Kate Misic, head of alternatives at Telstra Super, manages 7 per cent of the fund’s assets in private markets and hedge funds. She talks to Investment Magazine about her approach to each asset class.
Telstra’s allocation to hedge funds, private equity and private debt eats up a large part of the $17 billion fund’s fee budget, but it is justified in the belief that both approaches offer unique sources of return, giving the end result of diversification.
The set allocations to each asset class (see example below) is met depending on the opportunity set available at any one time.
Telstra Super’s hedge fund program consists of seven managers including Carlson Capital, Och-Ziff Capital Management Group, Winton Capital Management, York Capital Management Global Advisors and MKP Capital Management and is expected to produce returns that exceed inflation by 6 per cent or cash by 3 per cent over the long term.
“We are not wanting to take higher risk to try to shoot the lights out, we are looking for a moderate return profile with moderate risk and that has worked out so far,” says Misic. The program has worked well in not “particularly difficult markets” with bond like volatility and equity like returns since Misic took it over in 2010. On balance she says there is scope for the volatility in the program to be higher.
There are several attributes in having access to such managers, not least their ability to find value in current markets.
“When you talk to them, there are certain things that they are quite excited about doing, which does give us some comfort,” she says. “Things are getting expensive but not as much as in 2008, there are different balance sheets.”
She likes their flexibility to move assets away from emerging risks and towards emerging opportunities. “They tend to be quite rapid re-allocators of capital, much more rapid than Telstra Super can be at times,” she says.
While another attribute is their focus on niches or exposures for which they have a high conviction – and the flexibility with which they hold them. Though, she emphasises that such strategies are aimed at bringing medium term results, not for short term gains.
She gives the example of a manager with a large position in an oil company, because the manager believes it has opportunities around acquisitions. The manager then adds a short on oil – due to poor visibility around oil prices – to balance its bet.
“It is all about focusing the capital to where they have an information edge and that is why we continue to see good results out of the hedge fund program,” says Misic, who generally sees the dislocations from falling oil prices as leading to some energy companies being oversold and potentially having to recreate their capital structure in either private debt or private equity.
Misic selects hedge fund managers based on the fund’s internal know-how and with help from its specialist consultant Albourne. Where she is confident that the fund has the skill set to determine the best managers in a space for a specific strategy the fund will use a single manager. If not, and if the returns after the extra fees make sense, Misic is prepared to go with fund of hedge funds.
“If we find opportunity sets where it is better to have manager diversification, or we are unable to access the best managers, or we believe there is a particular skills set to access the best managers that we do not have internally in all those circumstances, we are happy to go to fund of funds,” she says.
Telstra Super’s private markets program allocates 70 per cent in private equity and 30 per cent to private debt. It uses 32 managers including such well-known names as Advent, Blackstone, Goldman Sachs Asset Management, HarbourVest, Oaktree and Siguler Guff. The objective for Telstra Super’s private market allocations is to exceed public market returns by 3 per cent net of all fees.
17 per cent of the fund’s fee budget is in private markets alone and similar to the rationale for hedge funds Misic says it is not just about the numbers it brings, but the wider source of returns it offers.
She explains it is about accessing strategies that cannot be pursued in listed markets such as venture capital, senior loans, distressed debt and the fact that private companies tend to have different sector biases to public companies.
Notably the bias within Australian listed equities towards resources and banks is a good example of the need for diversification. Another is the greater scope for sentiment to be a factor in volatility in listed markets.
Ironically perhaps, overheating in the private assets space has meant Telstra Super is in the unusual position of being a net seller of private equity, with the majority of its limited partnerships in exit phase. It still manages to hold its target allocation to the asset class.
“We think it is better to be a seller than a buyer today,” she says, before firmly stipulating that no one should be under any impression that the whole portfolio is for sale.
The fund’s last commitment in the space was a couple of years ago into senior loans. However, the up and coming search for a private market consultant shows that it believes opportunities will arise.
“We believe a new opportunity set will arise in the next five years, which is the time it takes private market allocations to be deployed.”
The fund’s main consultant Jana feeds into the process of private markets and hedge funds only in its overall asset allocation advice for setting the objectives of these assets. The role of the specialist is to advise on the strategies to best meet the objectives set by Jana.
Private equity co-investment is becoming increasingly popular at larger super funds, partly as a means of reducing fees and partly as a way of gaining useful knowledge, but Misic says that Telstra Super is not currently undertaking any co-investment. She rationalises that before participating in co-investments a fund needs appropriate resources for direct due diligence and needs to set up fit for purpose operational structures and governance.