Hostplus is seeking to grow investments in hedge fund strategies from 6% to 8% of its total assets under management (AUM), as well as raise investments in property, infrastructure, and private equity, as it seeks to improve its portfolio diversification, according to deputy chief investment officer Greg Clerk.
The board of the Australian superannuation fund asked last year for it to increase what it internally calls its ‘alternatives’ position. This consists of systematic global macro equity investment strategies; effectively they are hedge fund-like multi-asset investment approaches, along with some market-neutral strategies at the margin.
To do this Hostplus employed six asset managers – Bridgewater, IMP, GMO, Vinva, GSA and QIC – to do this, over the past three to four years. It aims to raise its 'alternatives' allocation from 6% to 8% of its AUM. Partly this is because it hopes they will outperform a falling market, “although in that event even a zero level of return would be a good outcome,” Clerk told AsianInvestor.
Doing so also gives Hostplus more liquid assets to deploy in a market downturn: “If there are opportunities [to buy assets after a market crash] then we will sell some [of these strategies] to deploy into equities," he said. "And we can build up [our positions in these managers] again over time.”
Hostplus, which has A$33 billion ($23.82 billion) in AUM as of June 30, 2018, is also looking to beef up its investments in infrastructure, and property. The super already uses IFM and some other managers here, but Clerk said it seeks other managers to “augment our capacity … [and] increase our stakes [internationally].”
He added: “We are doing the same thing in property (about 13% of its portfolio, with about half in listed and half in unlisted assets), where we are very Australia-centric, where we can access deals and get tax advantages. But we appreciate that, given the rate we are growing at, we need an outlet beyond Australia.”
Private equity funds can be harder to get into, in part because the best ones are very popular. That said, Hostplus is seeking to raise its allocation by a couple of percentage points, while cutting its listed active equity stake to help fund it.
“Markets are higher and alternatives add some protection,” Clerk explained. “They may take a fall [at some point] but there is some latency there, while for us the superannuation guarantee is 9.5% [of cash inflows a year from ongoing member contributions] so money comes into the fund no matter which way markets turn. We can use it to deploy at lower valuations [as and when a crisis does hit].”
The super invests about 25% of its private equity exposure into venture capital. Clerk said it does so partly because many VC-backed firms today are tech related. This means they can off the ground far more quickly than manufacturing-focused investments of the past. Plus they can act as a weather vane for future technology and market changes.
As he told the audience of AsianInvestor's Southeast Asia Institutional Investor Forum in December forum, “if our VC investments make no money but inform the rest of our portfolio about the future, it will have been worthwhile.”
Sifting through VC funds and small businesses isn’t easy. So the fund is looking to where inspiration occurs: universities.
“If you ask where the most fundamental innovation occurs it’s usually universities, so we have got access via VC partners to many [top-tier] universities, which is a good place to start and build relationships,” Clerk said.
This story was adapted from the Big Interview article in AsianInvestor's December 2018/January 2019 publication.