Handling investments in a decarbonising world is one of the great challenges − and opportunities − facing investment managers of today according to Andrew Lill, chief investment officer of the $70 billion retail industry super fund REST.
“Super funds in Australia, as well as asset owners generally, have a really important role when it comes to responsible investing and the commitment to moving to net zero,” he says in an interview with Investment Magazine.
“It’s probably the biggest opportunity for investors of my generation to think about the transition of energy away from fossil fuels. It is both a responsibility and an opportunity and it’s not easy.”
“But it is a tremendous challenge and one which we want to give a lot of perspective but the path of progress towards decarbonising our portfolios won’t be simple, and it won’t be linear.”
Banking on renewables
REST, which receives some $500 million in net inflows to invest each month, is charting its own path towards net zero.
Its renewable energy investments include ownership of Western Australia’s largest wind farm Collgar Renewables, located south-east of Merredin, 260 km east of Perth.
Built over a land envelope of 18,000 hectares, it has more than 110 wind turbines with a total power production capacity of 222MW.
The only super fund in Australia which has 100 per cent ownership of a wind farm, REST is planning to expand its renewable capacity using its expertise learned from its investment in Collgar to add solar to the site.
“By investing in our connections to the grid, we can get a much larger production capacity,” says Lill, who has been CIO of REST since August 2020.
REST has a commitment to step up its investment in renewable energy from its current $1.2 billion to $2 billion.
Lill says REST’s two million members – many of whom are women under 30 – have a strong interest in climate change and environmental issues.
“Our members are much younger than most other members in super funds,” he says. “We have a very high proportion of young women. We know they are incredibly passionate about tackling climate change and broader environmental issues.”
Divestment not the answer
Lill says REST’s commitment to net zero does not involve selling off all its investments in companies with higher carbon emissions.
“Sometimes you’ve got to invest in companies which have higher carbon today and engage with them and help them to understand your interests and enable them to go through the changes to decarbonise.”
“What we don’t agree with is just excluding carbon from your portfolio and then telling the world you’ve done a great job. We have to participate and find a financial path and progress through that.
“If we can do that, returns to members over the long term are going to be better in 20 years’ time because of some of the hard decisions we have made.”
He thinks investments in coal will be unattractive in the long term. “Over the past year, coal companies have delivered great returns. But do I think they are going to produce great returns for our members in 20 years’ time? No.”
Lill says REST’s strong net cash inflows of between $300 million and $600 million a month allow it to invest in unlisted assets such as wind farms and sustainable agriculture where it also has a unique profile. The fund currently has some 25 per cent of its portfolio in unlisted assets.
Since taking over as CIO in 2020, Lill has brought an increasing proportion of its investments inhouse, while still working with asset consultant JANA.
The fund, one of the few major industry super funds to be based in Sydney, currently has 20 per cent of its portfolio managed in house, with its in house team focusing on Australian equities, fixed income and cash as well as unlisted property and infrastructure.
It has plans to boost its capacity for investing in global equities later this year through its office in London which he says should increase the proportion of inhouse investments to 25 per cent.
Global equities already represent the largest single asset class in the fund. “We’ve got approval to build a global equity capability which we are expecting to have in place by the start of the new financial year,” he said.
As part of a recruitment drive to step up its inhouse investment team, Sonia Bluzmanis was hired from BT Investment Group in May 2021 as head of global equities and subsequently promoted to head of research for external equities last year. She joined at the same time as Lill recruited Kirin Singh from construction industry super fund Cbus as head of listed assets.
The fund now has around 58 inhouse investment professionals and doubled its London-based staff to 10 from when Lill joined.
Hedging against volatility
A quarter of REST’s portfolio is invested in unlisted assets to provide some protection against the volatile markets says Lill.
The fund has several hundred million dollars worth of cropping farms in Victoria, New South Wales, Queensland and Victoria and is now the second largest grain grower in Western Australia. The farms are now producing good returns after a tough few years for the agricultural sector.
Lill says REST has been underweight in private equity investments for some time compared to some other funds but is now seeing it as an area potentially warranting more attention.
Lill is still cautious about the outlook for share markets despite the improvement in global sentiment over the past few months.
“I feel we have shifted from being potentially too worried about the future in the middle of last year to potentially being a bit too sanguine about it.”
Now he feels that optimism that inflation is falling may be overdone. “Inflation has potentially peaked for now so investors are celebrating the fact that there look to be less risks ahead.”
But he believes that inflation will be stickier than many people predict, potentially remaining at levels of around four per cent, which will have long term implications for companies and borrowers including mortgage holders after years of ultra-low interest rates.
“We’re moving into a strong period for the start of the year, but we might have more trouble ahead towards the end of the year.”
“Personally, I am not looking to jump back into shares right now. We continue to be more positive to Australian equities rather than global equities, but our share exposures are going to stay towards the lower end of our range.”