Super fund behemoth AustralianSuper is in the midst of unwinding its unlisted property portfolio which was badly hit by the pandemic according to CIO Mark Delaney.
“It was the wrong strategy,” he conceded at Morningstar’s annual investment conference on Wednesday, held at the Sydney Convention Centre. “It has been a really disappointing strategy. We were overweight retail and having more overseas property compared to Australian property. We also had short exposure to industrial [property].”
The pandemic forced governments globally to enforce lengthy lockdowns and border closures to minimise the transmission of the virus. This left office buildings and shopping centres vacant while demand for warehouse capacity soared as retailers struggled to cope with the huge demand in online shopping.
AustralianSuper has halted capital allocation to the asset class and is trying to unwind its exposure, but it is “difficult to get out and it will take at least five years to unwind,” he said.
With 56 per cent of assets under management, the criticism is “you can’t sack yourself” commented Morningstar’s director, manager research ratings, Asia-Pacific Annika Bradley who was moderating the session in front of a packed audience. However, Delaney maintained the fund was disciplined about terminating underperforming staff.
“We have terminated internal fund managers who have not performed,” he said. “I worry we are harder on internal staff than external managers. If it can’t be rebuilt – you need to terminate the strategy.”
Australia’s “most powerful CIO”
Delaney’s session was dubbed “Perspectives from Australia’s most powerful CIO”, not an understatement considering the fund received more than $25 billion of net inflows for the 2022 financial year.
He said the 60/40 equity-bond portfolio allocation was still relevant, notwithstanding the positive correlation between the two asset classes last year that wrecked investment returns of many asset managers.
“I don’t really think [the 60/40 split] is dead, the argument is higher inflation is going to make it hard for bonds than stocks,” Delaney said.
“Higher inflation will make it harder for all asset classes and the relative ranking of assets will be relatively the same.”
In the current market, Delaney believes unlisted assets such as infrastructure and private equity will be more important to generate returns. “It should be a core part of your portfolio,” he said. For example, AustralianSuper’s private equity book generated 14 per cent return in FY22 he said.
AustralianSuper’s sizeable – and growing – asset book will change how the fund will invest in the future he said.
“The return levers change due to fund size; you need to change how you invest,” Delaney said.
“These will include expanding their internal investment capability and realising strategies such as small caps in Australia will be harder while private equity and co-sponsorship transactions will be easier to do.”
Touching on his close to 20-year plus tenure at the fund, he said “I should stay as long as I’m good at it and adding value.”
“It is better to be broadly right than precisely wrong.”