QSuper's Distinctive Approach to Investing
When Charles Woodhouse, the distinguished geologist who discovered a new mineral in 1937 which he named “woodhouseite,” scientific journals described it as “hard to classify.” His grandson and namesake, the CIO of QSuper, the AUD$95 billion Australian superannuation fund, is a lot easier to classify: Charles Woodhouse is a rare American in the higher reaches of the Australian superannuation world who has spent the last decade shaping a distinct identity for one of the largest Australian super funds.
QSuper has been managing the retirement savings for Queensland public sector employees for more than a century. It was opened to the families of existing members in 2011, and then to the public in 2017. (In the unique Australian system, every worker must contribute to a superannuation scheme, but they can choose which scheme.)
Woodhouse officially became CIO in September 2019, after 10 years at the fund, during which he served two six-month stints as acting CIO for his mentor, Brad Holzberger. The two had worked together closely since Holzberger brought Woodhouse along with him when he moved from QIC to QSuper.
Together the team revamped the fund’s investment strategy after the global financial crisis, slashing equities and building up the fund’s exposure to long-duration bonds. The focus was on absolute return – beating the consumer price index – rather than just trying to outperform the other super funds.
Woodhouse says, “The GFC (global financial crisis) was a real, watershed moment for us. We were pursuing a very traditional investment strategy: We would have had about 60% of the portfolio in listed shares, as most of our peers did, and on a pure relative basis we performed very well compared to our peers.” But he says, “Our members experienced that volatility, and we saw a lot of members switching to cash and locking in losses and then not participating in the recovery.”
As a result, “we changed that investment strategy, and reduced the equity exposure by about half – down to about 30%. We allocated an increased portion of the fund to long duration bonds – that went up to between 25% and 30%. And then we also allocated to unlisted – infrastructure, real estate, and private equity programs. And within those allocations, we looked for assets that would generate strong cash flows irrespective of most market conditions. In doing that we really tried to create a smoother ride and take some of the downside off in down markets.”
That approach continues. Woodhouse says, “I think if you look at our asset allocation and the way we allocate, it would stand out relative to our peers. “It looks very different, and it’s different by design. We were not afraid as a fund to step away from our peers, knowing that we would have very different outcomes than our peers in certain years.” He adds, “We give away a little bit when equity markets run very strongly, but we’re not so reliant on one asset class to achieve our investment objectives, and that has served us very well. And I think served our members very well. There’s now almost a 10-year record where you can really trace that reduced volatility without sacrificing expected return.”
But at the same time, he says, “Our members need us to generate returns over the medium to long term because they draw on these balances to live on, so most of them cannot afford for us to target lower returns.” That’s led QSuper “to try to allocate to things that are diversifying to that liquid listed equity exposure, but still in their own right have the ability to generate strong returns.” That approach seems to have worked out rather well: QSuper has regularly been among the top 10 super funds for 10-year returns.
QSuper also has a distinctive approach to outside managers. Its AUD$95 billion is in the hands of only 23 external managers. “That’s a very low number relative to most of our peers. What we’ve done is we’ve created very strong strategic partnerships. By definition, they are multibillion-dollar relationships with a single manager.” He says, “We have really been able to tap into some of the best talent globally, and we use that scale to get very attractive fee terms, which of course lessens one of the reasons why some people are internalizing those functions.” Woodhouse notes that the portfolio is fully global, and only three of the 23 managers are based in Australia.
One thing that is managed in-house is the derivatives portfolio. “It’s just operationally more efficient if what the investment strategy team can do is sit right next to the capital markets team so that we can act quickly,” he says, “and in these periods of volatility, that has really paid off very well. The intra-day volatility in some of these markets, like the U.S. listed equities market has been really substantial.” Woodhouse and his team also directly negotiated the purchase of an 11% stake in London’s Heathrow Airport.
As he looks back on his decade at QSuper, Woodhouse says, “The best thing I’ve done from an investment perspective was build out those private asset classes and those strategic partnerships. This has borne rich dividends for our membership and has been very profitable.” And what’s the worst thing? “About eight years ago, we invested in a venture capital fund, and we are always very cost focused, and we negotiated hard on fees, and we negotiated those fees to a point where it encouraged the manager to get money to work – it was not fees on commitment, it was fees on drawn capital. And they invested too quickly. We recognized that and stopped the program. But I always worry that we took an otherwise good manager and created an incentive for them to deviate from their process, and we learned. We’re always been focused on getting good value for money, but we’re also aware of where the managers needs are.”
Woodhouse has been busy in recent months developing the QSuper ESG (environment, social, governance) program. And thinking about the global markets. He notes that because the U.S. has such an immense internal market, investment managers have often been slow to think globally. Conversely, Australia has a small number of large funds in a small economy, and they have had to look beyond their shores for many years.
Woodhouse was born in a log cabin in America’s Pacific Northwest. “My dad was going to the University of Oregon, and we lived out in Coos Bay while he was working on his master’s degree. I actually was born in a log cabin, and I’ve got the photos to prove it.” He was raised in Santa Barbara, California, and went to university there. How did he get into finance? “I come from a family of scientists,” he says, adding, “My grandfather was a geologist. My father was an oceanographer, and much to his dismay, I was in my third year at the University of California and informed him I was going to take economics – which he was not thrilled about – he wanted me to follow in his footsteps into science. But I found economics fascinating. “
Woodhouse finished the course work for a Ph.D. in finance, but he went to work Stonebridge Capital Management in Los Angeles and spent the next decade there. So, how did he get to Australia? “The long and the short of it is I married an Australian. She was in Los Angeles for university. My parents had passed away in 1997 and 2000, and her family was down there, and she said, ‘You know you really should take a look at Australia.’ And we did that over a number of years, starting in 2000, and we not only loved the country – the feel of it, the people, the culture – but also recognized that the instructional investment market was growing substantially.”
Now based in Brisbane, Woodhouse and his wife have three children. For recreation he says, “I’m a very keen trout fisherman. There’s one lake called Lake George in the eastern Sierras of California that I’ve been fishing for 40 years, and that’s a keen pastime of mine.” Another one is sailing. He doesn’t get to do that often enough, he says, adding, “I’m pretty focused on my work at QSuper.”
In contrast to many U.S. managers who regard their end clients and beneficiaries as an abstraction, he notes, “There’s a level of responsibility that you feel toward the membership that is stronger here.” He explains, “The investment team speaks directly to our membership multiple times a year, whether it's at our annual investment update, or seminars or other forums.” They’ve stepped up the pace of these “during the COVID-19 crisis,” he adds. “It’s helpful not only to the members, but also very beneficial to the investments team because it constantly reminds us who we’re managing money for, and they are absolutely the kind of people that you want to give your best work to.” He explains, “They are the nurses, the teachers, the firemen and policemen – they’re the people that take care of you – and so, if we can take care of them and take care of their financial future and let them sleep at night because they’re not having the big ups and downs that others get, for us it absolutely makes waking up at two in the morning to work on some offshore investment opportunity almost an attractive proposition. You feel like you're doing good work.”
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