The creation of the $230 billion Australian Retirement Trust will give the combined group more opportunity to participate in big deals, according to Sunsuper’s chief investment officer, Ian Patrick, who will run the investment portfolio of the combined group from early 2022.

The merger between the $120 billion QSuper and the $85 billion Sunsuper, which is set to be finalised by February 28, will create one of the largest super funds in the country, just behind the $250 billion industry giant Australian Super.

The deal, which follows the signing of heads of agreement between the two funds in March, will combine the investment management teams of both organisations with the combined group, to be renamed the Australian Retirement Trust, having some two million members.

Patrick, who joined Sunsuper in 2015, will become chief investment officer of the combined fund while QSuper’s chief investment officer, Charles Woodhouse, will become deputy CIO.

The power of one

Patrick said the deal would give the combined group “the capacity to play a different role in consortia for the acquisition of real assets, or co-investment activity alongside other sponsors of investments in private equity or property or infrastructure.”

“There are scale advantages which come from a number of things,” he said.

“It gives us an opportunity to be a more proactive player in any number of transactions.”

“If you are writing a bigger cheque, you are also likely to get more governance rights and more seats on the board. This confers an ability to extract the right benefits for members from those assets.”

In 2021, Sunsuper combined with the Future Fund and the Commonwealth Superannuation Corporation in a $2.8 billion deal to buy a 49 per cent stake in Telstra’s mobile phone tower business, a deal organised by alternative asset manager, Morrison & Co.

It has also been involved in the $10 billion deal for the privatisation of ASX listed electricity company AusNet, as part of a consortium led by Canadian asset management giant Brookfield.

“If you look back at Sunsuper’s history ten years ago, it would very seldom have been a co-investor in consortia like these,” Patrick said.

“As time has moved on, we have been able to be a participant at the $300 million to $400 million cheque size.”

“Once we get to the size of the merged fund (more than $200 billion), it gives us the capacity to appoint members to the board and participate in the governance levels which are reserved for (large) shareholders.”

In it for the long run

Patrick said the superannuation industry had shown that it was “long term value focussed.”

“All we want to do is drive long term returns for members and be good participants in the governance chain as a consequence.”

The merged group will still see the operation of two different funds – one for employees of the Queensland Government and a second public offer fund.

The QSuper brand will continue as part of Australian Retirement Trust.

“Everybody from Sunsuper, and every new member who joins the merged group, will go into the public offer division,” Patrick said.

But he said the merger would bring the two investment teams together.

“From quite early on in the merged fund, the intention is to bring the asset class teams together which look after property, infrastructure and the like,” he said.

“We are planning for the day when the two pools of assets integrate more closely. The strategy will continue to be set for the two funds separately, but the (management) of the assets underneath will be more closely integrated under one team.”

Investment Strategy

Patrick said the majority of the investments of the combined fund would continue to be outsourced “for the foreseeable future.”

The strategy contrasts with current industry leader the $250 billion Australian Super which is bringing an increasing amount of its investments in-house.

Patrick said while the combined fund would largely manage most sectors such as cash management, bonds and fixed income in-house, it would use external managers to manage the investment of large assets such as property and infrastructure.

Patrick was chief executive officer at JANA Investment Advisers from 2008 before joining Sunsuper. A trained actuary, he worked for consulting firm Mercer before joining JANA as head of global equities.

He welcomed the moves by the Australian Prudential Regulation Authority (APRA) to step up scrutiny on the investment performance of superannuation funds which came into effect this year.

The moves, which require trustees of poor performing funds to inform their members of this, is stepping up the pressure on smaller funds to consider merger talks.

Patrick said some smaller funds had been approaching Sunsuper about potential mergers as a result of the new legislation.

“Sunsuper has a very strong track record in terms of prior mergers and taking over meaningful corporate funds over time,” he said.

“It is a natural place to open a line of conversation. But we wouldn’t be the only ones having those conversations (aka being approached about mergers).”

Patrick said he felt the “focus on the good execution of investment strategy” was “a very positive thing”.

Rethinking risk

But he said the new performance comparisons, which are being made against specific benchmarks, could prompt a rethink of investment strategies by some funds.

He said it could mean that some funds would opt to play it safe and not take on active risk in some areas and only take active risks in investments where they had a high level of conviction.

“Every time you take on active risk, you have to have a reasonable level of conviction that it will pay off over the performance test horizon which is eight years.”

He said one question is whether funds would continue to use active management approaches in areas like equities and fixed interest.

He said they may prefer to take the risk in areas such as property and infrastructure.

“Maybe that is where you take your active risk, and you try not to take on active risk in your public markets as a way of offsetting that.”

“The merged fund collectively believes you can extract value from active management in public markets, equities and fixed income, but that skill is rare.

“You should predominantly use low risk or passive strategies where you cannot obtain conviction that you have the skill necessary to extract value from active management.”

Offshore moves

Patrick said the merger and the continued growth of the new fund would see an increasing amount of its investments made offshore.

He said Sunsuper already had a larger proportion of its investments in property and infrastructure offshore compared with some other funds.

He expected this would grow under the combined fund “because of the size of the local capital market and the fact that there has already been a meaningful level of privatisation of [the] largest assets here.”

“We [at Sunsuper] were fairly early adopters, particularly in property, in investing offshore.”

“As the funds grow, both the combination of the opportunities that exist in a relative sense, and the deepening of our expertise, will mean a greater percentage of every net dollar that comes into the fund will be going offshore,” he said.

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