The $94 billion hospitality industry super fund, Hostplus, is determined to defy the market trend to internalise investments, maintaining its strategy of using external managers, according to chief investment officer Sam Sicilia.
In an interview with Investment Magazine, Sicilia says Hostplus does not believe the benefits of internalisation of investment − largely seen by other funds as reducing fees − would be offset by the increasing risk such a strategy would entail.
He says the fund’s younger demographic − with an average member age of 37 − and its continued strong cash flow, ranging between $800 million and $1.2 billion a month, also shaped its strategy of having a relatively high proportion of unlisted assets including infrastructure, property, credit, and private equity.
“We have zero dollars invested internally,” said Sicilia who celebrates his 15th year as CIO of Hostplus in March 2023.
“We have 100 per cent of our investments − listed and unlisted − managed externally. There is no internalisation, and we intend to stay that way.”
Internalisation is risky
Hostplus’ view is in sharp contrast with many larger industry super funds, led by the $260 billion industry giant AustralianSuper, which are actively bringing their investment management inhouse as they continue to grow.
Sicilia, who has a PhD in theoretical physics, argues that it has no plans to change its investment strategy, despite its growing size, arguing that the internalisation of asset management means the fund is taking on more risk.
He says it has been reducing the fees paid to investment managers by a combination of negotiation and some partnership deals with funds.
“There are other ways of getting the benefits of internalisation without internalising the risk,” he says. “We ask for fee discounts, respectfully but aggressively.
“Every time fund managers get terminated because some of our peer funds have decided to go down another path, it makes us more important to them,” he says.
Hostplus currently has some 24 people in its internal investment team who are involved in asset allocation decisions and dealing with external fund managers.
Internalising investments, he says, would see the need to hire a significant staff, potentially of several hundred people, to oversee the fund’s investments.
Hostplus was named the best performing fund in the MySuper market by research house SuperRatings last year, with a return of 1.6 per cent for its balanced fund for the 2021-22 financial year, at a time when many other large funds were reporting negative returns for the period.
The fund also topped the 10 year returns with an average annual return of 9.7 per cent, just above AustralianSuper’s balanced fund, with a return of 9.3 per cent, Australian Retirement Trust’s Super Savings with a return of nine per cent and Cbus MySuper Growth at 8.96 per cent.
One of the top five industry super funds in Australia with 1.6 million members, Hostplus has grown due to mergers with Intrust and Statewide Super, which closed last year, and plans for a merger with Maritime Super which is expected to be finalised in September 2023. The fund is on track hit $100 billion in assets this year.
Sicilia has seen Hostplus’ assets grow from only $7 billion when he joined in March 2008.
Hostplus has about 50 per cent of its assets in shares (21 per cent Australian shares, 21 per cent shares in developed markets and eight per cent in shares in emerging markets).
“The other 50 per cent is in unlisted assets such as infrastructure, real estate, credit,” he says.
While the fund itself has some 40 percent of its assets offshore, in the area of private equity it has almost 60 per cent of its exposure offshore.
Hostplus’ external investment partners in infrastructure are industry superannuation investment vehicle IFM Investors, New Zealand-headquartered investment company, Morrison & Co and Brisbane-based QIC.
Its property investors include industry super property trust, ISPT, Charter Hall, Lend Lease and QIC.
Some of its private equity investments, including its stake in unlisted unicorn, Canva, are held through venture capital funds AirTree Ventures, Square Peg and Blackbird.
Hostplus’ very different approach to managing its funds was driven by its distinctive demographic of young workers in the hospitality sector.
“We have a young demographic which is not retiring anytime soon. We have a large amount of cash inflow and not a lot of money leaves. This gives us the ability to tolerate illiquidity and to have a greater asset class diversification,” he says.
Unlisted asset valuations criticised
Hostplus’ critics say its higher than average performance has been a result of not revaluing its high proportion of unlisted assets frequently enough or having overstated valuations in times of market slumps.
Sicilia rejects suggestions that Hostplus’ emphasis on unlisted markets meant that its valuations could be overstated in a declining market.
He says unlisted assets were never going to be revalued on a daily basis like shares.
“Having daily mark-to-market for unlisted assets is not going to happen,” he said. “We won’t be able to do it, nor will any other investor.”
Hostplus did not do its own valuations of unlisted assets but used the valuations done by its external fund managers which were the same valuations would apply to all other investors in these funds.
“What we are doing is what the rest of the industry is doing, which complies with global accounting standards,” he says. “The regulator [APRA] has never questioned our valuation methodology.”
But Hostplus supported the idea of more frequent valuations of material unlisted assets which has been suggested by APRA.
Hostplus received the news of a down grading in the valuation for Canva from three funds which held Canva stock in late July this year.
While this was not reflected in Hostplus’ reported returns for the year to June 2022, it was reflected in the unit prices for Hostplus options which are updated on a daily basis.
“When equity markets drop by 30 per cent, I don’t agree that we should have to drop the value of our unlisted assets by 30 per cent… It’s not logical,” he says.
“The value of an asset is driven by the characteristics of that asset to generate an income. Changes in the equity market shouldn’t drive valuations. It [the share market] is just a potpourri of sentiment and a whole set of other things.”
Appetite for private credit
Private credit is a growing area of interest for Hostplus, with some companies offshore having issues raising funding from conventional sources such as banks, a view shared by QIC’s Allison Hill.
Sicilia says Hostplus had been investing in the share market in 2022, encouraged by the market dip, but was also putting more money into private credit where he says the “opportunity set is huge.”
“Traditional lenders are pulling back, the risk adjusted returns are good. In the foreseeable future it will be in low double digits of ten and 12 per cent. We have an insatiable appetite for credit markets for that obvious reason.”