Innovation – it’s a cultural thing
In previous articles we have commented on the history of innovation that has characterised the investment approach of many industry funds. In this article we look more deeply into the approach of one fund, AustralianSuper, which could be said to be setting the benchmark for the industry. We also touch on the implications of the trend towards greater investment in unlisted assets.
Compared with their commercial counterparts, industry funds have typically been early adopters (starting in the mid-1990s) of alternative assets such as private equity and infrastructure. They have been more prepared to invest in unlisted assets. And within traditional asset sectors, they have pioneered new approaches in their search for performance and diversification.
This originality is well illustrated when we look in detail at the portfolio structure of the biggest of the industry funds, AustralianSuper. With about $25 billion under management, AustralianSuper has the scale to back the best ideas of its in-house investment team, led by Mark Delaney, its principal asset consultants, JANA and Frontier, and its experienced investment committee. The result is an interesting model that others will observe and possibly seek to emulate.
Using the Balanced option as an example, AustralianSuper’s portfolio differs from the industry average in several key areas. Some of the more interesting variations are shown in Table 1.
|TABLE 1: STRATEGIC ASSET ALLOCATIONS|
|ASSET SECTOR||AUSTRALIANSUPER||INDUSTRY AVERAGE|
|Australian listed property||0%||3%|
AN ECLECTIC MIX OF STRATEGIES
A 14% allocation to alternative assets is significant, especially when that translates into over $3 billion. With that amount of money, AustralianSuper is able to diversify its exposure across private equity (2%) and infrastructure (9%) and a range of absolute return strategies (3%).
Like an increasing number of its contemporaries, AustralianSuper invests in alternative assets largely at the expense of traditional bonds. It believes that alternatives can deliver superior returns to bonds, with greater diversification benefits.
The fund’s fixed interest exposure is also interesting. Not only does it treat Australian and international fixed interest as one diversified pool, but it also has one third of its sector exposure in alternative debt and mortgage-backed securities.
AustralianSuper has no exposure at all to listed property securities. Instead, it invests in direct property in Australia and – increasingly – overseas (currently a 91/9 split). While the majority of this is core office, retail and industrial property, there are increasing elements of value added (redevelopment) and opportunistic (new development) property exposure, especially in Asia.
With over $15 billion in listed shares, the fund also has the luxury of being able to diversify widely across strategies and managers, including a stable of emerging or ‘nursery’ managers. Table 2, for example, sets out the current structure for Australian shares.
|TABLE 2: BREAKDOWN OF AUSTRALIAN SHARE MANAGERS |
|Type||No. of Managers||% of Asset Sector|
Also noteworthy is AustralianSuper’s extensive use of the investment managers it jointly owns, Industry Funds Management (IFM) and Industry Superannuation Property Trust (ISPT). Together they manage about 22% of the fund’s total assets. ISPT manages about $1.5 billion (about 70% of the fund’s property investments). IFM manages about $4 billion across Australian shares (enhanced index), private equity (Australian and international), infrastructure (Australian and international) and diversified fixed interest (alternative debt and mortgage-backed).
This again is a reflection of the culture and history of the industry funds movement. ISPT and IFM were established primarily to give its industry fund owners efficient and low cost access to the specialist investment sectors – direct property, infrastructure, private equity, alternative debt – that were to become a key area of differentiation with commercial funds.
UNLISTED ASSETS AND COMFORT LEVELS
One consequence of the AustralianSuper strategy is its relatively high allocation to unlisted assets. Much has been written and said about the liquidity risk of unlisted assets, and about related issues to do with valuations, unit pricing and the classification of products.
Trustees will determine their own comfort levels. AustralianSuper’s proportion of unlisted assets, at about 21%, is high even by industry fund standards, largely because of its preference for direct property. Our latest review of asset allocations across the industry reveals the following picture.
|TABLE 3: AVERAGE GROWTH FUND ALLOCATION TO UNLISTED ASSETS – DECEMBER 2006|
|Industry Sector||% Allocation to Unlisted Assets|
|Public Sector Funds||11%|
As Table 3 shows, industry funds as a group tend to hold much higher levels of unlisted assets than their commercial counterparts. The reasons are partly cultural and partly historical. Before the advent of member choice of fund, industry funds effectively had a captive membership and a mandated inflow of contributions. They were relatively unconstrained by business risk, and the liquidity of their underlying assets was largely a non-issue. They simply invested in whatever they believed was in the best interests of their members. And, where possible, in specialist areas, they preferred to have control over the investment managers’ operations.
Choice of fund has changed that picture to some extent. All funds need to be mindful of the possibility of redemptions, although the likelihood of a serious ‘run’ on large funds (à la unlisted property trusts in the late 1980s) is highly remote.
The AustralianSuper portfolio shows what can be done when an industry fund reaches ‘mega’ size. Scale provides the opportunity for greater diversification and the pursuit of new and innovative investment strategies. Clearly, there are still some fundamental differences that separate the not-for-profit and for-profit camps. It will be interesting to observe whether, over time, those differences persist or whether all large superannuation funds will eventually converge in their thinking.
In the June 2006 edition of our Multi-Manager Survey, we published the summary results of our strategic asset allocation survey which covered the growth option (61% to 80% growth assets) of over 50 major superannuation funds. In this edition, we have updated this information. Tables 4 and 5 show the summary results at 31 December 2006.
|TABLE 4: AVERAGE STRATEGIC ASSET ALLOCATIONS (%)|
|Aust Listed Property||1||2||3||5||3||3|
|Aust Unlisted Property||6||7||7||1||2||5|
|Growth /defensive assets split||73/27||74/26||75/25||72/28||73/27||73/27|
|Aust/int’l share split||55/45||55/45||53/47||55/45||54/46||55/45|
|Aust/int’l property split||92/8||89/11||94/6||76/24||67/33||85/15|
|Unhedged/hedged int’l shares (%)||16/10||14/13||16/11||19/9||18/11||16/11|
|Unlisted assets (%)||15||11||9||2||4||8|
|TABLE 5: BREAKDOWN OF ALTERNATIVE ASSETS|
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