First State Super’s investment chief Damian Graham said that with the fund’s liquidity buffers intact, his team were now getting ready to snap up bargain assets as they come to market over the next 12 months.

Graham, who has held the top investment job at Australia’s third-largest industry fund since 2016, said part of its liquidity plan was not just to manage future liabilities but also to take advantage of investment opportunities as they arise. Unlike the flurry of recent equity raisings in public markets, the CIO said the fund had yet to see the same level of distressed opportunities on the unlisted side.

“Over the next three, six to 12 months we think we will start to see some motivated sellers that will need to (offload) some assets,” Graham said in an interview with Investment Magazine. “So we will be looking for opportunities that are really attractive and have become dislocated.”

As well as looking at infrastructure, property and credit, Graham said the $103 billion super fund had also set aside part of the portfolio for a so-called strategic equity program that is geared to acquire long-term holdings in companies. The program could see First State join asset owners like AustralianSuper and QIC who have built substantial stakes in publicly-listed companies to eventually take them private.

“The nexus between public and private is an interesting value add,” the CIO said. “We’ve looked at doing it for a while but we hadn’t seen as many as many opportunities as an organisation.”

At least until now. The fund has also allocated capital to direct lending.

First State has repeatedly said that the fund entered into the downturn which has already wiped billions of dollars from the value of equity markets in a strong position and that it has ample liquidity to manage any redemptions from member switching to the government’s early release provision scheme.

Graham said that the fund had not needed to sell any assets to bolster liquidity buffers. However, if it was required, his team would have taken money out of fixed income despite a strong performance in the asset class from general investor demand for safe-haven assets.

As at the end of March, First State’s balanced fund had 11.4 per cent allocated to cash, 32 per cent in equities and about 31 per cent in illiquid assets including credit income. Graham said that while the fund had been building up their unlisted holdings over recent years, the selloff in listed markets had inadvertently increased their allocations to illiquids in percentage terms.

He added that the fund had devalued some unlisted assets on a case-by-case basis, but some areas including agriculture were more resilient. While he declined to comment on which of their holdings were most affected or by how much, Graham did concede that some sectors like retail property were down more than 10 per cent.

“We have been rebalancing our asset classes, but it’s not primarily around liquidity,” he said. “We have target levels for equities and fixed income, but around illiquids… you need to think about the medium to long term strategy. You need to maintain the veracity of the valuations,” he added.

Graham said he expects to see a further “moderation” in equity markets, which are already down more than 20 per cent from the peak, as investors come to grips with the full impact that government measures to combat the spread of the coronavirus have had on corporate Australia.

“The goal is to take opportunities across the listed and unlisted space,” he said. “We are not worried about (liquidity), we went through some crisis scenario planning a little while ago if we did see a significant event.”

Unlike many of its peers, First State’s membership base is expected to be less affected by unemployment. It’s 800,000 members includes NSW public sector workers and employees for the health and community services sector after the fund merged with Health Super in 2012.

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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