Australia’s largest industry super fund has looked to India to boost returns, as it ramps up its allocation in offshore private markets to further diversify its portfolio.
The strategy has seen AustralianSuper join Ontario Teachers’ Pension Plan to invest a combined US$500 million in India’s National Investment and Infrastructure Fund (NIIF) with plans to double that allocation in the future.
India’s sovereign wealth fund had previously struggled to attract foreign investment into a sector beset by corruption, red tape and a weak legal system. Further, the pension funds’ investment follows a crisis in India’s shadow banking sector which threatened NIIF’s ability to finance infrastructure projects.
But AustralianSuper chief investment officer, Mark Delaney, who helps oversee some $165 billion in assets, insists that there have been improvements over the years. He also said that it is noteworthy that Ontario Teachers is investing in the NIIF too. “Given there is heightened regulatory risk globally, it is not enough to simply say that India has high risk where OECD countries are low,” he says. “Different sectors will have different regulatory risks.”
Delaney also said India looks relatively benign compared to other countries currently, adding that the regulatory risk in developed markets infrastructure is high and increasing.“It’s important to remember that this can change quickly and no country is immune,” he concedes.
The investment chief pointed to the nationalist threat in the UK and numerous examples of regulatory risk in Australia. “There is a question that in developed markets, investors are not getting the returns for the regulatory risks that exist there,” he said. “While India also has these risks, the returns appear to be priced better is some sectors.”
Delaney likes India’s high GDP growth, largely driven by a growing middle-class. This thematic is what makes India interesting. “It is because of this growth we believe that over the medium to long term, there will continue to be opportunities to invest in the region and hence the potential to invest more there at attractive risk/return profiles,” he says.
Further, he cites structural reforms undertaken by the Indian government such as a national GST, time bound insolvency processes and privatisation processes that split the pricing and assessment criteria. “These will make India’s growth more sustainable, and while risks are still present, they are reducing and likely to trend in that direction going forward.”
Currently, around 5.90 per cent of the fund’s assets are allocated to emerging markets with exposure to India running at 0.58 per cent and China at 1.83 per cent.
Structural forces at play
The super fund currently has 25 per cent allocated to private markets, 11.7 per cent of which is invested in infrastructure. Delaney plans to boost that allocation to 15 per cent.
While his longer-term strategy is to increase investment in offshore private markets, in the shorter term, Delaney says he is not looking to ‘move up the risk spectrum’ but will tilt the portfolio towards infrastructure assets. “The trick is to balance the structurally lower interest rates against being late in the cycle and private markets being in strong demand,” he says.
Delaney expects the ‘lower for longer’ theme will play out over the next 12 months. Further, he anticipates the desire for pension plans to have greater weight in private market assets will play out over the next three to four years. “And then we have the equities cycle which is overlapping on top of that,” he says.
He remains cautious about private equity given the amount of dry powder in the sector, the level of entry multiples and given his view of listed markets. Private markets always lag listed markets in the cycle, he went on to say, so if listed markets come off, unlisted markets will also come off. These are conflicting forces,” he says. “We’re late in the cycle, interest rates are low and we get this conflict because the central banks are seeking to extend the cycle by lowering rates further. On that basis, we are carefully monitoring our capital deployment in private equity and expect to remain cautious for at least the next 12 months.”
Delaney says there are three big global structural forces at play – low interest rates, a swing away from multilateralism to regionalism and governments playing a bigger role in supporting economies’ fiscal stimulus, determining infrastructure spend and increased regulation.
“These things affect every asset; some will benefit from these forces while others will be penalised by them,’ he says. In terms of infrastructure assets, he continues, some will be subject to more regulatory risk while others will benefit from sitting outside of the regulatory regime. “If you look at each asset through those three windows, you can work out their relative attractiveness as and how it changes.”
As he sees it, the world has moved towards multilateralism for the last 40 years as evidenced by the small number of free trade agreements signed in the last few years compared to the much bigger number of pacts forged five or six years ago. Pointing to the geopolitical rifts and schisms around the world – between US and China, the UK and Europe, Europe and the US – Delaney says these are examples of this shift.
Lower for longer
Asked about this long-term view on interest rates, he wavers. Delaney doesn’t think that there is a lot of value in very long-term forecasts, and largely manages the portfolio to shorter-term horizons.
“We do note, however, that a lot of the structural factors that have helped drive down rates over the past few years – demographics, high levels of global debt, technology, and globalisation largely remain in place,” he argues.
Regarding the fund’s listed-equities exposure, Delaney manages via a tactical asset allocation process which seeks to balance both valuation metrics with the macro environment. Around 55 per cent of AustralianSuper’s portfolio is allocated to equities.
Given the current high prices, are lower risk assets that generate lower returns still attractive on a risk-adjusted return basis?
“It’s unclear whether the risks of now lower returning assets, for example bonds and property, have actually reduced,” says Delaney. “We’re focused on identifying the investments that are going to generate us the strongest return, while being adequately compensated for the risk.”
AustralianSuper will probably lift its private market’s allocation in response to lower rates and reduce its listed equities and fixed interest weighting, the CIO said.
In terms of risk premia and liquid alts, Delaney is still trying to determine whether it has a role in the fund’s portfolio. “It’s not an immediate priority for us.”
Despite AustralianSuper being the nation’s largest superannuation fund, Delaney says $165 billion is a “pretty small number” relative to the total pool of retirement savings and a drop in the ocean for global capital markets. “We talk about Australia being the third or fourth biggest retirement market in the world with $3 trillion dollars, or US$2 trillion. The US pension market is worth US 41 trillion so Australia is less than a tenth of the US market and that’s not even the whole globe,” he adds.
The fund is projected to double in size to $300 billion over the next five years.