Colonial First State CIO Jonathan Armitage

Having remained largely on the sidelines of the private assets boom, Colonial First State chief investment officer Jonathan Armitage says the private equity-owned retail fund giant is now on the right side of the trade.

“Over the next few years we think there are going to be some very interesting opportunities that will emerge,” Armitage tells Investment Magazine.

We are looking at transactions overseas, which is where we see the more attractive investment opportunities currently. Some of our peers have large holdings in unlisted assets, upwards of 30 per cent in some cases. As those investments are repriced and potentially written down markedly, CFS is in the enviable position to put money to work and continue delivering strong returns to members.”

For the better part of a decade, asset owners who have found themselves at the top of the balanced fund league tables have consistently credited their allocation to unlisted assets. But many of the large profit-to-member funds with large allocations to unlisted property and infrastructure in some products are now feeling the heat as mainstream media coverage and regulator scrutiny of the lucrative but often opaque market intensifies.

Meanwhile, large retail funds, which have sometimes questioned their peers’ penchant for these assets and their influence over the league tables, are now in the position of pivoting from critic to opportunist. A slew of macroeconomic conditions has created challenges for commercial property and private equity valuations and funds are under pressure to mark to market.

CFS – which is majority-owned by KKR, with a minority stake retained by its former owner, the Commonwealth Bank – has a total exposure to unlisted assets of about 5 per cent (across superannuation, discretionary investment and platform channels). Its MySuper option has an allocation of 9 per cent to unlisted assets, compared to 27 per cent for AustralianSuper’s MySuper balanced option, and 51.3 per cent for the Hostplus MySuper balanced option (which, it should be pointed out, remains the best-performing fund over a 10-year period according to SuperRatings).

That historical advantage for large industry funds with relatively few redemptions is now arguably a problem as regulators turn the screws. Prudential watchdog APRA on Thursday released updated investment governance guidance, which laid out its expectations that funds re-value their unlisted assets at least quarterly, and even more often during times of heightened volatility.

The edict, outlined in Prudential Standard SPS 530, follows a report by the soon-to-be-disbanded Financial Regulator Assessment Authority, which found APRA had not been proactive enough in planning for systemic risks in the superannuation system, including those emanating from slow or unclear valuations.

Armitage stresses that any deployment of capital to unlisted assets would be “measured” and “disciplined” and handled by external specialist managers. But his bullish thesis is backed by what he sees as “significant valuation discrepancies” between asset owners.

“We have been in a recent competitive tender process where the price differential on the same asset from 2 current owners has been 20 per cent,” he says. “That speaks to the current issues that members should be aware of.”

The comments come as CFS reported a 10.5 per cent return for FY23 in its FirstChoice Employer Super’s balanced fund (Lifestage 1965-69), a 12.2 per cent return in its FirstChoice Employer Super’s growth fund (Lifestage 1975-79) and a 10.7 per cent return for Essential Super members. Armitage attributed the result primarily to resilient domestic and global equity markets.

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