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.
Super gets a housing win, but the devil is in the detail
Treasurer Jim Chalmers’ plan for his first budget was to not make a big statement, economic or otherwise. Tuesday’s effort was supposed to be bread and butter stuff, and large parts of it were just that. But Chalmers kept one policy surprise fairly close to his chest, bucking the time honoured ritual of raving about it to select media days or weeks out from Budget Night: a new accord between the government and private investors to boost housing supply in Australia.
“The ambition of this accord is big and it’s bold – an aspiration to build one million new, well located homes over five years from 2024,” Chalmers said. “Most of this supply needs to come from the market, not the government. But there’s a role for government, and we intend to play a leading role – by coordinating and kick-starting the investment we know needs to happen.”
“Institutional investors, including superannuation funds, have endorsed the accord and will work with us to leverage more investment that delivers for their investors’ and members’ interests, and for the national interest.”
Chalmers committed another $350 million in additional funding for 10,000 new affordable homes on top of the government’s existing commitments. But the accord – which appears to have been struck at the 11th hour – has been criticised for a lack of detail. Still, some in the superannuation industry have welcomed that lack of detail. It’s a good thing the industry hasn’t received “chapter and verse”, says one independent policy expert, as it means that the government will be taking a more collaborative approach to the accord rather than trying to rigidly define a “wonderful idea that might not be practical”.
If it turns out there are issues with the investment thesis then they need to be worked out. Treasury doesn’t know how to make this work; institutional investors do. Chalmers, speaking at Labor’s budget night dinner, made it a point that the government was open to collaboration, feedback and ideas.
Some expect that investments will be similar to a joint program between ART, QIC, the Queensland Government and affordable housing provider Brisbane Housing Company, which saw ART invest $150 million for subordinated debt tranches with QIC as investment manager in a deal to deliver 1200 homes. States are expected to provide land. Funds might also pursue direct affordable housing investments.
This is where that lack of detail becomes very important, particularly around the interplay of those asset classes/investment strategies with their respective Your Future Your Super (YFYS) benchmarks. The main YFYS property benchmark doesn’t have much in the way of affordable housing investments, potentially introducing an unhealthy amount of tracking error. Conversely, debt funding for affordable housing would give funds a reasonable chance of killing the fixed interest benchmark (mostly government bonds) “19 periods out of 20”. Still, there could be a downturn in housing markets and mortgage defaults, putting funds at risk of failing the test.
But a big idea lacking in detail is probably better than no idea at all, and the industry is hopeful that the government will take the same good faith, collaborative approach to its affordable housing plan as it has (so far) with the YFYS review.
