Sunsuper has overhauled its strategic asset allocation while also emboldening its alternative investment program through a series of co-investment deals, SIMON MUMME learns.

David Hartley, the chief investment officer of Sunsuper, says investors for retirement can be placed in one of two categories: those who want to achieve a specific goal with their returns, such as concluding a mortgage or another enduring debt, and those who “want to generate wealth and own as much of the world as they can”.

The $12 billion multi-industry fund’s new strategic asset allocation is designed to satisfy both types. The fund has disbanded its previous five investment choices – from conservative through to aggressive – and accompanying 29 options. Since members “struggled with that much choice,” developing an easier way for them to choose an appropriate option was required, according to Hartley.

So the fund built three “purpose-driven” options for members: long-term wealth-creation, conservative and default. “Members either want wealth-creation, or accumulation to some relatively fixed sum of money.” The wealth-creation option aims to outperform the rate of inflation by 5 per cent in seven-year periods and has a larger weighting to alternatives, while the conservative targets a return of 1 per cent above cash in two-to-five-year periods.

The default product has a bias towards wealth-creation but has a similar risk profile to the median Australian super fund. If members are not satisfied by these options, they can customise their asset allocation, including the respective weightings to asset classes. While an increasing proportion of members have been taking a more active interest in determining which investment strategies they want to govern their super in the last five years, 80 per cent remain invested in the default product, Hartley says.

In addition to restructuring member investment options, the fund has concentrated on its alternatives program in recent months and formed two new co-investment relationships. In April it allied with Peter Cassidy, founder of private equity firm The Sentient Group, which manages the $168 million Global Resources Fund, to bid for a 10 per cent stake in Geodynamics, an Australian geothermal resources developer. In February, Geodynamics finished drilling a 4,200 metre well, Habanero 3, in the Cooper Basin in its quest to extract ‘hot fractured rock geothermal energy’ from the earth.

The company has not yet proved the viability of generating a reliable energy flow from this source, as it must build plant and transmission lines before establishing a commercial power plant. Hence, if their bid is successful, Sunsuper and Sentient would be early backers of the company. “If you can extract that energy, if it works, it will work spectacularly well,” Hartley says. The outcome of the bid was subject to a shareholder vote scheduled to take place shortly after Investment & Technology went to press.

If approved, Sunsuper will own 5 per cent of Geodynamics, valued at $19 million. Sunsuper’s other co-investment relationships, with Macquarie Bank and Lazard Carnegie Wylie, are not so direct. The fund recently awarded an initial $150 million mandate to the Macquarie Special Situations Fund.

Hartley expects the deals transacted by the manager to each be exited after one or two years and to be struck across global markets – “wherever Macquarie finds opportunities…We’re happy to accept wherever they’re putting the money.” However these investments must not be strategic stakeholdings but “returns-focused”. The potential for the mandate to be invested in various asset classes appeals to Hartley. “We don’t want to too feel boxed in, like when a mandate only goes into a particular asset class, such as infrastructure. What happens if infrastructure isn’t the place to be in the future?”

One benefit of co-investing with Macquarie Bank is that the deals into which Sunsuper invests should be subject to “better due diligence since they involve [Macquarie] money as well”. Longer-term private equity deals are sought by Sunsuper through a now two-year old relationship with Lazard Carnegie Wylie, with $200 million committed by Sunsuper so far (accompanied by a 5 per cent stake in the LCW business and guaranteed access to further fundraisings).

In 2007 the firm bought a 90 per cent stake in Dun & Bradstreet, an Australian credit reporting, debt collection and sales and marketing data provision company, and a 29 per cent holding in PPI Corporation Holdings, which manufactures and distributes water and irrigation materials. Hartley and his internal team will also seed esoteric investment vehicles.

“One of our favourite questions to ask managers when we visit them is: ‘Which opportunities do you want to take but have no money to take them with?” Hartley says. GMO, for instance, has built a ‘mean-reversion’ vehicle for the fund, which detects movements in stock prices between two and four standard deviations from their respective means. After identifying these movements, the manager sets investment positions in response and holds them until further movement occurs – hopefully towards fair value. Sunsuper has put $250 million into that fund.

Towards the end of the last bull market, the Boston-based GMO also found that investors were dumping large-cap stocks to invest in private equity “at high prices,” according to Hartley. With Sunsuper’s backing, it set up the Large Cap Quality fund, into which the institution poured up to $200 million. The internal Sunsuper team has appointed numerous asset consultants to analyse particular market sectors. “We recognise that we’re not the sole source of ideas…We want significant relationships everywhere in the world,” Hartley says.

The major consulting contract, formerly with Russell, has been given to Mercer, although Russell still provides ad hoc research for the fund. The Ray King-founded Sovereign Investment Research, and Access Capital Advisers, help source the infrastructure and alternative investments overseen by portfolio managers Megan Chan and Bruce Tomlinson. “During our strategic asset allocation review we used information from Mercer, Russell, Access [Capital Advisors], Makena Capital and Bridgewater,” Hartley says.

The fund’s alternative investments also extend to the terrains frequented by US academic endowment funds, an area notoriously difficult to access since the managers in this market rarely open to money from new investors. Sunsuper’s passport was a $605 million mandate with Makena Capital Management. Makena’s portfolio is run exclusively by former endowment and foundation principals, such as ex-Stanford chief executive Mike McCafferey, and implements strategies similar to those used by the endowments across listed equities, private equity, hedge funds and listed and direct property. “They want equity-like returns with half the risk,” Hartley says. Sunsuper is the only Australian super fund to have secured an investment with Makena. “It has given us access to opportunities that we did not have, and more credibility,” Hartley says.

In late 2007 the fund purchased the assets of a listed infrastructure fund run by Colonial First State (CFS). The managers of CFS Private Capital were willing to shed assets, but could only find buyers for individual holdings. Sunsuper was interested, but reticent to buy, say, Brisbane or Perth airports as single investments, since the existing shareholders in those assets would be offered them at the same price that Sunsuper might propose. Instead, the fund chose to “clean the whole thing up” for $116 million, a 1 per cent premium to net-asset value.

These alternative investments were identified primarily as separate opportunities and not part of a planned strategy. “We’re interested in new ways of making lots of money,” Hartley says. “Personally, I’m one of those who want to own as much of the world as I can when I retire.”

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