The $150 billion Aware Super has set up its own property development company and plans to open its first office overseas to scout for more offshore deals as part of its strategy to internalise investments to lower costs and give members benefits of scale.
“We see internalisation [of investment management] as being part of our approach to deliver better scale benefits to our members,” chief investment officer Damian Graham said in an interview with Investment Magazine. “We see it giving us access to more investments – new deals and transactions and different types of strategies – but also to do it as a lower cost to our members.”
Graham said the current strategy would be to boost its assets managed in house to about 50 per cent by 2025. “We expect to get to 40 per cent by the end of this year by continuing to invest in listed and unlisted internal strategies.”
The internalising strategy could see its investment staff rise to around 170 or 180 in the next three or four years. Australia’s third largest super fund with 1.1 million members, Aware currently manages a third of its assets internally with a team of some 100 investment professionals.
Aware is looking at setting up an office in Europe, where it already has some investments, possibly by the end of next year, followed by one in the US. Both the $260 billion AustralianSuper and the $200 billion industry super fund vehicle, IFM Investors, already have offices around the world including in London and New York.
Graham said Aware has plans to expand its role in private credit and is expecting to become involved in more public to private transactions such last year’s deal to buy ASX listed telecommunications company Vocus with Macquarie Infrastructure and Real Assets (MIRA).
Aware currently uses about 100 different fund managers to manage its investments. Graham says its approach to bringing asset management in house varies by asset class. It now has more than 50 per cent of its infrastructure and property assets managed in house. It has some $20 billion of its listed equities also managed internally.
“It’s still a minority, but it has been a big shift over the last four to five years,” he says. “We also have a macro strategies area which is trying to define areas of asset allocation where we can create value which is internally done as well.”
Graham says the fund is currently reviewing plans to open an office in Europe – a decision which has yet to be put to the board. “We believe it will open up additional opportunities for us to continue to internalise asset classes such as property and infrastructure and keep evolving our approach to private equity.”
The fund currently has some 45 per cent of its assets invested offshore, a percentage which will increase as it looks for more private capital deals. “The absolute dollar value of our domestic investments will continue to increase, but the proportion offshore will continue to grow.”
Property development expansion
Graham says Aware’s decision to set up its own property development company, Aware Real Estate, which was announced in early September, followed similar moves by construction industry fund, Cbus, and big offshore pension funds in Canada and the US.
Aware is seeding the new company with $1.7 billion of its existing real estate properties, including office blocks, industrial properties and affordable housing. The fund has a goal to see the new property company have some $7 billion in assets in the next five years.
In a recent interview with Investment Magazine, Cbus chief investment office Kristian Fok credited Cbus Property for giving it valuable experience in development projects. This experience has helped it assess more higher risk development investments such as its investment in offshore wind company Star of the Sea, as well as providing more opportunities for higher returns.
Graham said the establishment of Aware Real Estate was part of the fund’s plan to become more involved in property development including brownfield developments as well as new developments such as industrial parks and new affordable housing projects.
Focus on affordable housing
Aware sees itself as a leader in investment in affordable housing in the industry superannuation sector, an aim linked to the fund’s membership which includes public servants and essential workers.
The fund opened its first affordable housing development for essential workers in the Sydney suburb of Miranda in June. The project includes 51 build to rent units which will be made available to essential workers at 80 per cent of market rent.
Aware has some 2,000 units it is finishing including in this sector, worth around $1 billion. “We are the largest investor in essential worker and affordable housing units in the [superannuation] industry,” he says. “We welcome any other investors who want to lean into it as well.”
He says Aware has already had discussions with Federal and state governments about how it can work with them to help develop more affordable housing projects.
Private credit is another area where the fund is expecting more growth. The fund has a team which is now investing more than $1 billion a year in private loans in Australia and New Zealand. The team generally comes into lending syndicates with banks and other financial institutions.
“We think we will be able to build a portfolio of maybe many billions of dollars in private credit. It’s a capacity which is delivering good risk-adjusted returns for us.”
The fund looking at more acquisitions of public companies. Last year saw its first big deal, buying Vocus last year with MIRA and the fall in the stock market this year is encouraging private investors to take a new look at potential bids for listed companies.
“Private investors are continuing to look for opportunities as assets become more attractively priced,” he said. “We would expect to participate in some of those where it makes sense. It is an ongoing trend, we have the eye on where are the opportunities, if any, for us to participate in.”
Volatility creates value
While the increased market is keeping some investors on the sideline, it is also creating value in areas which previously were unattractive.
“There’s uncertainty around the resetting of interest rates which is going to impact investment markets. These periods of market volatility create some value in areas where there may not have been as much value in the past,” he said. He cited bonds being more attractive in the current market with Australian yields just under four per cent and the US, around 3.7 to 3.8 per cent.
The drop in valuations in growth sectors such as technology make investing in this space more attractive. “There are also some great opportunities around growth companies. Tech companies were relatively expensive, but we have seen some of the valuation of these businesses come back a bit. We need to keep focused on not just the risks, but the opportunities.”