Sometimes institutional investors must consider radical changes to their investment approach if they are to improve their returns. Media Super offers a good example.
In 2014, the Melbourne-based superannuation fund’s board oversaw a successful root-and-branch review of its investment oversight, asset allocation, manager selection and strategy implementation.
Subsequently, in the Australian research house SuperRatings’ SR50 Balanced fund survey for December 2016, Media Super’s MySuper Balanced option ranked as the third-best performing fund for the financial year (returning 6.72%) and was in the top 10 for calendar 2016 (with 8.73%).
The A$4.93 billion ($3.74 billion) fund outsources 95% of its assets, with its main asset managers including AIFM Investors, Perpetual, Dimensional, BlackRock and QIC. Some 43% of its portfolio is invested overseas, across private and public equities, property and debt.
MediaSuper’s chief executive, Graeme Russell, explains how the turnaround was achieved.
Q Please describe the fund’s investment mandate.
The fund’s mandate states that 75% of assets are invested in the default balanced option, under MySuper rules. The Balanced Option has 72% exposure to growth assets and 28% to defensive assets. Over rolling 10-year periods, the investment objective is to have a 70% probability of achieving the required return after fees and taxes, equivalent to CPI +3.5% per annum. On a risk measure, we set the estimated chance of a negative return in any one financial year at less than one in six. The estimated number of negative annual returns over a 20-year period is three to four.
Q How has your investment policy and asset allocation changed in recent times to keep the fund on track to meet the return target?
In mid-2014 we took a strong dynamic asset allocation based on our belief that equities around the world had some way to go and that was the place to be, particularly in an environment of very low interest rates. We also took a view on the Australian equity market, where the top 40% of the market is represented by four banks, three mining companies, two supermarkets and a telco. We said our exposure was too high and there was too much concentration risk, so we took a lot of money out of the top 20 stocks and put it into the next 80.
Q What were the key factors in the fund’s asset growth in the past three years?
Because we were taking such a strong tilt towards equities, we decided to put some downside protection in place. We were one of the first super funds in Australia to buy put options, which served us well through a market fall in August 2015, but it also served us well to have those options in place during Brexit [Britain's vote to exit the EU in June last year] and during the US election [in November], even though in each case the market bounced back up.
The other downside protection we had was to maintain fairly significant exposure to foreign currencies, based on the belief at the time that the Australian dollar was overvalued. It was at 94 [US dollar] cents when we made the decision, and today we are at 75. So that’s boosted returns as well.
The strong underpinning of our unlisted infrastructure and property has been really important to us, because we know that for 20% of our portfolio we are going to get between 8% and 11% with low leverage. Australian industry funds all have about the same allocation to unlisted infrastructure and unlisted property through vehicles that we own via [Australian real asset managers] IFM and ISPT, and so we’ve got about 10% in unlisted infra and 10% in unlisted property.
That’s a core to our portfolio because it’s going to deliver around 10% to our portfolio every year. But the issue with that is: it’s unlisted and there’s a limit as to how much we can put into illiquid assets. We’ve still got some scope for investment into property, but we are close to our limits on private equity and opportunistic debt.
Q Do you invest in alternative strategies such as hedge funds?
Yes, approximately 3% of the fund is invested in opportunistic investments. We had some underperforming hedge funds, which we divested and invested in opportunistic equities, getting into smaller companies that need capital.
We also have a revolving film and TV financing fund – the Fulcrum Film Finance Fund – to help finance Australian film productions, and that’s done very well for us over the six-year lifespan so far.
The fund’s loans are secured against a government-produced offset guarantee, so it’s a pretty secure investment for us. It has delivered an annualised 6.8% over that time. That’s fairly quick turnaround, inside 18 months for film and 12 months for TV. That’s given us a much better return than cash and is much more secure than bonds.
We are about to announce a similar A$30 million fund for research and development grants, and we’ll be using the same model to advance money to companies that qualify. We expect that will deliver us returns even higher than the film fund, in the range of three to four times cash returns.
Q What type of investments have you made in private markets?
Approximately 4% of the fund is invested in private equity. We partner with organisations such as Champ, where we recently participated in the purchase of Macpac (outdoor apparel); Archer GoGet cars; Best Friends Pet SuperCentre; and EQT, which owns the largest vet services provider in Northern Europe, with more than 160 clinics and hospitals across Sweden, Norway, Denmark and Finland.
In the second part of this series, Russell explains how Media Super hopes to keep its good performance going and reflects on lessons learnt.