How Hostplus seeks alpha through illiquid assets
“I’d love to talk to you, but I’ve already agreed to speak with this journalist,” Greg Clerk said, adroitly fending off the attention of a venture capital representative as he wended his way through the crowd of AsianInvestor’s 10th Southeast Asia Institutional Investor Forum.
The newly appointed deputy chief investment officer of Australian superannuation fund Hostplus was targeted by other would-be networkers as he walked. Little surprise; his pension fund has a reputation as a particularly progressive investor, ploughing money into venture capital funds among other areas.
At Hostplus, Clerk and his boss, Sam Sicilia, have attempted to bring a scientific approach to the long term application of risk. Their rationale is simple: the average age of their members is just 34, meaning they won’t need their retirement savings for 30 years or more. The offers a long investment horizon.
“They are young and they rarely make [detailed retirement] choices, so they go into our default fund,” Clerk explained.
The default Balanced MySuper fund accounts for 78% of Hostplus’s total assets, while cheap, index-focused investments account for 12% of those assets. The fund can use the former to make lengthy investment bets, including the likes of VC.
“It affords us a very long investment horizon. So what we chose to do was to try and be long-term investors and to be alternatives investors,” said Clerk.
In this instance, he’s not joking: about 50% of Hostplus’s default fund is invested into unlisted assets. And 40% is in illiquid assets such as property, infrastructure and private equity. The fund defines such assets as those it cannot liquidate in under 90 days. “We are trying to look through cycles, rather than manage cycles,” said Clerk.
While Hostplus is heavy in illiquid assets and a big active equity investor, it doesn’t hold any bonds, an unusual approach for a pension fund, “Over a time frame of a 20-year period there is no expectation that bonds will outperform. We are firm believers in the equity risk premium.”
It’s also a strategy that has worked very well to date. Hostplus enjoyed close to a 30% fund growth over 2016 and 2017, hitting A$33 billion ($23.82 billion) as of June 30, 2018, while its benchmark MySuper balanced fund returned 12.5% for the 2017-2018 financial year. That makes it the top performer in the industry – over one, three, five, seven and 15 years.
That performance helps explain why AsianInvestor made Hostplus the standout Pension Fund in our Institutional Excellence Awards.
EXTERNAL APPOINTMENTS
Part of Hostplus’s approach is a willingness to hire external managers across asset classes rather than manage assets internally. That stands in contrast to some peers, which are adding personnel to internally manage parts of their portfolios.
“If there is a cyclical element to the equity risk premium we have to admit this to managers in our space. We won’t go as far as [Japanese government pension fund] GPIF and lock them in for five to 10 years, but de facto [working with managers over several year periods] is what we do.”
Clerk noted that appointing outside managers is part of the super funds’ strategy to identify and enjoy long-term alpha returns. “We find great value in relationships and we like to incubate relationships,” he said. “We might find a manager with pleasing attributes or [find] smart investors but they’re in a small shop.”
He offered the example of Paradice [Investment Management], which Hostplus initially seeded with A$30 million into its small-cap equity fund in February 2002. “It’s shot the lights out at 6% [on average] ever since, and once we developed trust with someone like [founder] David Paradice, he could identify other investors too, such as people who could manage the mid-cap space.”
Building such relationships offers other benefits too. “If we say we will invest with you for the long term and if are unlikely to redeem or even reduce when you are down, then we can use this to our advantage to negotiate lower fees,” Clerk noted.
There are other benefits to building relationships over years as well, Clerk said. “When we source more assets externally, we can extract information from those managers. We have a lot of smart partners whose insights shouldn’t be confined,” he said. “Cultural alignment is a huge thing for us. If we are long-term investors we want our partners to be long-term as well.”
Of course, governance and performance questions do still matter. “David Paradice will move on at some stage, so at that point do we reconsider all of our mandates [with his company] or do the alignment of goals survive him? It’s important to find mutually rewarding partnerships.”
In addition, Clerk said that his boss Sicilia takes a pragmatic view on fund house fees.
“Sam always says that at some stage managers will realise they will go out of business if everybody insources [because they aren’t good enough and too expensive]. So they will need to meet the market at some stage, which means fees must come down.”
This story was adapted from an interview with Hostplus, which originally featured in AsianInvestor's December 2018/January 2019 edition.