Institutional investors with long-term focus can afford to take more risks: Commonwealth Super Corp
Having clear objectives and the courage to take risks is what makes institutional investors stand above the rest, according to The Commonwealth Superannuation Corporation (CSC).
The Australian super fund won in several categories at AsianInvestor’s 2021 Institutional Excellence Awards this year, including an institutional award for best small/medium pension fund (AUM under $50 billion) and three best-in-class awards for alternative asset investing; ESG engagement; and investing progress and innovation.
CSC’s chief investment officer Alison Tarditi told AsianInvestor that being recognised among a very capable Australasian peer group has been very constructive and motivating for herself and her team.
“It's particularly encouraging because it comes amid industry pressure in Australia to prioritise short term returns regardless of embedded risks, to focus on relatively arbitrary yardsticks over purposed objectives, and to focus on cost rather than quality necessarily,” said Tarditi.
“The fact that AsianInvestor recognises the importance of long-term sustainable outcomes and the capabilities required to deliver them means quite a lot to us.”
For Tarditi, these awards reflect CSC’s investment philosophy, which is to leverage its competitive advantages to access the best net real returns. It is also a reflection of her fund’s willingness to take calculated risks when searching for the best opportunities globally.
“We're not afraid to move first, and we're able to do this because we've got clarity of objective which is tied directly to our customers’ needs. We think about risk taking as a competitive advantage and reflect that in our risk budgets and our distributed decision making,” she said.
The CSC looks after superannuation funds designed specifically for the Australian government and its defence force employees. Throughout the fund’s history, this culture of risk-taking has allowed the fund to become a pioneer in the Australian super fund landscape.
“We were the first pension fund in Australia to invest in private assets almost three decades ago. First to prosecute as an active long-term owner of our investee companies rather than a short-term speculator on their earnings. First to deploy a bottom-up risk process in Australia for portfolio analysis back in the mid 2000s. First to invest in data centres and future fit industries. We were also an early investor in renewables and an early provider of seed capital to new investment management and advisory businesses.”
UNCERTAIN TIMES
Discussing CSC’s investment outlook for 2022, Tarditi said that the spectrum of scenarios for asset allocation is unusually wide at present — with global tailwinds in the form of low rates, falling input costs, and Chinese consumption demand all in flux.
CSC has been preparing its portfolios by building greater geographic diversity into its defensive assets as well as prioritising assets with inflation-linked cash flows and stable-or-growing capital values. Global conditions now appear conducive to sustaining a higher average level of price inflation than investors might have grown accustomed to.
“We’ve been investing in new private assets and businesses that are seeking to build the kind of sustainable futures we need, rather than simply trading claims on existing assets and building new asset management businesses that not only grow our customers’ savings in innovative ways, but also share their own revenue with them,” said Tarditi.
Tarditi asserted that her fund remains focused on the fundamental value and quality of assets, rather than the current prices of assets and the narratives that surround them.
“Fifty percent of companies within Covid-accelerated transformation industries like consumer tech, green energy, internet, retail, and biotech still aren’t profitable today despite seeing pretty massive price increases fueled by really compelling narratives — which are what have really been selling their stocks,” she said.
“Not all of those companies will succeed or even survive. The Morgan Stanley unprofitable tech index that combines all the tech companies that sort of sit in this group is already down 54%, since its peak last year,” Tarditi added. “We continue to focus our asset allocation on where the risks are going to pay off, and on diversification.”
BLURRED LINES
As an asset owner, CSC invests on a global scale, and Tarditi believes that the historical distinction between developed and emerging markets has become far less defined.
“Systems risks are common to all regions, the presence of policy and regulatory interventions are pretty broad and increasing everywhere, and the challenges of a fragile and shrinking middle class are all part of a shared global experience,” said Tarditi.
As such, CSC remains agnostic to asset or regional labels and focuses on objective assessment of the substance of the risk themselves.
“Overall, regions, wherever they are today, that are experiencing high inflation but only moderate to poor growth, or with revealed deficiencies of policy response, make them a wait-and-see for further investment. And that involves some developing markets, but it also involves some developed ones."
According to Tarditi, there are fantastic opportunities across Asia, though they are not necessarily to be found in the public equity markets.
“Most of our investments in the Asian region, including in China, are accessed through private channels rather than public. But we are very open to looking at those risks that will be best compensated, so we're not thematic in that regard. We're very pragmatic," said Tarditi.
“We believe there are some really good opportunities across the region, but they don’t necessarily come neatly bundled in an index that we can just buy.”