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How Australia's second-largest pension fund navigates liquidity risk

With a large allocation to unlisted assets, the Australian Retirement Trust’s CIO says the fund takes a proactive approach to managing its liquidity risk to ensure it meets its obligations.
How Australia's second-largest pension fund navigates liquidity risk

Although a relatively new superannuation fund, the Australian Retirement Trust (ART) has been rapidly expanding to become the second-largest pension in Australia with A$280 billion ($184 billion) in assets and over 2.3 million members since its historic inception in 2022.

Ian Patrick,
ART

ART's investment strategy involves a substantial exposure to unlisted assets, such as infrastructure and real estate. While these assets offer the potential for attractive returns, they also pose liquidity challenges.

"We're very conscious of our liquidity risk, given that we have a meaningful exposure to unlisted assets, and that's something that we monitor and manage very carefully," Ian Patrick, chief investment officer at ART told AsianInvestor.

Managing liquidity risk is a delicate balancing act for any super fund, especially one of substantial size, and Patrick is no stranger to its nuances.

"We've determined the appropriate balance of risk between seeking out the illiquidity premium as a return driver, and managing the liquidity risk is in that low 30% exposure to the sum of unlisted assets,” said Patrick.

Originally established through the merger of super funds Sunsuper and QSuper, ART has gone on to absorb Commonwealth Bank Group Super and AV Super, and recently opened its first overseas office in the UK.

The fund’s strategic allocation across four key asset classes – infrastructure, real estate, private equity, and private debt – allows it to optimise returns while maintaining a manageable level of risk.

LIQUIDITY TRIGGERS

ART's approach to the liquidity challenge also includes rigorous stress testing.

"We include a number of considerations, including that strong cash flow from compulsory contributions, and employ a number of liquidity stress tests."

By simulating various market scenarios and assessing the potential impact on the portfolio's liquidity, ART can identify potential vulnerabilities and take pre-emptive measures to mitigate risks.

Also read: Australia's second largest pension targets infra, private markets from UK office

The super fund has established a set of triggers and tests within its investment policy to guide decision-making and ensure prudent risk management, according to Patrick.

"We have within our liquidity policy some triggers that we have to consider as we approach 35% [exposure to unlisted assets]. It's not a hard limit, but it's certainly a soft limit that forces us to reexamine commitment schedules, deals under consideration, etc." he said.

These triggers serve as an early warning system, prompting the investment team to reassess the portfolio's position and make necessary adjustments.

A robust governance structure that includes thematic reviews, internal audits, and an annual deep dive liquidity report presented to ART’s Investment Committee also complements the system of stress tests and triggers.

This multi-layered approach ensures that the super fund’s liquidity risk management strategy remains effective and adaptable, according to Patrick.

“By proactively monitoring and managing liquidity risk, we aim to maintain a well-balanced portfolio that can withstand market volatility and meet our obligations to members,” he said.

BALANCING ACT

As the Australian Prudential Regulation Authority (APRA) heightens its scrutiny of unlisted asset valuations this year, the super fund's investment strategy remains flexible and responsive to evolving market dynamics, according to Patrick.

ALSO READ: Australian regulatory scrutiny of unlisted assets reflects global trend

"We're very conscious of the need to be responsive to changes in the market and the regulatory environment. Being flexible allows ART to adjust its investment strategies and liquidity management practices as needed to navigate evolving risks and opportunities.”

As the fund pursues both organic and inorganic growth strategies, maintaining a balance between growth and liquidity remains a top priority, according to Patrick.

Another key aspect of ART's risk management strategy is leveraging external expertise in the pursuit of real assets.

By partnering with specialist managers who have deep knowledge and experience in managing unlisted assets, ART can tap their expertise to make informed investment decisions and manage liquidity risks effectively.

"We believe that specialist capability is best vested in the best managers in the world who can attract and retain that talent."

¬ Haymarket Media Limited. All rights reserved.
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