Size is important in super fund land – David Elia knows that as well as anyone. But the CEO of Hostplus, the $73 billion soon-to-be $90-plus billion dollar fund doesn’t necessarily believe that greater size and scale predicates a move to insourcing of investment management.
“I think when Australian Super started down its path of internalisation, [investment management] fees were much higher. So that was the benchmark that they were using to justify internalisation. I think given what we’re seeing in the market today with investment fees. They’ve dropped a lot, I mean, they have really, really dropped. I think the benchmark now for anyone contemplating internalisation I think is more marginal,” Elia said in a conversation with Investment Magazine as part of its CEO series in partnership with TAL.
Australian Super has been public about its continuing internalisation journey; already with half of its funds managed by inhouse investment teams it has flagged its intention to continue a now decade-old move to insource investment management under new CEO Paul Schroder.
In contrast, Elia confirms that Hostplus, the soon to be top 10 ranked fund by size, currently has no plans to start bringing investment management inhouse despite growing the ranks of its investment leadership team with Statewide Super CIO Con Michalakis joining Greg Clark as co-deputy CIO under Hostplus’s Sam Sicilia when its acquisition of the $11 billion Statewide closes in March 2022.
“We’ve come into it from a different perspective,” Elia says of Hostplus’s outsourced investment model in contrast to Australian Super’s continuing push to insource.
“We believe in active management and active management has paid off for us,” he said.
Investment-wise Hostplus is perhaps best known for its tilt towards private equity and its early bets in venture capital to which it remains a significant allocator. About 14 per cent of the fund is invested in private equity currently with venture capital accounting for about 2 per cent of that allocation, Elia confirms.
On peer ranking tables Hostplus is a regular fixture in the top quartile of funds for performance over most periods. Meanwhile its MySuper product never seemed in doubt of falling under the government’s performance test with APRA’s December 2020 disclosures revealing a close to 1 per cent outperformance of the six-year SAA listed benchmark portfolio.
“But the only thing I would really want to internalise is active management because that’s where you have the potential to add the most value, but by doing it [insourcing active management] you’re really taking a punt that you’re able to attract the best and brightest,” Elia explains.
“I don’t think we’re yet at a juncture where industry funds are prepared to provide the types of incentives that you may need to because I generally believe you’ve got to pay in order to attract the very, very best investment talent,” he said.
“So it’s not just about managing money internally, it’s all the baggage that comes with that, which adds significant cost,” Elia says, noting that it’s a lot easier to relinquish a mandate if an investment team underperforms than going through that process with an internal investment team.
“We think the outsource model gives us access to the smartest people globally and it gives us greater agility, greater flexibility to effectively move and move quite quickly,” he says.
Co-investing deals like Hostplus’s transaction with property investor Charter Hall to take over listed pubs owner ALE in September will likely become more frequent and where its future internalisation efforts will germinate, Elia says.
Industry fund roots
If the local superannuation industry is increasingly finding itself divided into the haves and the have nots then Hostplus must land into the former category thanks to the headroom it enjoys relative to the government’s performance benchmark, the benefits stapling affords it in light of its natural first employer fund status, along with the scale its managed to quickly amass thanks to a series of agreements Elia has negotiated this year.
With the acquisition of the $3 billion Intrust Super, the Statewide deal as well as the agreement to pool the assets of Maritime Super via a joint venture partnership, Elia will be in charge of a fund with high net member roll-ins well and truly within the reach of the mega-fund pack.
Further, Elia points to the growth Hostplus has begun to enjoy through its self managed superannuation fund partnerships as a diversifier of its organic growth sources.
When discussing the future of the Australian superannuation funds landscape and Hostplus’s role within it, Elia gives a nod to the fund’s profit-for-member roots and the cultural alignment Hostplus has to industry funds both big and small.
“There is a uniqueness in the connectivity between many of the smaller funds out there and their communities which is something you really have to respect,” Elia describes.
“These long-standing industry funds are very committed to a member first culture and ethos and from our perspective the member first ethos is absolutely important and critical.
“Certainly my board the CEOs [of these smaller industry funds] and their boards probably have a similar view. And I suspect they will consider that to be a major factor in pursuing merger opportunities in the future,” he says.