Key Points
BRISBANE, 29 April 2020: Investment manager QIC this week hosted eight of Australia’s most experienced superannuation Chief Investment Officers (CIOs) to shape the national debate surrounding the management of superannuation portfolios during the COVID-19 crisis.
CIOs from AustralianSuper, First State Super, LGIAsuper, MLC, QSuper, Sunsuper, TelstraSuper and QIC State Investments appeared via video conference where they addressed concerns the industry’s allocation to illiquid assets was undercutting their ability to meet the volume of current, unplanned financial hardship withdrawals.
The CIOs, who oversee approximately A$600 billion in assets for more than 6.5 million members, used the opportunity to reassure members they could satisfy short-term liquidity demands.
They also argued their current allocation to illiquid assets was correct as it enabled them to meet their members long-term drawdown needs for their future retirement.
Participants agreed the current financial and economic fallout from the COVID-19 pandemic was “not unique” and advised members to remain calm and focused on their long-term investment goals.
AustralianSuper CIO Mark Delaney said members would see another five or six bear markets in their lifespan.
“When you strip it down to its basics… there's been a bear market in U.S. stocks every decade since 1950 so these aren't unusual events,” he said. “The trigger's unusual but having a recession and a bear market in stocks is part and parcel of what we all live with.”
The CIOs advocated the current level of illiquid holdings in investment portfolios was correct, and essential for achieving a long-term investment strategy that had to deliver returns over a 30 to 50-year time span.
Mr Delaney said: “I think [the criticism about the volume of illiquid assets], is a furphy. Most [super funds] would have two-thirds of their portfolio in liquid assets and most of the money won't be accessible for a long time. So, the idea they've got too much I think is wrong, it's at best misplaced.”
CIO of TelstraSuper Graeme Miller said the nature of investing was that “we choose to actually seek risk and we choose to get rewarded for taking that risk” with illiquid risk generating greater returns over the long run. He added managers blended illiquidity risk with a myriad of other risks to create an attractive return stream.
He stressed there was no single, ideal allocation to any risk premium for a particular portfolio, with a fund’s demographics a key deciding factor.
CIO of MLC, Jonathan Armitage, said illiquid assets played an essential role in exposing portfolios to different parts of the economy, especially outside of listed markets where the number of securities have diminished over the past 10 to 15 years.
The CIOs also pushed back against current concerns and uncertainty surrounding the valuations for illiquid assets.
Deputy State CIO, QIC, Allison Hill said due to the uncertain environment, the data regarding the impact was continuing to evolve and that it was important to update valuations regularly as new information becomes available to ensure member equity.
Mr Miller also challenged the perception that listed markets get the valuations question right.
“We've just seen the market plunge by 38% and then rise by 27%, and to put that up as a poster child of this is sort of cogent, rational valuation of future cash flow streams, I think is a notion that then in fact can be challenged,” he said.
LGIAsuper CIO Troy Rieck said portfolio construction, investment strategy and risk management were “timeless and very important” and would not change because of short-term events such as COVID-19, especially as they were looking at a 30 to 50-year horizon.
He added: “Certainly the opportunity set has changed quite a lot in the last three months. We're still very interested in some of the aspects of infrastructure, private credit, distressed credit now for example much more so than we were three months ago … and whoever has got the cash right now is king.”
Sunsuper CIO Ian Patrick added super funds were in a position where they had to increase the speed in which they responded to fast-moving market downturns and economic contractions but also plan for the medium- to long-term when the impact was still not fully understood.
“The announcements for early release created an environment in which we all have to be acutely sensitive to being able to meet our members’ needs when they arise and we saw that start last week,” he said.
“And so risk management around being adequately positioned to satisfy those liquidity demands definitely went up a notch ... because you can never plan specifically for this scenario, you learn as it emerges.”
The eight CIOs strongly agreed their industry would play a vital role in Australia’s economic recovery.
QSuper CIO Charles Woodhouse also said the pandemic was a “bit of a wake-up call” in terms of the need to rebuild economic and community resilience.
“I think financial institutions can play a role in rebuilding economic resilience… and I think we have played a role similar to that historically. But what’s important now [is] large, well-funded organisations with access to liquidity and funds to invest can really act to take advantage of opportunities that will benefit members, but also the community.”
First State Super CIO Damian Graham said that super playing a role in stimulating productivity growth was a lens everyone should currently be applying: “For a long period of time we have been considering the role for super funds in supporting Australia to really grow productivity. We'd all agree that it's a key driver of economic growth, and there needs to be a conversation around how super can support productivity growth – particularly where governments may not have a lot of fire power, or a lot of money to support growth in the future. Some of those key activities to support productivity growth may otherwise fall away given the lack of fiscal firepower and we need to think innovatively about the role for super in this space.”
Ms Hill said real assets provided strong, risk-adjusted returns, which drove real wealth generation for super fund members as they moved towards retirement.
“We are often purchasing assets which are essential to the fabric of society. Superfunds provide strong governance and oversight to those assets as well as efficient management,” she said.
Mr Rieck said governments have an opportunity to provide regulatory certainty and foster the right investment environment so that super funds could continue to make vital contributions.
“We've always been here helping to make the economy work better,” he said. “There's no reason why super funds can't be an even bigger share of the economy over time here. That's going to be good for members and it'll be good for the economy as well.”
QIC is preparing a report to share the outcomes of the debate. Please contact us for a copy.
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QIC is a long-term specialist manager in alternatives offering infrastructure, real estate, private capital, liquid strategies and multi-asset investments. It is one of the largest institutional investment managers in Australia, with A$80 billion (US$56 billion) in funds under management1. QIC has over 1000 employees and serves more than 110 clients. Headquartered in Brisbane, Australia, QIC also has offices in Sydney, Melbourne, New York, Los Angeles, Cleveland, San Francisco, London and Copenhagen. For more information, please visit: www.qic.com
1As at 31 December 2019
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