It is a real changing of the guard at UniSuper, with a new chief executive and a new chief investment officer being appointed in the past year. John Pearce, the new CIO, has only been in the job for two months, but already he is engaging staff and the investment committee in challenging dialogues about how they conduct business. Managing equities in house is one of the options he would like to consider, and he is asking his team to engage in some collective thinking about the best way forward. The fund has 24 internal staff, spread across private and public markets, asset allocation, as well as fund rebalancing and performance reporting. “To date we haven’t managed any money inhouse but it is one of the things I’d like to look at for the future,” Pearce says.
“There is no reason why we can’t, with the level of skills we have in the organisation, particularly in the quant area.” The idea is to explore the possibility of model-based investing with the investment decisions made by UniSuper, and the administration and transactions performed by its custodian, National Custodian Services. With a lot of consultant studies now suggesting inhouse management is cheaper than external management, it is a persuasive argument, however it is not just cost savings per se that would drive the decision. “We have driven costs down pretty aggressively for our members, so I’d like us to have a better proposition than just costs. I would like us to demonstrate we can add value through returns, top line as much as the bottom line.”
Pearce’s predecessor as CIO, David St John, was famous for saying that for every $1 billion under management another internal investment person should be added, but Pearce doesn’t believe there is any magic number. “Asset management is a very scalable business in the public asset classes, I don’t think it takes any more resources to manage $1 billion or $5 billion of, say, fixed income. But when you get into private markets, it’s much more labour intensive. But if in 12 months time we haven’t increased our staff I’d be disappointed, I’m a growth guy. If we take on more internally, and we are going to be more committed to the private markets, that will come with staffing requirements,” he said. At the next investment committee meeting, Pearce said there would also be consideration of the fund’s international and Australian equities mix. UniSuper’s balanced fund still has a relatively high allocation to domestic equities at 27.5 per cent while the international equities allocation is 22.5 per cent, although it is quite innovative in its alternatives allocation.
Pearce believes the recommitment by Western governments to infrastructure projects is one of the benefits of the recent crisis, and with less capital chasing potentially more deals, investing in developed economies’ infrastructure looks quite attractive. While the fund is committed to investing in illiquid assets, and has more than 10 per cent of the fund currently committed to alternatives, Pearce is mindful of the risks associated with these investments. “My biggest issue at the moment is the risk that comes with investing in illiquid assets. As an industry I don’t think we have come to grips with that. My intuition is that for the last couple of years, maybe forever, the market hasn’t properly priced the risk of illiquidity.” Within its alternatives bucket, UniSuper has more than 48 separate international private equity investments, including its largest commitment of $30 million in the NGP M&R Offshore Fund, a US-based private equity fund investing in selected areas of the energy infrastructure and natural resources sectors.
It has a further 32 domestic private equity commitments, including $32 million in CHAMP Buyout Fund 2, with its largest alternative commitments being $110 million in Leichhardt Coal (Blair Athol), and a $120 million allocation to Anglican Water Group. But Pearce says, just because you can invest in illiquid securities, doesn’t mean you should. He joined the fund in July, after spending the last few years as head of global asset management for China’s second largest insurance company, Ping An based in Hong Kong, and was also formerly chief executive of Colonial First State, the asset management division of Commonwealth Bank and Australia’s largest funds manager. Pearce is a big believer in the inefficiencies of markets, and so in active management.
“The active/passive debate is something that will never go away, but I hope the debate over inefficient and efficient markets goes away. I don’t believe any market is efficient, I don’t even believe the US Treasury market is efficient, [it] just means it is tough to exploit. If you believe in market inefficiency then you set up an argument for active management, it is just a question of how much and who,” he says. “We are very supportive of taking an active approach, how we exactly do that is something we are constantly looking at.” UniSuper has about 15 Australian equities managers, and the same amount of international equities managers, and the fund is grappling with that mix.
“The question is whether that is too many, whether we can modify that.” In addition to manager selection, Pearce says there could be more attention paid to the scope of the mandate of each manager. “As a whole, the institutional market in Australia is not creative or aggressive in the way they set their mandates – the structure, the benchmark and the length of time. One thing we can look at is whether there is room to be more creative, add international, restrict number of stocks, or increase the commitment according to time frame.”