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the new school of super podcast series

Episode 19

Explaining Sunsuper's alternative strategy investments

September 2019

Head of Advice and Retirement Anne Fuchs explores more of Sunsuper's alternative asset investments with Head of Alternative Strategies Bruce Tomlinson. The conversation travels from post-GFC investments in Icelandic banks to the Tel Aviv Stock Exchange, and how these investments are a low-risk strategy to earn a return for members well above cash, and diversify our portfolios during volatile market conditions.

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 investment markets, money matters, your super and helping you reach 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 our members access great quality financial advice because we know that when they do, they have the best possible chance of living a wonderful retirement. Now we, as you know, we love doing deep dives here in the New School of Super, and we have another fantastic deep dive today with another one of Brian Parker's colleagues Bruce Tomlinson, who is Head of Alternative Strategies in our investment team. How are you? It's so good to have you here, Bruce.

Bruce Tomlinson: I'm very well thanks Anne, good to be with you.

Anne Fuchs: You're not bewildered to be sitting in Brian's chair? It's a big chair to fill.

Bruce Tomlinson: It is a big chair.

Anne Fuchs: It is a big chair to fill. Look before we get into it, I must read out that good general advice warning to keep in the good books with compliance. So before we get underway, I just want to point out that any information I'm providing today is general information only and do not act on anything without seeking personal financial advice. You can contact us on 13 11 84 or, of course, go to our product disclosure statement. So, Bruce, that's a very sexy title if I might say so: Head of Alternative Strategies. What on earth is an alternative strategy?

Bruce Tomlinson: Glad you asked Anne. So alternative strategies is a defensive alternative asset class. We call it cross-asset, and by that I mean we can invest in both credit and equities, both public and private securities. So it is quite an opportunistic programme. But there is a strong focus on being defensive, a strong focus on credit investments in particular.

Anne Fuchs: So credit: I'm pretending that I'm sitting in the shoes of our listeners, and I'm hearing opportunistic and credit and I think of fixed interest. The ordinary person down the street would think of fixed interest and think how terrible things are. Are you able to explain? And also to is that risky? A you able to explain that a bit further?

Bruce Tomlinson: Sure Anne, so it's alternative fixed income. So we're not investing in government bonds that are negative interest rates or zero interest rates, we're investing often in private credit in areas where the cost of finance is higher. And the return that our members will achieve from those assets is significantly higher than some of those government bonds that are yielding almost nothing.

Anne Fuchs: But you described it earlier as defensive, so that to me or to our listeners, I should say, would imply that it plays a role in portfolios as reducing risk. Is that the case or not?

Bruce Tomlinson: Yes. I mean, I was saying it's defensive within the context of the four alternative asset classes at Sunsuper. So it is more defensive say, than private capital or the real asset portfolios.

Anne Fuchs: So maybe should we just list off the four for our listeners?

Bruce Tomlinson: Yes. So the four alternative asset classes are private capital, infrastructure, property, and alternative strategies. And the Alternative Strategies Portfolio, which me and my team look after, as I say it focuses on credit. It has a focus on downside protection and on being a defensive programme. It's not risk-seeking or growth oriented, particularly like the private capital or private equity portfolio.

Anne Fuchs: So I think it might be good for our listeners for an example to bring it to life. Iceland has a few things, including a famous singer, Bjork. Is that how you pronounce? How's my Icelandic pronunciation?

Bruce Tomlinson: Very good, it's good enough.

Anne Fuchs: Okay, so what else has happened in Iceland? And what on earth might that have to do with with private debt?

Bruce Tomlinson: Sure, Anne. So the example there is Sunsuper invested in the debt of some of the Icelandic banks.

Anne Fuchs: This is post GFC?

Bruce Tomlinson: Yes, this is post GFC. So just very briefly, the Icelandic banks took on a lot of debt and they financed investors all over Europe and they got into trouble. And when the GFC happened, those those debts became impaired. And so some of our specialist managers overseas were monitoring the situation. They waited until the prices of the bonds from these banks declined and then they bought them at a cheap level. And then we, with the manager, held those positions for a number of years. And gradually the Icelandic economy healed. The estates of those banks sold assets, and we were paid back more than the purchase price of those bonds.

Anne Fuchs: So you're saying that buying these banks, that were really in a bad way, made our members a good healthy return?

Bruce Tomlinson: Yes. So we bought them you know, I would characterise, this as being modest or low risk because we bought these assets at distress prices at a cheap low price. And our managers had assessed that the value of those businesses were significantly more than the bonds that we were buying. And so there wasn't... we didn't perceive the risk as being high.

Anne Fuchs: But how are you undertaking- how do you and the team source a deal, like a deal in Iceland for goodness sake, when you're sitting in Australia square in Sydney?

Bruce Tomlinson: We invest through specialist managers all over the world. So those are the experts who will find these unique opportunities and then monitor them for for years if necessary, and then deciding at the right time the right price to purchase them on our behalf. Yeah, we have a global network. We travel widely. We engage with lots of different people, and we're alert to these opportunities.

Anne Fuchs: And what's the other part of alternate strategies that's in your portfolio Bruce?

Bruce Tomlinson: So besides the private and specialist credit, Iceland being an example, we do invest in hedge funds. So we should talk about that. The hedge funds that Sunsuper invest in are what we call low risk funds. So they are generally market neutral, in that we don't have a long or levered exposure to the market. These are risk controlled strategies that aren't taking market risk.

Anne Fuchs: So why would we invest in them if they're not taking market risk? Isn't it the job of an investment manager to take market risk to make our members money?

Bruce Tomlinson: Yes well, market risk we get that through our listed equity listed fixed income portfolio. So what we want from alternative managers, hedge fund managers, is to give us non-market risk. So they need to make money in a way that isn't correlated to the market. So they will buy securities in a distressed business. They will go long and short, different parts of the capital structure of a business to to extract the value within that business. They will look at opportunities of companies in the same industry long and short. So what they're trying to hedge out some of that market risk and earn an outsized return from basically idiosyncratic fundamentals.

Anne Fuchs: If you're undertaking a risk profile of a client, if you're a financial advisor and you're looking at this asset class; is it a growth asset class or would you describe it as more defensive?

Bruce Tomlinson: I would describe it as defensive. There are some small elements of growth, but generally it is defensive. So we've been managing the capital in this opportunity set for over a dozen years, we went through the GFC and we were successful in preserving members capital.

Anne Fuchs: Because, well, not just advisers, a lot of people would think hedge funds are risky and growth-y in characteristic.

Bruce Tomlinson: Yeah, so let me just say that we have approximately 50% of the portfolios in hedge funds, and that is likely to decline in the near term because we're finding better opportunities in some of the credit investments that we mentioned before. The hedge funds that we invest in are not growth-y and not risky. They are like I said, market neutral. So they are absolute return strategies, trying to deliver a significant margin over cash. They're not benchmarked against the market.

Anne Fuchs: Okay, and so when our head of asset allocation, Andrew Fisher, is pulling together a portfolio, I guess my first question is, what percentage of the overall assets do these diversified alternative strategies - so the four that we spoke about earlier, what percentage do they represent off the overall money we manage?

Bruce Tomlinson: Sure. So they range from about 5% to 8% depending on the diversified option that the members invest in. So they're small but meaningful components.

Anne Fuchs: So just to clarify though, 5% to 8% of your asset class or of the overall unlisted assets?

Bruce Tomlinson: No, it's 5 to 8% of the balance fund or the growth fund or the conservative or retirement.

Anne Fuchs: Okay, all right. Because I think sometimes there is a perception from investors, whether it's members or advisers, that in superfund world all of our money is invested in these sort of diversified alternative strategies, these unlisted opportunities, and there's sort of opaqueness around transparency. But that you're saying that's not the case at all?

Bruce Tomlinson: No, it's a modest but meaningful part of those diversified options.

Anne Fuchs: And with the hedge fund - because it's probably useful, too, as it's a complex instrument or investment class, as a class that you've described - is there just a quick story you could give us, to our listeners, to bring that to life?

Bruce Tomlinson: Yes. Okay, so one of...

Anne Fuchs: I'm putting you on the spot there.

Bruce Tomlinson: So one of our managers in New York is Manikay Partners, we've been invested with them since 2010. They invest in public equities and they have an expertise in the financial sector and particularly in stock exchanges. So they've invested in the ASX and in Deutsche Börse and the New York Stock Exchange, etc. So they have public equities, they go long and short these investments and they've generated a very good return for us over many, many years. They, because of their knowledge and expertise in exchanges, made an investment in the Tel Aviv Stock Exchange, which was a private investment in a business that was de-mutualising and was owned collectively by the banks and the Israeli government wanted it to be privatised. So through Manikay we ended up purchasing a stake in this business during the de-mutualisation before the IPO. That businesses is now successfully IPO'd, we've sold down some of our stake and we've retained some of our stake. But that's an example of a hedge fund manager who delivered a very unique investment for Sunsuper and it's continuing to deliver strong returns.

Anne Fuchs: So let me play this back; Sunsuper members own little bit of the Tel Aviv Stock Exchange. That's incredibly exciting. There you go, listeners. I bet you didn't know that. So you have absolutely learned something incredibly interesting today on the New school of Super. Bruce, to finish off, what are your reflections? You've been managing money for a long time now, you're a very experienced investment manager. What are your reflections around investment markets generally in the role that your team play to optimise our members' retirement savings?

Bruce Tomlinson: Look, we're very excited about the opportunities.

Anne Fuchs: You're not worried? There's a few worried people out there.

Bruce Tomlinson: Not at all, not at all. In fact, the more dislocation and disruption that there is we see that as more opportunities for our managers and therefore for Sunsuper to make good investments for our members. So in the alternative space, because we can move between public and private markets, because we're less constrained by parameters that other investors and other asset classes have, we can take advantage of these opportunities - these dislocations. So, for example, in energy, it's a dislocated space because of because of greenhouse gas emissions, because of global warming, because of renewables disrupting traditional power sources. That to us is an interesting opportunity. In transportation you've got change and disruption again because of emerging markets, because of the growing middle class in emerging markets, again because of different transportation methods. So we embrace change and disruption, and we think that it's an opportunity to make good investments, good safe investments with strong asset backing and strong cash flows that can deliver outsized returns for members.

Anne Fuchs: Look that I think is a beautiful way to end. I certainly think if I reflect on my mother, who turns 70 next year, and I know she, as she ages, is I know many, many of our members do, they get worried about the pace of change technology and the world's just getting to complicated. And they see that as risky, and particularly in relation to the security of their money and worrying about it running out. But what you're saying is, actually, they can sleep at night because you and the team have the expertise to make the most of that, so that that money can outlast them.

Bruce Tomlinson: Absolutely. And we're working very hard to safeguard the money and to grow the money. We have very good managers globally. We have good, good connections and and we're looking forward to those opportunities.

Anne Fuchs: Now Bruce, if you ever need anyone to carry your bags to Iceland or Tel Aviv or New York or any of these other really interesting places you go to, I'll take some time off from the New School of Super and come along. Will you have me?

Bruce Tomlinson: Absolutely.

Anne Fuchs: That's great. All right, well to our listeners thanks again. That was an incredibly interesting episode and thank you, Bruce, for coming along, and we look forward to you joining us again soon.

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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