The key offerings from fund manager QIC read like the constituent parts of a stable, inflation-linked income portfolio. There is property and infrastructure, bonds and – for a bit of spice – some absolute-return capabilities. The possibilities are not lost. So while many are busy philosophising about how to invest in retirement, QIC believes it already has the building blocks.
“We need to play a part in the development of those post-retirement solutions and set our mind to some way of packaging these asset classes together to come up with an appropriate solution,” says Damian Frawley, chief executive of QIC.
As someone who has come up through sales and business development, Frawley’s role is to maximise potential based on feedback from clients, many of whom are increasingly looking for investment solutions such as this rather than just access to an asset class.
Pooled funds are also planned so that QIC can cater for funds smaller than its existing clients.
“There is a bunch of small-to-mediumsized super funds that would like access to our team, but cannot because it is a segregated business. So we are looking at infrastructure and fixed income for comingled vehicles. In real estate we are saying, ‘Let’s look at the product structures. Do we have the right products to go to a wider universe of clients?’”
The fund’s top-end clients, by contrast, are looking to exploit the advantages of scale.
“They want to deal with fewer managers, they want to have broader and deeper relationships with their managers, by and large,” he says.
One of these clients is QSuper, a fund QIC is rumoured to be working to a time limit with, which Frawley dismisses. “There’s no set finite time for them to keep the money with us. We have a good level of dialogue with QSuper on many fronts.”
Simplification, not diversification
When a fund manager is successful and growing it must be tempting to offer more asset classes, but Frawley is passionate about sticking to what he calls the “engines” of QIC.
He explains how when he became chief executive in July 2012, one of his first actions was to focus on core capabilities by terminating an Asia-Pacific quant fund, winding down a bioventure business and shelving plans for a resources fund.
“There were a couple of smaller businesses that I needed to make a call on whether they were going to be core to the business going forward and, no, they weren’t, so I terminated them reasonably quickly so that we could focus our energy on those more robust engines [private equity, infrastructure, real estate, fixed income and the multi asset class team]. These have stood the test of time, have stable investment teams, had a good process and clients wanted to buy them,” he says.
“We do not need to be in every asset class. There are no plans in the foreseeable future to be in equities, with the exception of our small-caps team where we have a strong track record. We can innovate enough in those asset classes to create new ideas and provide solutions to clients.”
When so many fund managers offer a long, confusing mix of product lines, Frawley rightly sees the advantage of a smaller range of asset classes with a logic to them – he describes QIC as a “diversified alternatives business” – as means for prospective and current clients to understand and engage with them better.
Expanding asset classes
QIC manages most money in multi-asset strategies on behalf of government defined benefit plans and Frawley sees the lessons derived from liability matching as applicable to many other institutional investors. “We face the same challenges as many of our clients through our management of government superannuation funds and other statutory funds, so we can engage with large funds at a very different level to your normal fund manager. The recent merging of our capital markets and diversified funds management teams gives us that ability to have holistic discussions with clients.”
In fixed income, he sees more development of absolute return and inflation-plus solutions. “We are moving from a core bond to a multi-strategy, outcome-based, almost hedge fund-looking fixed income business. It is what is in demand at the moment, not core bonds.”
Meanwhile, the private equity business has evolved to focus more on direct and secondary investments, with co-investments a key focus. Frawley says clients are seeking greater control, transparency and access without the layers of fees associated with the fund of fund model.
He spends the greatest time talking about the potential in infrastructure and property investing – “infrastructure and real estate are hot and will remain hot for some time”, and reveals that both teams are expanding through recruitment.
Retail, infrastructure and other real estate
In property, QIC specialises in shopping centres and commercial outlets. At the time of this interview, the real estate team had just agreed with US investor Forest City to form a joint venture for a real estate portfolio of US retail malls. The deal has been struck to give clients access to scarce offshore, premium-quality assets.
The deal took nearly four years to come to fruition, owing to due diligence, admits Frawley, but it is the sort of deal it is looking to pursue more of. Demand is such in these asset classes that QIC does not find enough opportunity in Australia to buy assets. He says buying abroad involves a longer due diligence process – particularly when assessing sovereign risk, tax and regulatory issues – but demand from superannuation is forcing the issue. “There is an abundance of capital chasing scarce assets and Australia is a finite market. That is why domestic investors are looking more globally.”
Additionally, Australian infrastructure is popular among foreign investors as its low government debt means less risk of default, and Frawley points to a “lot of interest from Canada and Asia” and “consortiums of smart global investors”.
QIC has acquired ports in Spain and car parks in the US, as well as gaining a great deal of experience in talking to overseas governments and sovereign wealth funds.
Frawley is proud of what his team has achieved. “We have, in my belief, the best team in the country as evidenced by the fact that we recently purchased on behalf of a client the Moomba gas line between the Cooper Basin and Adelaide. It is a complex asset class, but we have a good team. It has been in existence for seven years and has avoided all the train crashes in that time – and there have been a few along the way in the sector – which is testament to the quality of that team.”
Part of the process in adding real value, he says, is to intensively manage the assets. In the example of toll roads and tunnels, this would be in maximising traffic flow based on the experience gained in running many other similar assets.
QIC has investment offices in North America, one in Europe but none in Asia. Frawley admits this looks unbalanced, but does not want to rush in.
“We need to understand the Asian market better and that is going to take some time. There is no doubt China is on the radar of many domestic businesses, but how you play China is the $64-million question and we are still trying to find the answer.”
He is adamant any new outlet will be for investment rather than sales.
“Plonking a sales office in Asia and trying to kick doors down is a flawed strategy. There has got to be an investment reason for you to go there.”
As bold as these plans are, there is one area Frawley has no intention of entering.
“We will always be institutional. We will never play in the deep retail space. You have to spend a lot of money to do that and I am not prepared to do that. There is ample scope for us to grow our business with those existing asset classes that we play in.”