Commonwealth Super's investment picks to weather volatility
From the pandemic outbreak in 2020 to the cyclical recovery and slowing growth of 2021-22, to higher interest rates, higher inflation and recessionary concerns going forward, portfolio-management agility continues to be critical according to Alison Tarditi, CIO of the Commonwealth Super Corporation (CSC).
“I have a lot of respect for the difference between risk and genuine uncertainty,” Tarditi told AsianInvestor.
“We often think about investment risk in statistical terms, but there is real uncertainty in today’s global outlook and that means dealing with potential eventualities that are unknowable.”
As the volatility and uncertainty of financial markets rose drastically over the last few years, the A$60 billion ($40 billion) Australian superannuation fund has redefined itself through its long-term investments and ability to adapt.
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“Instead of forecasting macroeconomic outcomes, we analyse the performance of our portfolios under multiple different, but plausible, future scenarios to find their vulnerabilities and address them proactively.”
NEW ECONOMY INFRASTRUCTURE
“We hunt where others aren’t, either because their size precludes it, or because they haven’t yet thought to look. Our private markets program, which covers private equity, infrastructure and real estate, has outperformed our blended private markets benchmark over the 3 years to June 2022 by 14.2% p.a.” said Tarditi.
The super fund recognised the needs of the energy transition and the digital economy early, investing in assets such as windfarms back in 2015 and data centres in 2016, before they became thematic.
“As these assets appreciated strongly, because others began recognising their value, and CSC’s domain expertise increased, we have been able to recycle that early-mover capital into higher-returning opportunities including development platforms – platforms that build new renewable assets across solar, wind, biomass and hydro,” said Tarditi.
“These businesses are valuable to CSC customers’ retirement outcomes because their financial returns are largely insulated from short-term economic conditions. Instead, their cashflows benefit from long-term power purchase agreements or regulated inflation-linked tariffs,” she said.
CSC’s investments in renewables development platforms and early-stage technologies are those that the fund differentiate as having impact beyond their portfolios in the real world. According to Tarditi, its investments finance activities that are adding to the stock of renewable assets, not just trading claims on existing ones, and are enabling companies to work on discovering novel solutions to some of the broader challenges in the world beyond finance.
Investment returns are reverting to lower, more sustainable levels as central banks raise interest rates to curb higher inflation. Tarditi’s team identified this underpriced risk in 2021 and responded by prioritising inflation-linked assets in CSC’s private asset pipeline and building some downside protection into customer portfolios.
CSC was the first Australian superannuation fund to recognise that data centres would be a critical form of infrastructure for a technology-driven future and subsequently made a significant pioneering investment in Canberra Data Centres (CDC) in 2016. The value of this investment increased by 40% per annum in the first three years since inception.
In December 2019, the fund sold 50% of its interest in CDC to lock in material gains for its members, but continues to be a major shareholder in the company.
“Our risk management disciplines mean that we have been able to recycle some of that capital in a timely way, re-allocating it to a number of new digital infrastructure investments around the world that leverage our domain expertise to take further advantage of the unremitting advance of digitalization,” said Tarditi.
CSC went in search of assets that had both defensive cash flows and exposure to growth from digitisation trends that are less correlated to market and economic cycles.
“We invested in the number one privately owned developer and owner of last-mile residential fibre broadband networks in Australia, completed via a public to private transaction,” said Tarditi.
Other notable investments include a US residential broadband internet provider, which owns both the network infrastructure and is also the retailer to the end customer; a Latin American fibre and data centre business that provides services to more than 20 countries; and a US data centre business with a focus on facilities with so-called “cloud on-ramps”, which provide fast connections to cloud services.
“These assets broaden our exposure to different segments of the digital-infrastructure universe and improve the quality of our portfolio’s diversification, to improve its resilience to inflation or potential cyclical shocks,” said Tarditi.
This story has been updated in para 12.