Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Big super’s ‘once in a lifetime opportunity’ to build the future
“There’s one point that’s never made when we talk about unlisted assets,” Sicilia said on Tuesday (August 23). “The point that is made is one of diversification benefits – different volatility, different risk/return profiles. But there’s another benefit that’s hardly ever mentioned: unlisted assets are pretty important in constructing long-term investment portfolios, partly because they’re illiquid, and partly because they’re infrequently priced.”
Those two features also make them somewhat controversial investments, and Hostplus has often been on the wrong end of that controversy. The fund was heavily criticised at the time of the early super release scheme in the (ultimately incorrect) belief that it would be unable to meet redemptions. But Sicilia believes that illiquidity and infrequent pricing are “outstanding attributes if they… stop you from making bad short-term decisions.”
“You can’t get out of an airport if the equity market falls 30 per cent, so you don’t… That’s a good characteristic. A contrarian nature is forced upon unlisted asset investors, which is a good thing. Liquidity is important but it’s overrated in the super system. You shouldn’t need as much liquidity as we all provision for.”
Sicilia acknowledged the lack of transparency around unlisted asset valuations – a lack transparency that has seen Hostplus’ robust 2021-22 return scrutinised by the press and other commentators, who suggest that the super fund is essentially “marking its own homework” – but warned against making the information freely available out of concern that some more informed members would be able to trade on it.
And he cast doubt on suggestions that the practices underpinning unlisted asset valuations are somehow shoddy, noting that the vast majority of the world’s assets are unlisted – that there are probably more residential homes in Sydney alone than there are securities on all the indices in the world – and people still manage to put a price on them.
“It’s an absurdity,” Sicilia said. “We value unlisted assets all the time using independent expert valuations that are then audited. If there are vested interests out there who don’t happen to like that, that’s not my problem. I’m answerable to my board, my members, and to my regulator.”
Sicilia made the remarks at an event to mark the launch of an Industry Super Australia (ISA) report, “Super Charging our Future”, which explores the role that industry funds have played in developing the Australian economy and backstopping it during times of crisis, including the GFC and the early days of Covid.
It essentially constitutes a spirited defence of industry fund investments in unlisted assets (which will, according to the report, provide the average member an additional $137,000 in retirement); a blueprint for the nation-building projects that Treasurer Jim Chalmers verbally greenlit this week; and a message that ISA deputy CEO Matthew Linden says “needs to be reinforced every day.”
“Certainly our hope is that if the nature of these investments are better understood, and we can demonstrate how businesses – whether small, medium or large – are capitalised, with jobs created and essential infrastructure built, there may be less appetite to make disruptive policy change that places all of this at risk,” Linden said.
Sicilia believes that the new Albanese Government presents a “once in a lifetime opportunity” to leverage the trillions of dollars in the superannuation system to reorient the Australian economy, noting that as universal owners, super funds are already having an impact on the economy even without explicitly targeting their investments.
“You can’t separate return streams from the other benefits that come with those investments,” Sicilia said. “Every time you put a dollar into a private company, you generate employment… Every time you buy an infrastructure asset or a real estate asset, you contribute to nation building. You can’t divorce the return stream from the social good or the social bad it does. The two go hand-in-hand.”
And Sicilia holds that industry funds should also be helping to commercialise early stage venture capital with an eye to keeping innovation in Australia.
“It’s about returns, returns, returns,” Sicilia said. “But if you don’t support domestic companies, what you’re saying to them is go offshore and get capital. Start that company somewhere else. Employ people in another country. Contribute to their future economy, not ours. They’re the secondary benefits, if you like.”
