

He said Aware Super is tracking three channels in which the conflict could translate into changes in the capital market.

The first one he notes is stagflation.

"We don't have a very rich data set in terms of our stress tests. How do you scenario test that?" he questioned.

"How do you create a dashboard of indicators, hopefully leading indicators, alternative data sets, financial market data sets, that you think can inform that scenario to try to give you an early warning indicator?"

Other signs Warner is monitoring include a massive loss in one sector of the market that could cascade through the system, as well as a traditional trading partner shocks.

"We've got forward-looking dashboards...and they flash green or orange at the moment, but it could change at any moment," he said.

"Most of our tactical conversations are around ensuring the portfolio has resilience in both a return and a liquidity point of view, in order to be proactive in the event of stress."

Warner said the investment teams spends time to ensure it can be a buyer or provide liquidity to pockets of the market where it might dry up.

"But proactively selling out risk, I'm not sure we can time it," he said.

In terms of managing complexity in portfolios, Warner said the one principle the super fund follows is being clear on the risk premium and the idiosyncratic risk, which he said is natural for those working in the superannuation industry.

"It's not natural, actually, in many parts of private markets. Still there is a habit to confuse the two either inadvertently or deliberately."

Warner said Aware Super is being very targeted in where it delivers complexity and "it should be able to deliver an idiosyncratic source of risk and an idiosyncratic source of return, but we can't access in a simpler and cheaper way."