Market volatility is back, selloffs have begun to make valuations in some of the hardest hit sectors look appealing, and UniSuper chief investment officer John Pearce appears to be in his element.
US banks, technology, even retail shopping centres are all areas Pearce is looking at closely, judging them against other relative value opportunities as he contemplates whether it’s too soon or just the right time to jump in to areas others have deserted since the spread of the COVID virus turned the world upside down.
“Probably the ultimate contrarian trade at the moment is retail shopping centres,” Pearce said.
“You can buy some quality REITs at 40 per cent discount to NTA [net tangible assets]. Is this NTA right? Probably not. But is it 40 per cent wrong? Probably not. It seems like a brave bet but that’s where there is some real value in the market,” Pearce said during a wide-ranging interview on Investment Magazine’s Market Narratives podcast.
Known as one of the superannuation industry most hands-on chief investment officers, Pearce has perhaps a heightened interest in comparing listed and unlisted property and infrastructure considering the $85 billion fund’s major holdings are dominated by both.
Among them Adelaide and Brisbane Airport are the fund’s top two real asset infrastructure holdings, while Transurban and Sydney Airport populate the fund’s top five listed Australian shares holdings. GPT and Scentre Group are in the fund’s top 10 local share holdings.
Many of the major themes and trends that dominated financial markets before COVID-19 disrupted financial markets and economies still endure today, Pearce noted. Although he also highlighted there have been some notable exceptions.
The dominance of the technology sector has continued and if anything has been super-charged since COVID.
“We are in the middle of the tech sector revolution. This could go for some time,” Pearce said, comparing the dominance of tech to the reign of the auto industry in the United States which lasted more than a decade.
“For some of the monopolies that have built a moat, it’s hard to see it ending without regulatory intervention,” Pearce added, noting that regulators and governments might need to start applying tests for market dominance to keep these companies in check instead of whether or not the consumer is better off. Technology companies feature heavily in UniSuper’s international shares holdings with Facebook and Amazon rounding out its top 10 and 11 positions.
Another theme that’s endured in a post COVID world that will continue to dominate financial markets for some time is the “financial repression” theme, Pearce continued.
“The dominant theme of the last decade was one of financial repression. For those who got onto that early they would have topped the league tables, both the equity and the bond market.
“What you found after the GFC is there were disbelievers. Bond yields fell, people thought they’d get back to normal, and normal [at that time] was north of 5 per cent.
“Those who adopted the lower for longer philosophy – and that took a lot of years to get built into the models – I think we are now seeing this extended,” he said. “We were seeing some recovery [since pre-COVID], some normalisation of yield curves, but now that’s all been reversed.”
“It may not be another decade, but it might be another four or five years of financial repression. And you’ve just got to accept that,” he said.
But there are some areas that COVID has fundamentally disrupted that couldn’t be predicted, including the previously-thought indestructible revenue streams of monopoly airport assets, Pearce acknowledged.
“We like the term ‘fortress assets’ and accumulating them at reasonable prices. Pre-COVID we would have argued Sydney Airport was a fortress asset. COVID has probably proved us wrong,” Pearce said. Sydney Airport is the fund’s fourth highest ranked Australian shares holding.
“Who would have thought that these tech companies would have proved to be more resilient than one of the best airports in the world?” Pearce posed.
In house alignment
Seventy per cent of UniSuper’s assets are managed in-house, predominantly from UniSuper’s Bourke Street headquarters in Melbourne.
Pearce alludes to the fund’s “complex” inhouse investment team model in which sector analysts will float between global and asset class teams.
“It’s a complex model because we have been brought up with it and it works for us,” he said.
Having a close relationship and alignment with UniSuper’s investment committee is an important aspect of Pearce’s process and decision making, he revealed.
“The first challenge is to get your board on side,” Pearce said, in response to a discussion about choosing to bring investment management capabilities in-house versus outsourcing.
“I have an investment committee staffed by people who have worked in the industry at senior level, I never had problems getting support but I know some of my peers have had challenges getting board sponsorship.”
Chris Cuffe, the person who brought Pearce on as head of investments at Colonial First State in 2000 and who’s job he took as CEO three years later when Cuffe left, is one of the independent non-director members on UniSuper’s investment committee.
UniSuper has drawn activist criticism from global data management systems company Market Forces for holding fossil fuel companies and not using its shareholder votes to openly support climate-change shareholder resolutions. “ESG [environmental, social and governance] has always been a sensible part of an investor’s toolkit,” Pearce said.
When it comes to considering returns alongside ESG considerations, Pearce is clear his role as CIO is to prioritise member outcomes.
“Our investment committee is very aware of our fiduciary responsibilities and we have always been able to manage money in the member’s best interests, he said