For the year ended 30 June, 2021, the Victorian Funds Management Corporation (VFMC) reported a one-year-return of 16.9% and ten-year annualized return of 9.4%. The state investor manages AUD $74.5 billion (US$ 56 billion) on behalf of 31 public authorities of the state of Victoria. Seven months ago, CEO Lisa Gray retired and passed the baton to Kate Galvin, an executive with extensive asset management, banking, wealth management, markets, and legal expertise that would enable VFMC to continue with its evolution and delivery of market leading long-term returns. We had the pleasure of chatting with Ms. Galvin about her vision for the future of the organization.
[GSWF] Analysts tend to put all Australian investors into the same bucket, but the reality is that they are all very different. How do you define yourselves at VFMC?
[VFMC] Our main purpose at VFMC is improving the future prosperity of Victoria. We are established as a public authority but are required to maintain a commercial approach in a competitive global asset management industry in order to meet our clients’ objectives.
[GSWF] Your foundation clients make up 90%+ of your FUM. How do you ensure a fair representation for all your clients?
[VFMC] The fact that we have four large clients benefits our centralization and scale, and it plays to their advantage from a cost and access to market perspective. We have a talented team looking after all our clients and ensuring that our focus is aligned to their needs.
[GSWF] How do you expect VFMC's portfolio mix to change over the next five years?
[VFMC] This is a very exciting time to be involved in markets. We have just completed the review of the strategic asset allocations for each of our foundation clients, which takes place every three years. For this cycle, we see fiscal and monetary policy settings as extremely unusual. Equity valuations are stretched against a backdrop of rising inflation, so we have adopted a valuation-aware approach to setting our forward-looking capital market assumptions, whereby the next 10 years are a pathway back to equilibrium and the following 10 years are then assumed to be in equilibrium. We support this with stress testing across a range of scenarios. The key change is that we expect to moderately increase our strategic asset allocations across private markets.
[GSWF] How does VFMC build resilience against exogenous shocks like geopolitical uncertainty or Covid 19?
[VFMC] It is always hard to predict exogenous shocks, but we draw on our key levers that enable us to respond in an appropriate manner:
Strategic asset allocation, which provides portfolio diversification within our risk parameters;
Cycle-aware asset allocation, which allows episodic adjustments with a 3-5 year timeframe to improve risk-adjusted returns; and
Dynamic asset allocation, which is designed to identify short term opportunities or risks. For example, in the current environment, we are looking at how current persistent inflation and geopolitical developments may impact global growth and markets.
[GSWF] You are putting a lot of effort around ESG, including UNPRI and net zero. Is ESG integrated across the portfolio?
[VFMC] It is integrated indeed. During my first five months, I attended our investment committee meetings, where it was apparent that all asset classes had strong ESG representation and integration into their investment processes. Additionally, we have introduced an ESG working group to discuss and identify emerging ESG trends, risks and opportunities, and ensure we are fully integrated across the portfolio. We believe ESG is not only the right thing to do, but also can provide profitable opportunities in the long term. We are committed to our role as active stewards of capital and have pledged to achieve net zero portfolio emissions by 2050.
[GSWF] Only 1 in 10 SOIs have a female CEO, and 1 in 20 SOIs have a female CIO. What do you think of these numbers?
[VFMC] I am not surprised about the numbers, but I am very passionate about enhancing them. A diverse group of people makes a better investor and a better place to work. At VFMC, 50% of our total team, 36% of our investment team, 83% of our executives and 56% of our board members are women. It is about providing good opportunities, attracting the best talent in the market, and retaining them.
[GSWF] How do you see VFMC evolving under your leadership in the next five to ten years?
[VFMC] If we were to speak again in 3-years’ time, there are three key areas I would have liked us to evolve:
We are creating a center of excellence for talent in Melbourne;
We have continued to evolve our analytical tools; and
We have accelerated work across our ESG roadmap.