Since 1999, when Damian Hill joined REST Industry Super to oversee administration, the $20-billion fund has never used a “set-and-forget” asset allocation.
In the late 1990s the fund reined its investments in global equities to 8 per cent of its capital amid soaring valuations of listed-technology companies, Hill recalls. The fund’s overall investments in “growth” assets, such as stocks, fell to 58 per cent of its capital – it’s lowest level ever. It then rose to 77 per cent in late 2009 and is currently 75 per cent, or $15 billion.
In stark contrast to Hill’s first days at REST during the dotcom boom, the fund now invests 26 per cent of its capital, or $5.2 billion, in global equity markets rattled by the European debt crisis. “We’ve probably been more prepared to make asset allocation calls in our history than other funds,” says Hill, who became chief executive officer of Sydney-based REST in 2006. “There are times to be different when you get the probabilities in your favour.”
REST, which was set up in 1988 for retail industry workers but is now open to all Australians, hoarded cash in 2006 and 2007 until about 12 per cent of its capital was invested in short-term paper. It sacrificed returns enjoyed by other funds in the final surge of the equity bull market but kept control of its asset allocation and had plenty of liquidity, or capital ready to invest, when the collapse of Lehman Brothers in September 2008 triggered the financial crisis. REST bought credit securities “in a big way” and kept buying until mid-2009. It was “an opportunity for our members to make money,” Hill says.
Currently, REST believes fixed income securities with terms of five years or longer are too expensive and is underweight the asset class. “That’s hurt us,” Hill says. According to Mercer Surveys, the UBS Australian Government Bond Index returned 12.6 per cent in the year to December 31, 2012. Instead of buying bonds, REST seeks “income streams to harvest” from other asset classes: stocks of companies with strong franchises and management; property; and infrastructure. Its acquisition of the so-called zigzag office building on Bourke Street in Melbourne’s Docklands, the horizontal levels of which are skewed like an unsolved Rubik’s Cube, illustrates this. It paid $250 million for the building and collects rent from long-term tenants including Telstra and BP.