Choppy markets, the possibility of inflation spikes and ongoing global geopolitical instability driven by US President Donald Trump mean that the $140 billion UniSuper  is “hoarding cash”, funded from inflows, for opportunistic deployment.

“Even though we think markets are looking a little bit choppy, and even though we think the next few months we’re going to get some spiky inflation numbers, et cetera, rather than selling, what we’re doing is we’re hoarding a bit of cash,” UniSuper CIO John Pearce tells Investment Magazine.

“The fund is in steady inflow, and rather than invest that straight away we’re actually just building up a bit of cash levels.”

Where UniSuper will invest that cash has yet to be determined. Pearce says the fund does not “set those sorts of targets in advance; it’s very opportunistic”.

“We’re working on a tie-up with a global manager to allocate more to private equity,” he says. “That’s a multi-hundred-million-dollar commitment, funded by cash, but we’ll still have more bullets to fire.”

Pearce says UniSuper has met the Australian Securities and Investments Commission to discuss the regulator’s examination of private and public markets, but that he cannot see “any obvious signs of market failure”.

“We can talk about the opaqueness, there’s liquidity issues, there’s potential conflicts with the sponsors and debt and equity, et cetera,” he says.

 “But as an institutional investor, we go in with eyes wide open. We understand that; we take it into account when we do our due diligence; and they’re the risks that we’re taking when we’re buying that. We’re buying that risk. I just don’t see any issues from an institutional perspective.

“Where there’s potentially room for tightening up in terms of disclosures  is probably on the retail side of things. Does the retail punter know what they’re buying, and issues around potential conflicts, or valuation discrepancies? I think that’s one for retail.”

Driven by dividends

On Thursday UniSuper revealed its default balanced fund returned 10.3 per cent for the year ended 30 June, and 7.8 per cent a year for the last ten years. The highest 12-month return for any of the fund’s investment options was 18.4 per cent for its Australian dividend income options, which Pearce says reflects one of the key performance drivers across its portfolios.

“In Australia, you had to be in Commonwealth Bank,” Pearce says.

“Our best performing option was a boring old Australian dividend income option, and the largest weighting, as you can imagine, is Commonwealth Bank. It’s got 14 per cent in Commonwealth Bank, and that’s up 20 per cent.

“So Australia has been very much driven by Commonwealth Bank. In the rest of the world, interestingly, it’s just been far more widespread than it has in previous years. This has not been a tech-driven, Mag-Seven rally. It’s been a lot broader, which is a positive.

“And it has not just been about the US. We’ve seen Europe actually outperform the US, which has been, once again, a positive. So this is, to me, a general sort of response to what we call a growing global economy, with an easing bias amongst the central bankers.”

Even so, “the biggest question mark that we’re all dealing with at the moment is” is whether to trim back US exposure.

“Everyone jumped on the bandwagon post- Liberation Day, and I was guilty of it too, [believing] we’ve seen peak US exposure. But it’s not that simple,” Pearce says.

“The reality is, if you look at the growth sector to be in, as it has been over the last decade and it is going to be over the next decade, it is still tech. And where is tech? It really is in the US.”

Pearce says a big moment in the tech sector during the year was the emergence of DeepSeek, an artificial intelligence developer which suggested that not only could AI potentially be developed at a far lower cost than previously thought, but it could also be developed outside the US.

“There’s stuff that we don’t know about DeepSeek still,” he says. “But ostensibly, the Chinese have cracked this nut. Really big deal, but the problem you’ve got is the country risk.

“To me, it looks like [China has] got a very vibrant tech scene, a really vibrant tech scene… and it’s going to be a lot cheaper than the US, far cheaper than the US. But are you really prepared to take that country risk?

“So, once again, if you want tech, it’s really the US. Israel has a vibrant tech scene. [But are you] going to put your money in Israel?”

End of exceptionalism overplayed

Pearce says suggestions that we’re witnessing the end of US exceptionalism might be overplayed, at least in the short term, but that he’s wary of the US turning inward-looking.

“Over the past 50 years the Europeans have created from scratch 14 companies worth over $10 billion,” Pearce says. “The US has created 241. US productivity dwarfs productivity of other of other countries. US return on equity is about 19 per cent; in Australia, it’s about 12 per cent.

“So you can argue all you want about Trump, but the facts are the facts. It’s just that whole Warren Buffet thing: Don’t bet against the US. Those stats are pretty compelling stats, so I can’t see the end of US exceptionalism.

“What we can see is at the margins, clearly. When a country starts turning inwards, history is not kind. And to the extent that Trump has not got any checks and balances around him, and he’s got the [Peter] Navarros and [Steve] Bannons… wanting [the US to be] very isolationist, that’s a slow grind. Things don’t change overnight.”

Still, rarely has volatility and uncertainty been driven to anything like the same extent as it is today by the whims of one person.

“ We can go back to during the middle of COVID, things were a lot more uncertain than they are now, but COVID wasn’t driven by a single person that’s actually calling the shots,” Pearce says.

“As a matter of fact, when we had that massive sell off post-Liberation Day, I actually cut a video, and I copped a bit of flack from it, because I said, ‘Look, what’s difference between the GFC, COVID and this current crisis?’ At the time markets were off 20 per cent and it felt like a bit of a crisis.

“I said, well, the difference is that, unlike the GFC and COVID, where in the middle of those two crises we actually didn’t know if there was a solution – in the depths of it, we fundamentally at heart didn’t know if this is the end of the financial system as we know it – in this one, the difference is not that we know the solution, but that we know the problem is man-made by a single man. So we know that that man’s got the power to unwind it all.”

Pearce says that, provided funds have their strategic asset allocations set about right, without deviating far from those benchmarks the investment outlook for the next 12 months is relatively benign.

“Let’s say tariffs settle somewhere between 15 to 20 per cent, that’s sort of the base-case for everyone,” he says.

“I think it’s a reasonable base-case. Now, that still takes us back to well above pre-Liberation Day level levels, but it’s way below what we would have said was a worst-case type of outcome.

“I think people, mentally, are adjusting to the fact that the US is going to have between 15 to 20 per cent [tariffs]; the world could get by with that.

“If, two months before Russia invaded Ukraine, I said, ‘Where’s the oil price going to be – and by the way, Iran is going to get bombed by the US – is it going to be higher or lower?’, you’d have said higher. Everyone would have said it has to be higher. It’s lower.

“The oil price is actually lower now than before Russia invested Ukraine and the US [bombed] Iran. So what I’m saying there is that I’m just not that concerned about geopolitical risk. The market tends to shrug it off.

“I’d change my view if China invades Taiwan. Then all bets are off.”