Australian Retirement Trust head of investment strategy Andrew Fisher says the fund has two particular things going for it as an investor: scale, and patience. He says ART is not about being consistently smarter than everyone else, and it certainly can’t move more quickly.
Fisher says that through the year ART exploited the benefits and worked around the disadvantages that inevitably accompany scale. On Sunday the $300 billion fund unveiled an 11.3% per cent return for its ART High Growth option for the 2023-24 financial year.
At the same time it is streamlining its range of investment choice options, and will transition around 1.4 million members under the age of 50 who do not make an active investment choice into its High Growth option. Fisher claims the transition will be completed with minimal market impact or impact on costs to members.
Fisher says ART’s investment team needs to continue to be mindful of playing to its strengths.
“We need to be really cautious that we’re not pursuing strategies where we take liquidity from the market,” he says.
“Momentum-like strategies, hedge funds, things like that, essentially if there’s a reliance on skill and speed to market, those are not areas where we should really see ourselves as having a sustainable edge. If anything, we probably have a marginal disadvantage.
“[We lean] away from trying to rely too much on being smarter than everybody else or faster than everybody else. We try and rely on being bigger than everybody else and more patient than everybody else.”
Fisher says a disciplined approach to rebalancing is also integral; the effective exposures of its growth and balanced portfolios have remained virtually unchanged over the past 12 months, despite movements in asset values over that time.
“In an arguably range-trading, from a fundamentals point of view, market that we’ve been through over the last year, [where] fundamentals are range-trading around a base case, it’s been a really good environment to be rebalancing with discipline,” he says.
Fisher says ART focuses on exploiting its competitive advantages in markets and is “really focused on adding value in ways where we’re providing liquidity to the market rather than taking it, because we are such a big player”.
| Effective investment exposure | ||||
| Growth option | 30-Jun-23 | 30-Sep-23 | 31-Dec-23 | 31-Mar-24 |
| Australian shares | 33.4 | 33.8 | 33.8 | 33.6 |
| International shares | 31.9 | 31.5 | 31.6 | 31.6 |
| Private equity | 10.0 | 10.0 | 10.0 | 10.0 |
| Property | 8.0 | 8.0 | 8.0 | 8.0 |
| Infrastructure | 10.0 | 10.0 | 10.0 | 10.0 |
| Fixed income | 1.9 | 1.9 | 1.9 | 2.0 |
| Alternative strategies | 4.8 | 4.8 | 4.7 | 4.8 |
| Cash | 0.0 | 0.0 | 0.0 | 0.0 |
| Total | 100.0 | 100.0 | 100.0 | 100.0 |
| Balanced option | 30-Jun-23 | 30-Sep-23 | 31-Dec-23 | 31-Mar-24 |
| Australian shares | 26.2 | 26.2 | 26.4 | 26.4 |
| International shares | 26.8 | 26.4 | 26.3 | 26.4 |
| Private equity | 6.5 | 6.5 | 6.5 | 6.5 |
| Property | 8.5 | 8.5 | 8.5 | 8.5 |
| Infrastructure | 10.5 | 10.5 | 10.5 | 10.5 |
| Fixed income | 13.7 | 14.0 | 14.0 | 14.0 |
| Alternative strategies | 5.5 | 5.5 | 5.5 | 5.5 |
| Cash | 2.3 | 2.4 | 2.3 | 2.2 |
| Total | 100.0 | 100.0 | 100.0 | 100.0 |
|
Note that the effective asset allocation in the above table takes into account both the physical exposures to assets along with the effective market exposure from derivative instruments such as futures. These instruments are used by the Fund to bring effective market exposures closer to those represented by each option’s strategic asset allocation Source: ART |
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“That’s natural and obvious in the unlisted asset space; when you invest in unlisted assets you get paid a premium over listed markets, otherwise, you don’t do it. That’s an easy way we can provide liquidity to a less liquid sector of the market and be rewarded for it.”
He says that in listed markets and the liquid portion of its portfolio ART has applied the same approach – dynamic asset allocation coupled with rebalancing.
“Essentially what we are doing [is] when everybody else wants to buy, we’re there to sell to them; and when everybody wants to sell, we’re there to buy from them,” he says.
“We’re able to implement those strategies with no market impact, even though we are quite large, and they’re also really accretive strategies over the long term, using our size and patience and a long-term investment horizon to add value to members with the liquid part of the portfolio.”
Questions around equity
Fisher says ART is “maintaining a convicted approach to the soft [economic] landing” scenario.
He says that while equities are generally expected to provide a hedge against inflation over the long term, “over the short term, we don’t necessarily expect equities to behave particularly positively in an inflationary environment”.
“What I think has probably surprised a lot of people is just how resilient and strong equities have been in a high-inflation environment,” he says.
“It’s not something that gives us particular concern on a forward-looking basis, because equities should be able to pass through inflation, but the ease with which the corporate sector has been able to pass through inflation has come as a bit of a surprise; pleasingly, we’ve been able to capture that that’s why returns have been quite strong.”
The trick now for Fisher and the ART investment team is to keep that going.
“Our outlook hasn’t changed a substantial amount,” he says.
He says while the fund has actively been building out its private debt exposures, opportunities may begin to diminish rather than increase in that space as interest rates peak.
In real assets – infrastructure and real estate – in the real estate space, we’ve been looking for opportunities outside of the very traditional sectors [and] have been for a few years now.
Fisher says ART believes infrastructure and real estate remain attractive, “and what we’re looking to do is marry up the demographic thematic around a particular sector of the market with the macro-outlook in regions”.
He says an example is investing in aged care in the UK “because the obvious demographic trend, which is a global one, around age care is attractive, but then there’s specifics around the structure of the market in the UK, and the outlook for the UK, that makes it particularly attractive there.”
Go with the flow
Fisher says the fund has had with infrastructure investments “for some time now”, and “you want to be the person selling when everyone else wants to start buying”.
“We are giving some thought to whether or not certain areas in the digital infrastructure space may be somewhere where we could rotate out and put our capital to work somewhere else,” he says.
“Something like data centres have had like this big run up…and now there’s a big demand coming in. Then you wonder if there’s more demand than there is supply in that sector, is pricing getting quite elevated, and is now perhaps a better exit than entry point?”
Fisher says this does not signal ART is quitting data centres, “but the ones we own are looking to be in very high demand”.
“In the unlisted space demand can ebb and flow, and when it’s there you want to question, well, we’ve done very well, should we start to rotate into a less-loved sector right now where we can get more attractive pricing?”
Fisher says ART sees private equity “as a long-term commitment, and so we don’t really try and turn our way into or out of private equity”.
“The sector can be really episodic in terms of when those payoffs come but when you look at it over seven to 10 years it’s been a really consistent outperformer versus listed markets,” he says.
“It’s been very accretive to the portfolio, so we continue to invest there.”
Fisher says ART has the lowest active risk and smallest DAA positions that he can remember having for as long as he’s been at the fund.
“Bonds are pretty fairly priced relative to cash relative to equities, which is good for diversification, so really diversifying positions in that space,” he says.
ART is “keeping the powder dry, because if equities get cheap or expensive or bonds get cheap or expensive from here, we want to be able to deploy and take advantage of that”.
“So [we are] mainly just sort of thinking about the volatility, and trading against that to add some value in DAA, while not taking particularly big risk.”
