Home / Big fund CIOs have their say: ‘we’re OK, but not overly happy’

In a rapid-fire series of conference sessions organised by information provider Bloomberg in Sydney last week, a group of high-profile super fund investment executives had their say across a range of issues and trends. They are not as happy as you might think they should be.

The participants were: Mark Delaney, CIO of AustralianSuper; Brendan Casey, general manager of investments at REST; John Pearce, CIO of UniSuper; Damian Graham, CIO of First State Super, and; Brett Himbury, CEO of fiduciary fund-owned IFM Investors. Combined, they speak for more than $400 billion of Australian super fund member money.

The markets

The biggest risk of losing money in the future will be in the fixed income markets, according to Mark Delaney. He believes that, at some stage, people will move to an “income” theme, but we are not there quite yet, despite what you read in the investment trade press (like this newsletter). Politics was, now, more important than in the past with its influence on markets.

“We [AustralianSuper] have a bar-bell portfolio,” he said. “We are holding more cash and more equities.” There was an interesting divide between politics and market valuations, in the US, he said. The US market was the most expensive in the world, “but at some stage this will rotate from that to those, such as Europe, that are earlier in the cycle… But the world is not on one cycle anymore. The US is the first into it.” He said: “There used to be an old saying which was ‘follow the economics and ignore the politics’. I don’t think that’s necessarily the case going forward.”

Brett Himbury, whose IFM has a big exposure to global infrastructure investments, said that super funds were now taking bigger bets on both markets and securities. While every country had a home-country bias, he said, there was still a trend to globalization. “We’re still finding value in infrastructure but there is definitely a lot more money chasing fewer opportunities.”

Damian Graham, head of investments at First State Super, said: “We don’t think everything’s expensive and we are trying to build a core-plus strategy for the very the very long term,” says Brendan Casey, of REST. About half of REST’s members are under 30 years of age. Let’s face it, everyone has a child who is a member of REST.

“We’re looking to take advantage of the liquidity premium, investing in infrastructure, private equity and property,” he said.

Engagement

There is no doubt that ESG issues are starting to take on a far greater importance than in the past. Brett Himbury, of IFM, who oversees more infrastructure investments for Australian funds than anyone, says that a lot of the “community” does not like private ownership of infrastructure.

“But we are a different form of private capital,” he says. IFM, for instance, gets involved in the sustainability of its investments, including things such as workforce welfare and the holistic nature of every business enterprise… We coined the phrase ‘Pension Public Partners’.”

Damian Graham said that First State Super had an ongoing dialogue with companies, including the banks, in which the $60 billion fund was a big investor. “The detail of what has come out [of the Royal Commission] is probably a lot worse than people expected,” he said. “Certainly, the AGM season coming up is going to be interesting.”

The issues, though, of which we read on a daily basis thanks to the Royal Commission, tend to be about the advice piece of the investment value chain, according to John Pearce. He said that consolidating the regulators, which has been suggested, was probably not going to fix the underlying problems.

“We were just about to send the AMP board a message and they all left,” he joked. Four directors left as of last Friday, including the chair, to be replaced, controversially, with David Murray, a former chief executive of Commonwealth Bank.

The banking sector had been “disappointing”, according to Mark Delaney. There has been a lack of public confidence as a result of all the news around the banks’ behaviour with their customers over a long period. “We’re going to be shareholders in the banks for 30, 40 or 50 years. We are long-term investors. Yet, it seems to me the banks are too narrowly focused and they have set themselves up for a public backlash. They are focused on the short term. It would have been able to address this before the Royal Commission.”

Pierce said: “Has the Royal Commission uncovered anything of a systemic nature that we didn’t already know? I doubt it… We haven’t had our time in front of the Royal Commission yet, so we are probably a bit more tempered in our comments than we might otherwise be. No-one finishes up after a day there and says: ‘that went well.”

Investments

Trends in Australia, such as downward pressure on fees, are not unique to this country, according to Brett Himbury. He said that in the 18 countries in which IFM had investment clients, the trends were similar. In the northern hemisphere, funds tended to have a big exposure to fixed income strategies, with a sub-allocation to credit and other debt instruments. Elsewhere, in equities, there was a big focus on fees and “clearly a shift to efficient or smart beta.”

IFM is looking forward to a big uplift in demand for its infrastructure capabilities in the US, thanks to the stated intentions of the presidency of Donald Trump. “I’ve been to the US three times this year already and seven times last year,” he said. “When it opens up, there will be a monumental opportunity for global investors.”

On the other hand, the Australian Government’s plans were “disappointing” with respect to infrastructure investing. Most of the recent developments have been as a result of the NSW Government rather than Federal Government. For the Federal Government to get involved in $75 billion over the next 10 years was “not a lot”, Himbury said.

The next big market correction, according to Mark Delaney, would likely come from a situation where some investors try to use public market to hedge out a certain risk. “But the odds are that we won’t know what is happening before it happens,” he said.

Insourcing

UniSuper, a $65 billion fund with more than 400,000 members, mostly from the tertiary education sector, has about 60 per cent of its assets managed internally. John Pearce said that the fund always had a big component of its asset allocation offshore. “We don’t invest in GDP [countries], we invest in companies,” he said.

Damian Graham said that superannuation tended to have a lot of areas which could “leak costs” and one of those areas was in changing mangers or a strategy change. First State, he said, was looking for high-conviction managers, over the past two-three years, with greater active shares in their equities portfolios. “We’re trying to manage the costs of us doing business,” he said.

– G.B.