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Finding value outside traditional markets

By Brian Parker, Sunsuper Chief Economist

For many years, Sunsuper’s diversified investment options have held substantial allocations to alternative assets and strategies. These include carefully selected hedge funds and well-diversified portfolios of unlisted assets, including private equity, property and infrastructure. I am often asked three questions in relation to our alternative asset philosophy at Sunsuper: why do we choose to hold significant allocations to these unlisted assets, how we are able to do this and still effectively manage the liquidity risk that such investments entail, and what specific assets have we chosen to invest in. 

Why does Sunsuper invest in alternative assets and strategies?

In short, these assets allow us to build portfolios that exhibit smaller fluctuations in returns, without compromising longer term return outcomes. They also provide greater diversification across the overall portfolio, and allow us to access opportunities not generally available in traditional asset classes.

More generally, the current economic environment may be a reasonable one, but it’s one that seems to be fully reflected in asset prices. And investors should understand that financial markets are likely to be more volatile going forward: the lack of volatility over 2017 was highly unusual. For asset allocators, the real problem is that traditional asset classes may not generate the kind of real returns that Australian investors will require over the medium to longer term. It’s hard to describe either Australian or global equities as cheap. Return prospects in fixed income still look decidedly ordinary, despite the rise in bond yields over the last year or so. In this kind of environment, alternative asset classes are likely to play a critical role. And at Sunsuper, we believe that these asset classes can significantly increase the likelihood that members will achieve the returns they need.

How can a fund like Sunsuper hold such assets and still manage liquidity risk?

Our scale (some $58 billion in assets under management and around 1.3 million members at the end of August 2018) and our strong reliable cash flows allow us to hold a higher allocation to unlisted assets than many of our competitors.

Importantly, in addition to this capacity, we pride ourselves at Sunsuper on our internal team of investment professionals, and the broader investment managers we work with in Australia and internationally. It is this combined expertise and experience that allows us to continue to find opportunities at home and across the globe in these alternative asset classes that offer the kind of returns our investors require – and returns that we believe are well in excess of the prospective returns from traditional asset classes.

What specific assets are incorporated into Sunsuper’s portfolios?

Our property and infrastructure portfolios are well-diversified and invest in a range of institutional quality assets, both within Australia and globally, including office buildings, airports and utilities. While the majority of the return comes from income, these assets also provide some medium to long-term growth. Our private equity portfolio invests in some debt, but mostly unlisted equity investments across the globe. Private equity provides access to the largest pool of companies in the world and enhances the diversification of the portfolio. The returns from our private equity portfolio will overwhelmingly be generated by the underlying growth of the businesses in which we invest.

During the June quarter, for instance, our private equity team made investments in GFL Environment (a Canadian waste management and recycling business) and we acquired the Siemens’ Power Services Division headquarters in Orlando, Florida for our property portfolio. We have also recently acquired a holding in two major UK airports: Birmingham (the UK’s seventh largest airport by passenger numbers) and Bristol (the ninth largest). At the time of our investment, Sunsuper did not have any other infrastructure assets in the UK market, and the majority of our European infrastructure assets were regulated utilities in gas and electricity distribution, with our only European transport asset being the Arlanda Express, the train servicing Arlanda Airport, Stockholm’s major international airport.

How else is Sunsuper finding value for its members?

Importantly, our investment portfolios at Sunsuper, including our flagship Balanced option, contain both traditional listed assets including shares, as well as alternative assets. Our Balanced fund, along with most other superannuation funds’ Balanced investment options, has now delivered six consecutive financial years of positive returns. Why? Well, apart from the vale we continue to find in unlisted assets, share markets have generally been very kind; the global economic environment has been very friendly to investors in growth assets. Economic growth has generally exceeded expectations without resulting in significantly higher inflation. As a consequence, monetary policy settings remain very supportive of global growth, even in the US where the Federal Reserve continues to increase interest rates.

Brian Parker, Chief Economist, Sunsuper

Brian was appointed to the role of Sunsuper’s Chief Economist in 2015. In a career spanning more than 25 years, Brian has worked in a series of economics, portfolio management and communication roles with a range of organisations including Rothschild, JP Morgan, Citigroup, MLC and the Reserve Bank of Australia. Brian has an honours degree in economics from the University of Queensland, where he also taught macroeconomics. Additionally, he is a Charted Financial Analyst.

Listen to The New School of Super, Brian’s podcast series with Sunsuper’s Head of Advice and Retirement Anne Fuchs. Subscribe through iTunes or Spotify, or listen on Sunsuper’s Dream Project education hub. And don’t miss Brian’s 4-minute market update video each quarter.

For more information on how Sunsuper can help you and your clients, contact the Retail Advice Distribution team at rad@sunsuper.com.au