UniSuper paring private equity exposure

It’s been a major trend in recent years for institutional investors in Asia Pacific to ramp up their exposure to alternative assets. So it comes as quite a surprise when a sizeable and sophisticated pension fund says it has been reducing its private equity allocation.

But that is what Australia’s UniSuper is doing, chief investment officer John Pearce told AsianInvestor.

“We are not really fans of alternative assets,” said Pearce, who took up the CIO role in 2008. “For example, since I joined, we’ve been divesting our private equity assets, and we’ve got the allocation down from $2.5 billion to about $500 million.”

This is a function of the caps imposed on illiquid asset holdings at the A$42 billion ($37.3 billion) superannuation fund for Australia’s higher-education sector. “We believe illiquidity has not been properly priced in the market,” noted Pearce, “and that super funds and others have not captured a premium for investing in illiquid assets.”

Hence UniSuper needs to ration its limited capacity for illiquid assets to those that give a better fit for its liabilities and a better risk/return profile, he added. “For us, that’s been property and infrastructure rather than private equity.”

Meanwhile, the fund has zero exposure to hedge funds, for two reasons, said Pearce: their lack of transparency and level of fees.

“I understand that the transparency issues are being resolved in many cases, with hedge funds becoming far more ready to disclose holdings on a timely basis. But we still have a hurdle with the fees.

“Like most of the industry funds in Australia, our positioning is as a low-cost provider,” he added. “Now you can argue that you shouldn’t be looking only at costs but at net returns, and that is a fair point. But the reality is that when you’re positioning yourself as a low-cost provider, hedge fund fee structures are problematic.

“And let’s face it, the value proposition offered by hedge funds in the past few years hasn’t been stellar.

Such views are commonly held among super funds in Australia, although some – such as HostPlus and Rest – are now looking at building their allocations to hedge funds, as reported.

Another change UniSuper has made to its portfolio is a move to upgrade the quality of its portfolios. The reason? “We have the mantra that superannuation is someone’s life savings, and it is their biggest asset after their primary home,” said Pearce.

For example, the fund has spent the last few years selling non-core property and investing very heavily in quality retail in prime locations.

In addition, it has divested minor stakes in some infrastructure, but is taking big stakes in “quality” infrastructure. For instance, it is the biggest owner of Sydney Airport and Transurban and own 50% of Adelaide airport.

“For the same reason we’ll stay away from complex structures and from frontier markets,” said Pearce. “We wouldn’t invest money in Africa, Pakistan or some eastern European countries, for instance.”