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the new school of super podcast series

Episode 18

Explaining Sunsuper's private market investments

September 2019

In this episode, Anne Fuchs describes Michael Weaver, Sunsuper's Head of Private Markets, as "never boring". Michael does not disappoint, explaining some of the property, infrastructure, private capital and hedge funds investments in Sunsuper's portfolio that may not be known or available to most individual investors, along with the diligence and consideration that goes into sourcing and maximising these opportunities for members.

Intro: Welcome to the New School of Super. A fresh look at money matters, your super and the things that could affect your financial dreams now and in future with Sunsuper's Chief Economist Brian Parker and Head of Advice and Retirement Anne Fuchs.

Anne Fuchs: Hello and thanks for listening. Welcome to the New School of Super, Sunsuper's podcast series covering money markets, investment matters, your super and most importantly, helping you achieve your retirement dreams. My name is Anne Fuchs, and I'm the head of Advice and Retirement here at Sunsuper. And the team and I come to work every day to help more members access great quality financial advice because we know that when they do, they have the best possible chance of living their best retirement. Today I have a very special guest with me, someone who is an investment guru themselves. And no, it's not the usual guest, my partner in crime Brian Parker, our chief economist at Sunsuper. It's someone that works very closely with Brian Parker though, his name is Michael Weaver, and he's Head of Private Markets here at Sunsuper and the team and him have had an extraordinary year and play such an important role in making sure our members live their best possible retirement, because we know that our members care most of all about maxing their hard-earned retirement savings. And that's what Michael and his team do. It's so good to have you here, Michael.

Michael Weaver: Thanks Anne, it's good to be here.

Anne Fuchs: Now, Brian is a bit of fun, so I'm hoping you're prepared to have a bit of fun with me as well on this episode of the New School of Super.

Michael Weaver: I'll do my best, but he is a hard act to follow.

Anne Fuchs: He is a hard act to follow, I couldn't agree more and saying he is a hard act to follow. I should follow in his footsteps of steps and give that general advice warning for you and our listeners. So what is very important for me to point out to our listeners is that today we're talking general information only, and any advice doesn't take into account your personal situation. And if you want to act on anything we discussed today in relation to Sunsuper, you should grab a copy of our product disclosure statement or contact us on 13 11 84. Now today, Michael I'm sure there'll be many of our listeners who are either members themselves or also financial advisors who are interested in this concept of unlisted assets and private markets. We've had some extraordinary investment performance of late of which your team have contributed to as I mentioned earlier. Can you explain? What are the assets within your portfolio that have have made such an important impact to our performance?

Michael Weaver: Yes, maybe I'll start by talking a little bit about the different asset classes that are in the alternative asset or unlisted asset area. So looking after property, so that's unlisted property that includes shopping centres, office buildings, industrial estates. Then there's infrastructure. Infrastructure includes airports, ports, gas and electricity distribution networks. And then this private equity, which is unlisted companies that manages by and then improve the operations, and look to sell in a few years time. Then we also have private credit that you'll be talking to Bruce Tomlinson later on and he'll tell you about that. Assets that have done really well in the last few years, are office buildings and industrial estates in the property sector have been really strong and we've found great returns from those both in Australia and offshore as more people have been attracted to those assets. Infrastructure in particular, has had a strong year. What's happened with interest rates reducing over time, more and more people are looking at infrastructure assets, as an alternative source of generating returns. So these could be long term monopoly assets, they're assets that people will generate a return from, both from a cash flow but also a capital growth perspective, and they've been quite quite good for us. And then in private equity space, lots of different companies all around the world. Different assets have done quite well.

Anne Fuchs: Michael, I know certainly in the financial advisor community, there is a lack of understanding and probably too, I think be fair to say in the broader Australian community, about what the type of roles that these assets play, particularly from a risk perspective. If you're a financial advisor and you're seeking to quantify the risk appetite of your client and them being perceived as certainly I think the perception is they're a high growth asset class. But what would you say to that superficial view of the assets you manage?

Michael Weaver: Look, I can understand the concern, because what's unknown to most people is there's a huge variety of assets within these different pools, so you can have everything from a relatively sort of boring building that has a long term lease to a good quality tenant might be a government tenant, something like that. That's a pretty low risk property investment. It could be mainly focused on cash flow, not really much growth. But sitting in that same property portfolio for some people might be a quite speculative development that doesn't have any cash flow - it's really essentially a bet on the future, which is good if it works, or it can be quite poor if it doesn't.

Anne Fuchs: So are we doing the latter though?

Michael Weaver: No. So we have a real focus in our property and our infrastructure portfolios for the core, and more boring assets.

Anne Fuchs: You're never boring, Michael.

Michael Weaver: Well, sometimes we need to be, because that's where we think we get the best risk adjusted returns. So a lot of people get excited by some of the more interesting and, you know, funky investments. But that's not necessarily where you get the best risk adjusted returns. So generally what we say to the adviser community is; in property and infrastructure it's somewhere between growth and defensive, because we're having a really high focus on cash flow generative investments. Both of those portfolios are generating at least 5% in terms of just a cash flow coming off the different investments. And then you're expecting a bit of growth on top of that as well, which we think is quite attractive, especially where bond and cash rates are right now.

Anne Fuchs: Well, there is too, I think, some concern that has been raised to me around the concept of valuing these assets and the lack of transparency that's perceived there, where that's not the case so much. Would you like to explain that to our listeners?

Michael Weaver: So we have external valuers that look at all of our different property and infrastructure, assets...

Anne Fuchs: Who are those valuers? What sort of organisations are you talking about there?

Michael Weaver: In the property sphere it's expert property valuers, people like CBRE or Savills or JLL. In the infrastructure area it's generally one of the Big Four accounting firms that do an external valuation so that can be PwC, KPMG, EY. So you're getting professional advisers, professional valuers, that this is what they do day in, day out. And then we have rolling valuations, where we constantly get these values updated - depends on the size of the asset, whether that's every three months or six months or 12 months, but it is constantly looked at. And then, obviously we're getting the cash flow on the way through. So it's the underlying value changes, but as we get cash flow come through that all accrues to members' accounts. So you know, we have to look after members, both for today and tomorrow, so we're very conscious of the valuation policies of the managers we work with and the valuation firms and as part of the job of our wider Sunsuper investment team to make sure that we're doing that in a sensible way.

Anne Fuchs: And for those advisers that are interested, we have a booklet that we've produced (if you contact us at Sunsuper) on a deep dive on the diversified alternative space that gives a lot of detail around this asset class, if you're interested in it and in particular valuation methodologies and the like. Now I guess the other question I pose to you is around asset allocation, and we have a gentleman, Andrew Fisher, who heads up our strategic asset allocation. When he's constructing a portfolio for our member and he looks at your asset class, what's the main function he's seeking that asset class to perform?

Michael Weaver: So in looking at the three different asset classes I mentioned, so both property and infrastructure seeing that's a more stable asset it'll generate a higher cash flow return than something like the bond portfolio today, or fixed income portfolios you might know it as or the cash portfolio obviously, but bond rates and cash rates are very low right now. So you're getting good good cash flow, but you're also generating some growth. You're not having that sort of high growth nature, which is more like what you're expecting from your equities books, so Australian equities or international equities. Private equity is a little bit different. We call it Private Capital because it includes private equity and venture capital and some other investments. That's one of the more high growth strategies that we'd be looking at. And what you're seeking there is over the medium to long term, you're seeking a premium over the listed assets.

Anne Fuchs: Sorry, too I cut you off. There must be a benefit too, within that in the spirit of that valuation question earlier, about these assets not being completely correlated to the stock exchange?

Michael Weaver: That's right. Particularly, you're going to have some correlation in the private equity area. But things like venture capital and some of the private equity businesses, you know, these are small businesses, very small. They're family run businesses that often get bought, bought out and then you helped grow them, where some of the founders or the families may not have had the capital or the desire to really grow the business a lot bigger. They're just not accessible on the listed market. Things like venture capital, we don't have a huge exposure to that. But that is an area that is just generally not on any listed market by its nature, because they're taking longer term view on where they think a company could go and not all of them will work. Some will be really good and quite a lot will be pretty poor. But over the long term, it can still generate differentiated returns to members.

Anne Fuchs: So when you say some can be really poor, we don't invest in these really poor ones?

Michael Weaver: No, so venture capital by its nature you're investing in quite a lot of different startup businesses and some will be really poor. So we're not making those decisions, we're finding expert external managers, both here on offshore. Let them make those decisions. Some will work really well and some won't be as good.

Anne Fuchs: So how do we manage that risk for members? Because that might be something that our advisers or members would be worried about.

Michael Weaver: That's right. So what you do, you have a diversification. So can you access the next Facebook or the next Google that gets born out of the venture capital community? You know, they can be one in 1000 shots. So what you need to do, you have diversification. You don't try and put all your eggs in one basket.

Anne Fuchs: It's in very small bits?

Michael Weaver: Very, very small bits that are diversified.

Anne Fuchs: So I know there's certainly one investment we made - which you know, you said you like being boring, which is around storage in the United States and there could be nothing more boring in property, than storage.

Michael Weaver: It depends. You might watch storage wars, and that might be a little bit more interesting. There'll be some people out there who will have seen that, and you might find it more than interesting. But you know, they are self storage investments. They've been something that big, relatively boring sheds where people, particularly in the U.S., it's been quite a large... they're becoming a larger and larger asset class, there it's quite a transient sort of workforce where people are quite happy to go and move states for a job or they move for education or whatever else it might be so they'll often store within a small shed within a much larger shed. We find it's a good cash flowing business. It's got quite good tenancy over time and you can buy a diversified pool. We partnered up with a listed company, bought boarding with them into a diversified pool of different assets across the U.S. Bought it for the income stream and then was able to sell that to an institutional investor down the track at quite a high valuation compared to where we bought it because this asset class, when we first invested, it wasn't as popular as it is now. So we're often looking for those things that are a little bit ahead of the curve if they can get a good income and then have some sort of upside on top of that.

Anne Fuchs: Look, I think when I describe this asset class, it is incredibly diverse. I think it's the most interesting by a long shot. And certainly I think the power that it has in terms of smoothing the ride out for our for our members and managing that downside risk is just so wonderful. And it's certainly a unique competitive advantage for superfunds, but particularly Sunsuper. To finish up, I guess my question to you, Michael, is why does Sunsuper have a competitive advantage over say other super funds in this space?

Michael Weaver: I think one of the advantages that we do have is that we're open to lots of different ideas. We see ourselves as having a real need to have lots of different ideas come our way, really big funnels of seeing lots of different investments. And then the teams work together for quite a while, so it's quite helpful to see lots of different investments, talk about which ones we think makes sense, spend a lot of time diligencing the ones that we think do make sense, and then buying the ones that we think we can buy at a reasonable price. Sometimes you get outbid, sometimes by a lot. That's okay. You work out what you think you should pay for an asset, and what you think it will learn the members over time. Then you're able to consistently do that time and time again, and you end up getting good performance out of it. And we've been able to achieve that and it's good for all of us coming to work, thinking about Well, how does this actually make money for the members? I think that has been helpful for us in our competitive advantage.

Anne Fuchs: That's great, and I think to, if I can point out that I think the strong net cash flows that we continue to experience obviously support your team, and if I could call that you've been very humble, I think the deep expertise and experience in your team also puts us at a competitive advantage, and I generally don't use this podcast to be sales-y. But I will say that in this in this instance.

Michael Weaver: I'm lucky to be supported by a really good team, so very lucky there. And there's no doubt that having strong cash flow, and we have had that and continue to have that, helps us allocate more to these asset classes, which is beneficial for members. So it's a good, virtuous cycle.

Anne Fuchs: So if members are advisors, are interested in this asset class we obviously have our quarterly investment report. There's the deep dive document on the asset class diversified alternatives that we also have available that can be emailed to you if you call us on 13 11 84. Michael Weaver, it has been a pleasure to have you sitting in the hot seat today.

Michael Weaver: Thank you, Anne.

Anne Fuchs: And thank you to our listeners for listening to another episode of the New School of Super.

Outro: This has been the New School of Super. For information and inspiration to help you plan your future, manager Super, and enjoy your retirement, visit sunsuper.com.au/thedreamproject. Or if you've got a superannuation or investment question, you'd like Brian and Anne to discuss, then get in touch at newschoolofsuper.com for it feature in one of our future New School of Super podcasts.

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