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State Super rejigs defensives

State Super has mandated two managers, as it allocates to Australian investment grade corporate credit and global investment grade structured credit.

State Super manages about $42 billion in assets, of which about 20% is in defined contribution schemes while 80% is in defined benefit schemes.

The defined contribution portfolio of about $8 billion, forgoes defining allocation by asset buckets in favour of defining them by their risk and return profiles.

State Super's liquid defensives portfolios (most comparable to fixed income allocations) has added a new 'income sector' which will target returns of 2% above cash.

The 'income sector' allocation comes as State Super moves some cash into Australian investment grade corporate credit and global investment grade structured credit. It appointed Pendal's Dynamic Income Fund and Pure Alpha Fixed Income Fund for the Australian investment grade corporate credit, and Bentham Asset Management as the manager for the latter.

The new allocations will flow on to State Super's multi-asset DC options.

State Super chief executive John Livanas told Financial Standard the fund made the changes, as its member base ages and cash makes little contribution to the returns. It also did not want to add duration risk or compromise on liquidity, he said.

"Many of us would remember back in the day when we thought cash was not a good investment, [and] many funds turned to all sorts of instruments inside cash allocations," Livanas said, referring to the Global Financial Crisis.

"We are in a similar environment now where cash is not presenting itself with types of returns [it used to]. Unlike other funds we need to have liquidity, [we have a] very significant negative cashflow."

Livanas said the fund did not want to classify the two investments as "cash type" products.

State Super chief investment officer Charles Wu said the parameters he considered while making the allocations were: an acceptable level of returns, a distribution component and liquidity.

"March 2020 was a really good example. Structured products - even though they are AAA rated were hard to liquidate at a reasonable price. It doesn't mean we rule them out, we just allocate [appropriately]," Wu said.

Wu said the fund's stress testing for the new allocations found it will be able to liquidate 85% of them within five days under a stressed scenario.

Read more: State SuperCharles WuJohn Livanas