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.
Funds back affordable housing, ‘critical’ HAFF change
In a hearing of the senate economics legislation committee on the recently-announced Housing Australia Future Fund (HAFF), senator Andrew Bragg quizzed representatives from Industry Super Australia (ISA) and HESTA on whether, given the new Housing Accord and the apparent willingness of funds to invest in affordable housing as an asset class, members should be permitted to draw down their own super for a first home.
But ISA deputy CEO Matthew Linden (pictured) said there were already mechanisms that rely upon additional contributions that members can make, including the Home Super Saver Scheme, where members can “leverage” some of the benefits of superannuation to accrue additional savings to help them with a deposit.
“It’s a different thing again if you have a proposal, which I think would infringe on the preservation principles, for significant withdrawals from superannuation for housing,” Linden said on Wednesday (March 15). “There would be a very long list of economists who would outline some of the inherent problems with that. In terms of whether or not it would actually address housing affordability it’s more likely to be inflationary.”
“It may not add to the housing supply, which is a key objective with the government’s program here. It could have quite significant and profound impacts in terms of the way in which funds invest, because they invest for the long-term. They construct diversified portfolios with a long-term investment horizon.”
The $10 billion HAFF, announced last year as part of a raft of measures to address housing affordability in Australia, is intended to address the shortfall in affordable housing by providing funding through investment returns for 30,000 new dwellings over five years. Cbus has already committed $500 million over five years to “support the construction of new social and affordable homes” through the HAFF. But Bragg questioned why members weren’t allowed to draw down their own super when large funds could “own houses and be subsidised by the taxpayer”.
“I think what we’re discussing here is the potential for funds to allocate part of their portfolio, in terms of the wholesale investment, to a particular type of social and affordable housing,” Linden said. “As I mentioned earlier, one key feature of that is expanding housing supply, which is an important part of potentially addressing this issue.”
“The nature of these holdings mean that it would likely be a small part of an individual’s own portfolio, so it’s important that there’s diversification in members’ savings. At a fund level, it takes on it takes on quite a different complexion to the idea that people reallocate their retirement savings for purchasing a home.”
Linden also called for the annual cap on disbursements from the HAFF (currently $500 million) to be indexed, arguing that the current lack of indexation “really does potentially diminish the amount of capital that can be raised”.
“That is really quite critical,” Linden said. “The whole premise on which the HAFF sits is that the fund will generate recurrent investment returns, which are made available. In order to build these dwellings there’s going to be a need to raise the capital upfront. In order for investors to provide that capital upfront, they need certainty around what those future cash flows look like. There’s some basic maths, really, that underlies what the estimated capital requirements might be and what the future cash flows are.”
In the same session, HESTA chief risk and compliance officer Andrew Major said that the fund was supportive of the legislation for the HAFF and that by “seeking to address supply-side challenges we can undertake investment innovation to deliver appropriate investment returns as well as improve affordability and provide greater housing choices for low- to middle-income-earning Australians.”
“We think that the HAFF really does give us an opportunity to bring private and public sector capital together to catalyse the supply of social, affordable and other dwellings,” Major said. “That will then support our members as they go through their journeys.”
“The Nightingale Housing opportunity… was a clear example of developing an affordable project in inner Melbourne which was close to hospitals. It was clearly aimed at key contribution workers like our members and other emergency services workers. That was one of the key attractions to us, alongside the return and impact element of making that investment.
Jeffrey Brunton, head of portfolio management at HESTA, said that affordable housing was “a really complex area of the investment landscape” and that the pressure was on funds to deliver not only a “great investment return” but a great housing solution. HESTA itself has begun with a built-to-rent (BTR) model because of the long-tenured relationship with the tenants, but will “invest with other models as they evolve and come to the table”.
“The whole investment process, within a super fund like HESTA and others around Australia, will be thinking about long-run competitive returns and the ability to manage risks along the way, as they eventuate, and delivering a value-for-money outcome for members,” Brunton said. “That institutional investor focus will start with that mix of assets and asset classes and look for diversification benefits, and we need a good plan to meet the long-term objective.”
“Where property fits into that mix is that it’s a really interesting place for a super fund to look for income, because it’s a high-income asset class-and it should be less risky than equities. We believe that adding housing to our property portfolio, currently more office and retail assets, will help with returns, risk and better diversification.”
