Australia’s largest superannuation fund, AustralianSuper, is “re-risking” its portfolio on the belief the Covid-19 downturn has provided a good opportunity to deploy capital, its CIO Mark Delaney says.
Having reduced its weighting of unlisted assets in 2017 and 2018 on the belief the economic cycle was nearing its end, Delaney tells Investment Magazine values of property, infrastructure and some private equity assets have come down since before Covid-19, and are likely to be “substantially improved” over the next two or three years.
A combination of lower near-term earnings plus potentially lower EBITDA multiples has made infrastructure investments in particular more attractive, he says.
“We reduced our weighting of unlisted assets in recent years, and we are using this as an opportunity to try and rebuild our weighting,” Delaney says. “Infrastructure in particular, potentially in private equity as well, and selectively in debt.”
Whether or not the world goes back to its previous status quo, Delaney is confident the world’s ability to manage Covid-19 will progressively improve over time. The widespread introduction of a 15-minute test at airports could free up international travel, for example.
“I don’t know what the path of the virus will be, but our ability to manage it will progressively increase over time through identification, treatment and then potentially vaccines,” Delaney says.
“And all three are being worked on. So the virus this time is much less deadly than what it was in the first round, the testing technology continues to improve rapidly and many vaccines are on the horizon as well which may have some impact.”
The basics of investing haven’t changed
Trying to manage unforeseen events like Covid-19 is futile, he says, but the basics of building a diversified and balanced portfolio haven’t changed much. The triggers vary from crisis to crisis, Delaney says, with triggers in recent history including the sub-prime mortgage crisis, going to war and most recently, global pandemic. But investors need to stay focussed on the underlying fundamentals more than the specific issues at hand.
“Bear markets and recessions happen at least every decade, and 20 per cent sell-offs happen two or three times a decade, so bear markets and recessions are commonplace for investors.”
“Covid-19 is like nothing else I’ve seen, but the oil price and inflation going to 25 per cent was like nothing I had ever seen,” Delaney says.
“The banking system collapsing was like nothing anyone had seen since the 1930s. So to get a big downturn these days you probably have to get something people haven’t seen, and that tells you things people haven’t seen happen a lot.”
Despite the differences this time, there are similarities to previous downturns also, he says.
“What you know in economic downturns is the government will stimulate and that’s what they’ve done. Interest rates will fall, that’s what happened. And you know things will gradually get better which is what’s happened.
“The recession this time was deeper but the recovery was faster than many other recessions. So don’t focus on the points of difference and instead look at the points of similarity, and you have some understanding.”
For long-term investors, events like Covid-19 are often the best times to be investing, he says.
“There are always opportunities coming out of a downturn,” Delaney says. “You can buy equities at substantially reduced prices, can buy unlisted assets at lower prices because people have trouble accessing capital, and with credit you get more money for lending as well. All these things have emerged and will continue to emerge.”
In March, AustralianSuper moved early to write down its unlisted assets by an average of 7.5 per cent. Follow-up valuations done on June 30 did not lead to further markdowns, leading him to think the fund’s asset valuations were “pretty right” and unlikely to see further markdowns, although it was impossible to be sure and different assets would behave in different ways depending on the timing out of Covid-19, he says.
He questioned how much Covid-19 would impact long-term profits on long-term infrastructure assets such as airports.
“For an airport, when does international flying come back, 2022 or 2023?” he says. “And how much of the value will adjust to reflect two years of lost earnings on a 40-year asset?”
The benefits of scale
In recent years the Australian Prudential Regulation Authority has stepped up its pressure on smaller and underperforming funds to merge. When asked about the benefits scale delivers to members, Delaney says it was easier for big funds to make money.
Delaney became Chief Investment Officer of Australian Super in 2006 when it was formed as a result of the merger between the Australian Retirement Fund, and the Superannuation Trust of Australia where Delaney was CEO. AustralianSuper began as a $26 billion fund with an investment team of 2, but it now has an investment team of 200 managing $186 billion.
“I’ve been small, I’ve been large, but when I put it all together it’s easier to make money when you’re larger,” Delaney says. “You have more talent, you have more diversified sources of value add and more people to look into opportunities for you. And you can also tailor your strategy for your circumstances rather than buy off-the-shelf solutions.”
When asked about his outlook for inflation, Delaney pointed to the US Federal Reserve’s Jackson Hole meeting, where Chair Jerome Powell on August 27 announced a historic change to Fed policy where it would sometimes allow inflation to run higher than its 2% target, and unemployment to run lower than it had previously tolerated.
“From 1980 to about the mid-2000s, central banks were focussing on keeping inflation low and using monetary policy to keep inflation low. With the Jackson Hole statement [at the end of August], we are officially declaring that world over and we’re saying the job of central banks is to keep jobs up. This is likely to lead to increased government role in keeping the economy going with more stimulus spending on infrastructure and households.”
But Delaney says he didn’t believe inflation would ramp up in the near term.
“In the near term a large amount of excess capacity will mean inflation will stay low. And some secular forces like technology will keep pushing inflation lower but some forces like less global trade will push it a bit higher.”