The $6.8 billion HOSTPLUS has, through its Australian equities incubation portfolio, become the first institutional backer of a high-conviction domestic equities manager.
The fund awarded a $30 million mandate to the strategic Australian equities fund, run by Industry Funds Management (IFM), continuing its program of investment in emerging domestic equities managers, which in the past has featured Paradice Investment Management and Acadian Asset Management.
The mandate represents the first institutional commitment to the IFM product and was funded by a partial redemption from HOSTPLUS’ passive equities allocation. Until now, the IFM product ran a small seeding from IFM and some family office money.
David Elia, chief executive officer of HOSTPLUS, said the fund was impressed by the long-term view that IFM applied to active management.
“The fund really does take that long-term view by investing in sustainable businesses with a long time horizon, and the mandate seeks to have a lower level of turnover than most in active management,” Elia said.
He said one major benefit of investing early on promising managers was that it helped secure capacity in years to come, and lower manager fees.
The incubation portfolio holds about $150 million in mandates, including those awarded to other high-conviction managers Greencape Capital and Orbis. Funds that have advanced from the incubation into the core Australian equities portfolio are Paradice’s mid and large-cap funds, and Acadian’s long/short product.
“We initially started off with a $40 million mandate to Acadian, which has grown to $130 million,” Elia said.
The manager of the fund, Clyde Haldane, who in the past was a founding partner of Portfolio Partners (now Aviva Investors), regards the ability of companies to replenish their assets, or effectively reinvest in their businesses, as paramount when making investment decisions.
Haldane’s process involves quantitative assessments of the ability of companies to recycle cash flows, and then qualitatively ranks them according to their prospects for providing solid returns through business strength and incremental reinvestment, arriving at a portfolio of between 15-25 companies.
Whether reinvestments are made through borrowings or free cash flow, and management have implemented long-term business plans, are important factors. ESG considerations are also taken into account.