Sonya Sawtell-Rickson is half way through her three-year plan to restructure the investment functions of HESTA that has seen the $57 billion superannuation fund bulk up its alternative and private asset holdings and build out an in-house equities team.

Sawtell-Rickson, who joined from Queensland Investment Corp. as chief investment officer in 2017, has spent much of the time juggling day-to-day asset allocation decisions with a broader review of the fund’s investment operations and capabilities. Ahead of the market rout that erased more than US$6 trillion from global equity markets, HESTA had already reduced equity risk in the portfolio.

“As market valuations became elevated and the economic outlook more fragile, we used our dynamic asset allocation process to further reduce our listed equity holdings,” the CIO said. “While we clearly couldn’t have predicted the COVID-19 outbreak, there were clearly risks and imbalances emerging in the global economy.”

Along with reducing their exposure to the equity market, by the end of 2019 Sawtell-Rickson’s investment team had completed a secondary sale in private equity, allocated more capital to alternative risk premium strategies and macro hedge funds and further diversified the portfolio into infrastructure and real estate.

“We have been doing things that wouldn’t surprise many people,” the CIO conceded. “The investments that we are making have the stability of cash flow underpinning them. It’s been not only about generating long term returns but also managing drawdown risk.”

Coronavirus

Since first speaking with Investment Magazine in December, Sawtell-Rickson said the outbreak of the new strand of the coronavirus that triggered a selloff in the market and coordinated interest rate cuts around the world, had increased the probability of recession. She added that fund’s high cash holdings, currently at 5 per cent, ensured they would not be constrained in taking advantage of investment opportunities during the market rout.

Her team is targeting 8.5 per cent of the core pool portfolio to alternatives along with a further 27.5 per cent to other “diversifying” asset classes including infrastructure and real estate. She added that while the fund had so far opted to sell equities, the use of options to mitigate further downside risk was also “under constant evaluation.”

“Our outlook was already cautious given the high valuations, the high level of debt and other late-cycle characteristics,” she said. “We’re carefully monitoring developments and working with our global partners to look through the noise and fear to focus on understanding and quantifying the potential impacts to long term earnings and value.”

HESTA’s core pool fund, which oversees the vast majority of the fund’s total assets, returned 7.25 per cent last financial year. For the calendar year it returned 14 per cent, falling just below the median and ranking 42 out of 65 on Chant West’s best performance list. Over 10 years, it has returned 8.5 per cent, placing seventh amongst its peers.

With Sawtell-Rickson’s experience in running multi-asset strategies for QIC, she has transitioned the team to take a total-portfolio approach to investing and has adopted a hybrid-manager model using a mix of internal and external investment managers. At the time of her appointment, the CIO said she was effectively given a “blank sheet of paper.”

Go direct

A “big area” of focus since Sawtell-Rickson came on board has been building out HESTA’s unlisted investment program. She’s gradually allocated capital to managed direct strategies where a fund manager invests on HESTA’s behalf. This has seen the super fund over the past 12 months invest in renewable energy and other so-called transitioning infrastructure assets in the emerging markets.

“We see managed direct is on the path towards direct investing,” she said. “It’s not currently planned in this strategy to go direct, but all things are on the table for the next three-year strategy which we are starting to turn our mind to now.”

The industry fund for health care professionals is also looking to allocate more money to affordable housing (“we’ve already done a number of tranches”), has set up an investment mandate in health care (“we have been increasingly looking to leverage our industry vertical”) and deploy even more capital in real estate and infrastructure (“we’re getting diversification across the board.”)

Already Australia’s seventh-biggest industry fund, HESTA’s assets along with most of its peers, is forecast to double in the next five years. Sawtell-Rickson said as they have increased their holdings in private assets, they’ve avoided the competitive investment process by partnering with firms like IFM Investors and investing in the emerging markets which are “less traditional” for the bigger asset owners.

Like AustralianSuper and her former employer QIC, HESTA is also weighing public-to-private investment opportunities. While the CIO stressed that the fund’s starting position was always to invest in the listed form first, particularly in Australia, they have occasionally received approaches from third parties to look at certain assets.

“I think often there is an opportunity that presents itself because there is dislocation in the listed market,” Sawtell-Rickson said. “It’s much more about what is it about the listed market that is not driving the value creation of the asset.” She said the fund had not invested much “so far” in such a strategy but they had done one such deal in India.

Emerging markets

Elsewhere, Sawtell-Rickson is looking to grow HESTA’s assets in the emerging markets, where one fifth of the portfolio is already allocated to listed equities. While they haven’t invested much on the debt side, they are monitoring the asset class, she said.

On the operational side, the CIO has been overseeing the development of HESTA’s investment operating platform to incorporate an internal asset management function. They’ve hired Steven Semczyszyn, the former CIO of the now defunct JCP Investment Partners, to build an Australian equities team by 2021 and plans are in place to start internalising cash and fixed income in 2022. Today, HESTA’s internal investment team including execution stands at 84 people.

“Through time I think (internalisation) will impact fees,” she said. “We don’t just see this as an option to lower fees, there are other benefits that funds will gain that are both performance and insight related.”

She also oversaw the appointment of Gerard Brown as head of investment execution last year from BNP Paribas. Together, they have been reviewing the fund’s implementation capabilities including appointing Russell Investments to oversee a currency hedging program for unlisted assets – “We traded $20 billion in currency last year so you want to make sure you are doing that as efficiently as possible,” Sawtell-Rickson said.

Like many of HESTA’s institutional peers including the Future Fund, they’ve upped their investment in the operations platform to boost the fund’s data capability. And they’re in the market for a portfolio management system with the chosen partner due to be announced in 2020.

“When we think about the portfolio that we are running – $57 billion across 31 options over a number of asset classes and managers – we need accurate and timely data,” the CIO said. “Data is quite manual so we want to make it much more automated and available to everyone on their desktops.”

Sarah Jones is the deputy editor of Investment Magazine. She previously worked for Bloomberg News in London for more than 12 years covering equity markets and global asset management. Prior to moving to the UK, she worked for Australian Associated Press in Sydney covering economics and monetary policy.
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