Investment managers are now facing an increasingly uncertain future of rising inflation and interest rates, according to the chief investment officer of the $115 billion NSW government asset manager, TCorp, Stewart Brentnall.
But he said there was no “silver bullet” approach to investing after a long benign period when rates were low and share markets and asset prices were rising.
“There is a lot of uncertainty which makes it very hard to predict where markets are going to go,” he said.
“Forecasting is hard, but it is going to be harder than usual because there are so many political, market, environmental and other factors at stake.”
No one view of the future
He said the response of TCorp, the fifth largest institutional investor in Australia, was to prepare for a range of scenarios rather than to take one view of the future.
“Our mantra has become ‘it is much more important to prepare rather than predict’,” he said.
Brentnall said the range of investment scenarios include the possibility of a sharp rise in inflation, the possibility of a “biting recession” in Australia, continued fiscal expansion which would see market economies and asset prices continuing to grow, a “crisis” in the Chinese economy which would have implications for the Australian economy, or a more benign future of a more balanced economy and more stable asset markets.
“We need to think through a number of different scenarios which might occur and build portfolios which will be resilient for all of those outcomes,” he said.
Boost to overseas assets
He said TCorp, whose investment returns go to funding NSW government employee pensions, claims from the state government owned insurance company and state government infrastructure, is planning to boost its assets overseas and its exposure to illiquid assets such as property and infrastructure.
It manages some 14 different diversified client portfolios, each with “an agreed risk appetite and investment objective”.
Its current asset split is 40 per cent Australian and global equities, 17 per cent in credit products (from investment grade to high yield and emerging market debt), 17 per cent in illiquid assets including property, infrastructure, and adjacent investments, 11 per cent in liquid alternatives (such as hedge funds), nine per cent bonds and government securities, four per cent cash and two per cent in “overlays”.
He said TCorp currently had just over half of its portfolio invested overseas and he expected this would go up by another five-to-10 per cent over the next five years.
“Australia is only a small proportion of the global economy,” he said.
“The opportunity set is huge in the other 98 per cent. It makes a lot of sense to use that opportunity set to find good investment opportunities (offshore).”
Diversifying portfolios
He said investing offshore allowed for more diversification of its portfolio and a hedge against an economic crisis in Australia which was where its investment returns were paid out.
Brentnall maintained TCorp’s investment of 40 per cent in equities in Australia and overseas was not risky as it was lower than some of its institutional investment peers.
TCorp is also planning to boost its exposure to illiquid assets like property and infrastructure as protections against rising inflation.
“With property and infrastructure, the rentals for the clients who occupy those assets are renegotiated over time,” he said.
“They will go up with, at least, inflationary increases.”
While TCorp is planning to increase its investments in infrastructure, he said it was unlikely to buy more stakes in airports like some other Australian institutional investors.
It already has a 20 per cent stake in Melbourne airport and a minority stake in two UK airports, and a minority share in Brussels airport.
Direct ownership
It prefers to own assets directly rather than through funds according to Brentnall.
“Our strategy is geared at a diversified Australian and overseas perspective,” he said.
“That way we feel we can have greater governance input to influence management decision making and deliver value.
“It [also] gives us greater liquidity. We are in control of our destiny. If we want to sell what we own directly we can. If we want to sell an investment in a fund, we have to put in a redemption request.”
He said TCorp was “deliberately not tactical” in its investments.
“It is very hard forecasting correctly when to get out of assets and back into them,” he said.
“If you are managing $1 million, it might be reasonably easy to do it, but when you are managing $110 billion it isn’t.”
“Our mission is to build portfolios where we focus on the diversification of long term risk based on our long term expectations of the returns we are going to harvest from each asset group and the volatilities we have to accept with those.”
No specific local mandate
TCorp has no specific mandate to invest in assets in New South Wales.
But it does have to abide by two directives from the state treasurer, no investment in tobacco companies and no investments in Russia.
He said TCorp had a policy of being an active owner of shares with its inhouse investment stewardship team making decisions on voting at annual meetings for all the shares it owns, both in Australia and around the world.
He maintained TCorp was finding it was voting against more than 10 percent of the resolutions being put to annual meetings, a sign of its active involvement in the governance of the companies it invests in.
“Through participation in collaborative groups such as Climate Action 100 we feel we have been able to bring to bear quite significant changes across the spectrum of companies and businesses that we own,” he said.
No rate surge expected
Brentnall said while TCorp is expecting a rise in inflation and increased market uncertainty, it was not expecting inflation and interest rates to surge.
“We’re seeing a supply-side-shock-induced increase in inflation and not a wage-led inflationary spike,” he said.
“Inflation rates have gone up and they may go up significantly further, given some of the supply chain interruptions we have seen.
“But they don’t stay very high for long before they come back down again.
“We are unlikely to see huge, and sustained increases in interest rates from the Reserve Bank and central banks around the rest of the world.”
