Investment chiefs in Australia are likely to increase their allocations to illiquid assets in the next 12 months as they reposition portfolios in response to the effects of Covid-19.
At Melbourne-based super fund Cbus, chief investment officer Kristian Fok said the environment for asset owners is forcing superannuation funds to challenge their traditional assumptions.
“Because of the unprecedented policy response that’s provided fast liquidity and the fiscal response to pump money directly into the economy, the way that markets are reacting to this means that it’s actually quite hard, from an investor’s point of view, to connect economic fundamentals and investment market returns directly," he told AsianInvestor.
Michael McQueen, chief investment officer with A$6 billion ($4.2 billion) fund Media Super believes that attractive investment opportunities will arise over the next six to 12 months, particularly in private equity, infrastructure and credit. But he told AsianInvestor he was concerned about a heightened risk to the global economy.
“We support the emergency actions of central banks to support financial markets; but if policy is not implemented prudently, there is a strong possibility that an unhealthy dependency could develop over the coming months and years,” he said.
Fok said that these exceptional conditions have changed his A$53 billion fund’s attitude towards risk in an asset allocation context. “It’s quite challenging because the asset classes that are traditionally deemed to be less risky, like fixed income, don’t provide the same degree of diversification as they have in the past.”
The asset allocation call around unlisted assets is more complicated and there has been criticism in some quarters of a rising proclivity of industry super funds to invest some of their members' money in unlisted assets, with complaints focusing on the fact such assets are less liquid and valued less frequently than listed ones.
Nonetheless, the trend appears to be for these funds to keep allocating more into such assets over the coming year. Fok said Cbus, which is focused on workers in the construction industry, currently has around 30% in illiquid assets, which includes its credit portfolios. The A$46 billion Hostplus industry fund, whose members are typically younger workers in the hospitality sector, has nearly 40% in unlisted assets.
Media Super also expects to allocate more to private equity, infrastructure and credit in the next 12 months, “as fiscal stimulus rolls off and we discover how much slack is in the Australian and global economies,” said McQueen.
Cbus sees debt and direct lending as one of the biggest areas to which it is likely to deploy new capital. Fok said that his team can see it having the advantage of offering a degree of liquidity on the upside.
“If outcomes within the economy are better, then spreads will come in and we can rotate out. If it’s not as positive as that, as long as we’ve selected the debt securities appropriately, then we’ll hold onto them longer and still get a decent return," said Fok.
It is for this reason, he explained, that the Cbus asset allocation is more than ever focused on quality securities.
“There are assets we already know have been adversely affected by the recession. But if you understand they have robustness in terms of their business model, and pricing is really cheap, they may not actually be as risky. You have to take a forward-looking view. That’s where the quality of what you’re investing in does make a difference,” he said.
The volatility of the current economic environment also reinforces the need for active management, Fok added. “Especially if you understand the type of asset managers that are better able to navigate an uncertain environment such as this."
Cbus has adopted this quality approach by taking a fundamental stock picking strategy, but it also uses factor strategies focused on quality and value.