Hospitality and tourism industry fund Hostplus’s predominantly young member base gives it an advantage over other funds in weathering market falls, CIO Sam Sicilia says. That’s why he says he isn’t fazed by the prospect of increased volatility, free falling equity markets or even the emergence of a prolonged bear market.
The fund enjoys high in-flows and low out-flows, as it has few retiring members, Sicilia tells Investment Magazine. This gives it a high tolerance for illiquid investments that hold their value in times of market turmoil.
Hostplus’s young membership played a role in it copping some heat during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, due to its large number of low-balance or inactive members. But Sicilia’s comments highlight the advantages this demographic can bring, as it helps the fund frequently head the SuperRatings top 50 list, due to its high returns.
The fund has also been able to build up a multibillion-dollar portfolio of “liquid defensive assets”, which will be cashed in if markets tank, and used to buy equities at cheaper prices.
Sicilia is not expecting anything worse than greater market volatility in the near term, however, and recent falls in Australian equities are evidence of volatility returning to historical norms, he said.
“We’ve just had a period over the last five or so years when volatility in listed markets has been very, very low,” Sicilia says. “So in many ways, we’re just going back to what is a more normal market.”
Fund managers can help counter volatility by ensuring they are fully diversified, he says, and Hostplus’s exposure to unlisted assets such as infrastructure, real estate and private equity make the fund less vulnerable to market volatility.
Hostplus gets much downside protection from its unlisted assets, he says, which it can buy liberally because its young membership gives it a high tolerance for illiquidity.
“When you have a young member demographic in a fund, a lot of money comes into the fund but not a lot of money leaves because they’re not retiring anytime soon,” Sicilia says. “So that gives us the cash flow to take advantage of markets, whether listed or unlisted.”
In July, Hostplus moved 2 per cent of its capital from Australian equities to international equities, which Sicilia says represents just some tweaks “at the margin” to account for increasing volatility, as international markets are more diversified.
He is not concerned about the emergence of a prolonged bear market, as interest rates are still low in most parts of the world, meaning equities will remain an attractive place to stow capital.
Falling house prices in Australian capital cities will probably have significant flow-on effects to other parts of the economy, he says, due to the impact on consumer sentiment.
“If people feel less wealthy because their house price has gone down, even if they’re not selling, there’s a general pessimism through the media,” Sicilia says. “Depressed housing prices affect sentiment, which affects spending, which affects inflation, which affects the central bank’s ability to raise interest rates.”
He says he doesn’t expect inflation to appear anytime soon, in wages or the price of goods, as there is downward pressure on prices in many sectors.
“Consumer sentiment is low, even though business sentiment might be high, so people aren’t spending,” Sicilia says. “I don’t see inflation soon or interest rates increasing soon and that’s probably true over the next year or so.”
Equity markets “should have a good time” in the absence of a breakout of inflation or higher interest rates, he says.
And if equity markets head south, Hostplus has spent years building up a portfolio of “liquid defensive assets”, which are hedge fund strategies that Sicilia expects to drop less than the equity market during a correction. These will be cashed in during times of market turmoil to buy equities at cheaper prices.
“That portfolio is now more than a couple of billion dollars in size,” Sicilia says. “We haven’t used it yet because the market has been volatile but not significantly so. The volatility we’re concerned about is when the market is, in essence, in free fall, and then we will slowly put money back in to buy equities at a cheaper price.”