Reshaping how we live

Digital transformation is reshaping all aspects of our lives, including the way we work, consume, and entertain ourselves. There have also been major shifts in the way companies operate, and every sector has had to adapt. In the retail industry, businesses must now consider not only the physical shelf, but also the digital shelf, as the shopping experience continues to digitise. In addition, there have been major changes in terms of how consumer brands market to their audience – they can no longer rely solely on television advertisements and billboards, but must now consider how they target customers through their mobile phones and social media.

As the digital transformation continues to permeate every aspect of our lives, there are technological developments that our investigative research team view as particularly interesting – including light detection and ranging (Lidar) and radio detection and ranging (Radar). To put it simply, this is the use of lasers and radio waves to detect other objects. Lidar and Radar are frequently used in cars and autonomous vehicles, and are now becoming increasingly smaller and more effective, meaning that numerous sensors can be used.

Has the tech ship sailed?

In recent years we have seen technology sector stocks that are dialled into the technology innovation theme perform very well, which raises the question: have investors missed the boat? The short answer, we believe, is no; we still see opportunities in the technology area. We are still relatively early in the digital transformation movement; in fact, many industries, such as education, energy, transportation and health care, are still in the earliest phases of deploying technology.

If we focus in on the UK market, although technology stocks account for only around 2% of the benchmark (FTSE All Share index) by value, the impact that digital transformation has on every sector means that investors do not have to miss out on the theme in this specific market. Despite not necessarily being household names, there are a number of small and mid-cap stocks that are leaders in their niche and have a significant runway for growth.

Risky business?

Although the digital transformation has the potential to significantly affect and improve our lives, we must acknowledge its potential drawbacks. As adoption of technology grows, we become increasingly connected to each other and to our surroundings. Our digital footprints will become much larger than they are today, which unfortunately presents increased scope for cyber attacks. Nevertheless, this also creates investment opportunities, for instance in the form of cyber-security vendors, which are able to protect users.

As technological innovation has progressed, so too have data privacy rules that seek to regulate who controls our data, such as the General Data Protection Regulation (GDPR) in Europe. These rules have changed the way that data is controlled: anyone who takes our data is now a custodian of it. This presents a number of risks to firms given the extent of the regulation, and there can be serious consequences if firms misuse this information. On the other hand, this has given rise to new companies that help businesses to ensure they are using data appropriately.

Technology and sustainability go hand in hand

Finally, we must recognise the implications that digitalisation has on sustainability. The consideration of environmental, social and governance (ESG) factors can be a useful tool to achieve a more holistic picture of companies. There are various ESG issues that are prevalent in the technology sector, in particular around social media, cyber security, and (as mentioned) data privacy. In addition, many of the large technology companies have voting structures that can be detrimental to shareholders. All of these risks must be monitored.

We look for businesses that will survive and thrive for not just the next few years, but for the next few decades, and the focus on sustainability has led to new business opportunities. A good example of this is a global leader in industrial software. The company essentially creates a digital representation of a physical asset for industrial businesses. This virtual model is able to study the asset and suggest potential improvements, thereby improving the efficiency of industrial processes. Not only does this have financial advantages, but also significant environmental benefits, including reduced waste and lower carbon emissions.

Important information

This is a financial promotion. This article is for institutional investors only. Material in this article is for general information only. The opinions expressed in this article are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Any reference to a specific country or sector should not be construed as a recommendation to buy or sell this country or sector. Please note that strategy holdings and positioning are subject to change without notice. Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions.
Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN. ‘Newton Investment Management Group’ is used to collectively describe a group of affiliated companies that provide investment advisory services under the brand name ‘Newton’ or ‘Newton Investment Management’. Investment advisory services are provided in the United Kingdom by Newton Investment Management Ltd (NIM) and in the United States by Newton Investment Management North America LLC (NIMNA). Both firms are indirect subsidiaries of The Bank of New York Mellon Corporation (‘BNY Mellon’). Newton Investment Management Limited is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton Investment Management Limited’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton.
Certain information contained herein is based on outside sources believed to be reliable, but their accuracy is not guaranteed. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2021 The Bank of New York Company, Inc. All rights reserved.
In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.

As investors, we have the ability and the responsibility to speak to the boards and management of the companies that we invest in, to raise concerns, offer feedback, and also share best practice. This dialogue enables us to get a sense of how key risks, such as the energy transition, are being managed, and helps us gauge how companies are positioned to pursue opportunities. We also gain useful insights into corporate culture. Our experience to date suggests that how a company engages with its investors and how receptive it is to feedback can be indicative of how open it is to change and, as a result, how wholeheartedly it is embracing the energy transition.

Stewardship feeds the research process

Our engagement uncovers data that cannot be gleaned from an annual report or a presentation alone. This data feeds into the mosaic of information we use in our investment research process and helps us be better informed investors and therefore better allocators of capital.

Companies must demonstrate a genuine commitment to the energy transition

Currently, it is rare to see a company report which does not contain the phrase ‘net zero’, and ‘greenwashing’ is a concern. When we analyse companies, and assess their strategies, there are a number of specific things that we look for. We want to see a roadmap, with interim targets up to 2025, 2030 and 2040. We want to see a discussion of scenario analysis, specifically showing that companies have considered how they could adapt to a range of different eventualities and externalities. We want to see evidence that the oft-stated commitment to the energy transition is genuine. Crucially, through our persistent engagement, we want to see how well the tone from the top is supported by action at the operational level.

One thing we find really useful in helping us understand a company’s approach is disclosure in line with the TCFD (Task Force on Climate-related Financial Disclosures) recommendations. This reporting framework provides a good structure for this level of detail. It should be emphasised that this assessment is undertaken in partnership with our investment analysts. These considerations are part of the fundamentals – capital expenditure is costs, for example, and changing product lines are changing revenue streams. Our collective viewpoints contribute to a better determination of the credibility of a company’s strategy.

The social implications of the energy transition

We see the social and environmental implications of the energy transition as intrinsically linked to the sustainability of companies’ business models. Human-capital management has been an important topic for Newton* for some time. Over the years, we have engaged with companies across the energy and utilities sectors in particular, in order to research how they are managing the transition for their employees. We ask companies to explain what they think the future model of work will be and how they are reskilling, or upskilling, their employees for the future they anticipate. Arguably, this area has been overlooked by many investors for a long time, with the result that there is a dearth of useful information and data investors can use to assess how companies are managing this risk, so peer-group analysis is challenging.

We look for companies to provide detailed disclosures and improved KPIs (key performance indicators), including what kind of reskilling and training is available to employees and what take-up rates have been across the business. We also look for longer-term planning measures which demonstrate considerations from an employee perspective, such as a thoughtful approach to a shift in geographic location based on future product offerings.

* Newton Investment Management Ltd

Important information

This is a financial promotion. This article is for institutional investors only. Material in this article is for general information only. The opinions expressed in this article are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Any reference to a specific country or sector should not be construed as a recommendation to buy or sell this country or sector. Please note that strategy holdings and positioning are subject to change without notice. Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions.
Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN. ‘Newton Investment Management Group’ is used to collectively describe a group of affiliated companies that provide investment advisory services under the brand name ‘Newton’ or ‘Newton Investment Management’. Investment advisory services are provided in the United Kingdom by Newton Investment Management Ltd (NIM) and in the United States by Newton Investment Management North America LLC (NIMNA). Both firms are indirect subsidiaries of The Bank of New York Mellon Corporation (‘BNY Mellon’). Newton Investment Management Limited is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton Investment Management Limited’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton.
Certain information contained herein is based on outside sources believed to be reliable, but their accuracy is not guaranteed. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2021 The Bank of New York Company, Inc. All rights reserved.
In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.

For a decade now, the behaviour of investors appears to have been predicated on the belief that a sustained acceleration in future inflation is unlikely. But if we are now entering an environment in which expectations of inflation begin to rise, the implications for investors are likely to be game-changing. A portfolio that is appropriate for an inflationary world is likely to be vastly different to one which has excelled in the last 40 years of disinflation.

Protecting a bond portfolio

Rising real yields and inflationary pressures are a key concern for bond investors, and conditions are likely to remain challenging for many developed-market government bonds in particular over the coming months. However, these assets may regain a role in portfolio construction as more elevated yield levels create attractive entry points.

There are a number of ways in which investors can seek to protect their bond portfolios in a more inflationary environment. Holding shorter-duration bonds helps to reduce the sensitivity of bond portfolios to rising yields. Other tools include inflation-linked bonds, such as US Treasury Inflation-Protected Securities (TIPS), and floating-rate notes where coupon payments rise with central-bank interest rates. Straightforward derivative strategies can help to protect against heightened rate volatility. Analysing the shape of any changes in the yield curve also provides opportunities to generate returns.

High-yield corporate bonds may also offer attractive characteristics. These bonds tend to be relatively short in duration and have a credit spread, providing a cushion against rising yields. Furthermore, while the economy is in a growth phase, companies are likely to be more profitable, meaning that they can better service their debt, resulting in lower default rates and potentially a tightening of credit spreads.

Finding equity opportunities

In equities, some of the more cyclical areas that have been out of favour in recent years may be set to outperform. Many ‘growth’ businesses, the relative winners of the low-growth, post financial-crisis world, have been trading at high valuation multiples, while those more cyclical areas of the market that traditionally benefit from higher inflation and higher interest rates now appear much cheaper relative to history.

Where can these stocks be found?

We see opportunities within parts of the financial sector; some of the large US banks, for example, have recently grown their dividend payments by 40%, as well as undertaking significant share buybacks. Together with the potential for multiple expansion, this has the potential to deliver a very attractive total return. Elsewhere, for many companies in the energy area, markets appear to be discounting a swift move to cleaner forms of power and the rollout of electric vehicles. Nevertheless, we believe there will be a need for transition fuels for some time, and see opportunities in certain businesses where we are observing a real shift in how management teams are allocating capital.

A different multi-asset toolkit

From a multi-asset perspective, a more inflationary environment over the medium term is likely to have profound implications in terms of how different asset classes behave and are correlated, and this will have repercussions for the way investment strategies are constructed. With bonds not offering the diversification that they have done in the past, it will be important to ensure that portfolios still have liquidity, tail-risk protection and alternative capital-preservation tools. Convex long option and volatility strategies, such as risk-premia strategies with an asymmetric return profile, could help and, if structured effectively, the cost of hedging may not be prohibitive.

Analysis of inflationary episodes and the performance of different asset classes over the last 50 years shows that bonds generated negative real returns during most inflationary episodes, and equities as an asset class also frequently underperformed. Gold performed strongly during the inflationary periods of the 1970s, but appears to have been much less related to inflation since then. On the other hand, commodities that constitute the raw materials of production processes have had a much more reliable relationship to inflation, with a strong positive correlation between broad commodity prices and inflation. Renewable-energy infrastructure assets, whose revenues are often linked to the rate of inflation, could also be well placed to outperform.

Ultimately, we believe an active and flexible approach will be critical in seeking to take advantage of a changing opportunity set, underpinned by a sound risk-management framework.

Important information

This is a financial promotion. This article is for institutional investors only. Material in this article is for general information only. The opinions expressed in this article are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Any reference to a specific country or sector should not be construed as a recommendation to buy or sell this country or sector. Please note that strategy holdings and positioning are subject to change without notice. Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions.
Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN. ‘Newton Investment Management Group’ is used to collectively describe a group of affiliated companies that provide investment advisory services under the brand name ‘Newton’ or ‘Newton Investment Management’. Investment advisory services are provided in the United Kingdom by Newton Investment Management Ltd (NIM) and in the United States by Newton Investment Management North America LLC (NIMNA). Both firms are indirect subsidiaries of The Bank of New York Mellon Corporation (‘BNY Mellon’). Newton Investment Management Limited is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton Investment Management Limited’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton.
Certain information contained herein is based on outside sources believed to be reliable, but their accuracy is not guaranteed. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2021 The Bank of New York Company, Inc. All rights reserved.
In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.

One of our defining characteristics, and main objectives, at Top1000funds.com, is to provide behind-the-scenes insight into the strategy and implementation of the world’s largest investors. In 2021, as the impact of the COVID-induced pandemic continued to be felt, we were on our toes to innovate our media and event offerings in a bid to give you what you needed to navigate a changing world.

We delivered four outstanding digital events and wrote more than 300 investor profiles and other analytical and research-driven pieces on the global institutional investment universe.

We now have readers at asset owners from 95 countries, with combined assets of $48 trillion, and we are also pleased to say that our readers are spending more time on our site and there are more people visiting, so thank you to all our interview subjects, readers and supporters over the last year. Below is a look at the most popular stories of 2021.

In February 2021 we launched the Global Pension Transparency Benchmark, a collaboration between Top1000funds.com and Toronto-based CEM Benchmarking, which ranks 15 countries on public disclosures of key value generation elements for the five largest pension fund organisations within each country. The overall country benchmark scores look at four factors: governance and organisation; performance; costs; and responsible investing; which are measured by assessing hundreds of underlying components. We focused on transparency because we believe transparency and accountability go hand in hand and lead to better decision making, and ultimately better outcomes.

AIMCo, the C$118 billion Canadian fund appointed its first chief investment strategy officer splitting the investment function between the top down strategy and bottom up implementation responsibilities. We spoke to Amit Prakash, as part of our Investor Profile series, about how the new function will add valuable investment insights to clients.

ESG remained a key focus for institutional investors this year (a reminder that ESG is topic du jour for the industry but Top1000funds.com has been reporting on ESG since 2009). As more investors around the world look at how to invest with a diversity lens we examined how investors in Japan, Sweden, the US and Canada are addressing the diversity question as part of their internal organisation and in their investments and the managers they work with.

Bridgewater’s head of investment research Karen Karniol-Tambour explained how integrating impact alongside risk and return is a revolution that will see more diversification among investor allocations to asset classes such as commodities. Elsewhere, it requires using multiple data sets to analyse stocks and sovereign bond allocations to see the real-world impact of a company’s product or services, and which governments are heading to net-zero.

And interestingly, research conducted by Scientific Beta looks at the performance of ESG strategies and asks whether non-financial information in ESG scores offers additional performance benefits. The research finds that the effect of risk adjusting the performance of ESG strategies shrinks the apparent alpha to a level where none of the strategies delivers positive alpha.

Earlier in the year we hosted celebrated economist Joseph Stiglitz, University Professor at Columbia Business School at one of our Sustainability events. He said that the slow pace around developing a comprehensive approach to debt in emerging markets and developing countries will result in a weaker global recovery. He urged for a restructuring of debt in a coordinated approach between the public and private sector.

More recently we looked at how the Abu Dhabi Investment Authority, the state-owned investor with an estimated $700 billion assets under management, is introducing more technology in its own internal processes and determined to become a more active – and reactive – investor. The fund’s decision to invest more in its own in-house technology came with the realisation that a slow down in its capacity to generate alpha was linked to a lack of investment in big data and AI.

Perhaps one of the most personal stories I have ever written is one remembering David Villa, the executive director and chief investment officer of the State of Wisconsin Investment Board who passed away this year.

David Villa was a unique thinker and generous with his ideas. It was hard not to be swept away by his passion for change. He had a deep thoughtfulness and desire to improve outcomes for his members and the many other pension fund members around the world for whom his peers managed money. This is worth remembering and anchoring ourselves in as we reflect on the year that was.

Thanks for reading.

 

 

Last year’s SPAC boom which saw 677 SPCAs raise an estimated $200 billion provided an unexpectedly rich seam of returns to the University of Texas Investment Management Co portfolio (UTIMCO). SPACs, or so-called blank check companies without any assets, float on the stock market and raise money from investors at which point they hunt and merge with private companies looking to go public and list.

Some of UTIMCO’s private assets were acquired by SPACSs in a process that achieved both liquidity and good valuations, said Rich Hall, UTIMCO’s new CIO responsible for investment strategy and selection and risk management at the $68 billion portfolio, taking over from Britt Harris who will remain President and CEO. Most recently UTIMCO’s investment team have developed strategies to arbitrage the market where Hall estimates there are still around 500 SPACs looking for acquisition targets.

The SPAC boom is part of the wider listing largesse that characterised 2021 as the capital markets roared back to life coming out of the pandemic. IPO markets have been at all-time highs, raising an estimated dollar value of $500 billion over the last two years, said Hall speaking at UTICMO’s December board meeting. UTIMCO benefited from the boom, particularly when some of the fund’s venture capital managers jumped through the IPO window to distribute significant cash back to the endowment. “It is market wisdom that when the IPO window is open you jump through it because you never know when it will close,” said Hall.

China challenge

In contrast, the growing regulatory crackdown in China has caused a more challenging investment backdrop in the capital markets. The Chinese government’s active regulation and intervention in the market in line with its social stability and political objectives has left the listing plans and investor hopes inherent in fast-growing Chinese corporates like Ant Group, and most recently ride hailing app Didi, in tatters. Elsewhere, investors have got burnt by the Chinese government’s decision to turn tutoring and education businesses into not-for-profit. “Many firms had investments in these sectors, and they’ve suffered significantly,” said Hall, adding that UTIMCO has no intention of allocating more to China. “We are very comfortable where we are.”

Still, uncertainty in China did little to dent UTIMCOs portfolio which grew by $15 billion last year on the back of robust contributions and exceptional investment returns, enabling it to distribute $2 billion to the university and medical systems it serves.

The portfolio is structured to provide diversity across different economic regimes with equity the wealth creator (propelled particularly by private equity), real return providing inflation protection and stable value countering the threat of deflation. For the year ending August 2021 UTICMO achieved a one-year return of over 30 per cent with every portfolio contributing alpha. The fund’s ten-year return sits at 10 per cent, well above a target of 7.5 per cent set to ensure the endowment doesn’t lose purchasing power through inflation.  “We target 100bps of alpha every year and on a 10yr basis, we are running 20 basis points ahead of that,” said Hall.

It leaves UTIMCO comfortably within Wilshire Trust’s universe of 13 similarly sized endowments with high allocations to private equity and venture. “We are in the bottom ten percent in terms of risk and the top 20 per cent in terms of return. Relative to a broad peer universe, we feel like we are doing pretty well,” Hall told the board.

Looking ahead

Looking ahead, Hall flagged enduring concentration in the US equity market. However, despite the fact the top ten stocks in the S&P 500 represent 30 per cent of the index; trade at a premium (to the index) and significantly move the market, he said these stocks’ influence was not “unwarranted” given they are the most profitable and fastest growing businesses around and can support higher multiples. Elsewhere, he noticed that although valuations are high, the dispersion of valuation is also high. “Managers still believe they can find good investment opportunities for us.”

A tone that informs his wider macro analysis of the year ahead. The sprint for returns is over and investors should now prepare for a marathon; the easy money has been made in terms of market returns but there is still some gas left in the economic tank – he doesn’t see a bear market ahead and is moderately risk-on.

Inflation (and strong wage gains) are risks and he warns supply chain disruption will continue to thwart business performance, observing how UTIMCO hears much more mention of both in earnings calls. Reflecting on the supply chain crisis, Harris stressed the dangers and damaging impact of the energy Transition going so quick it triggers spikes in energy prices and fuel shortages, recently visible in Europe.

However, above all that lies a still greater risk. If central banks turn suddenly hawkish and increase the frequency and magnitude of rate rises compared to what is already priced into the market, Hall warned that investors will face a far more challenging 2022.

 

 

The CIOs of two of Australia’s largest asset owners, Aware Super and UniSuper are looking to enhance their competitive advantage in an increasingly concentrated superannuation market.

The chief investment officers of two of Australia’s largest super funds have contrasting strategies to tackle regulation, investment strategy and performance in 2022.

Aware Super – the result of a merger of First State, VicSuper and WA Super – aims to continue growing through mergers which will create complexity for its investment management team, says CIO Damian Graham.

The fund engaged consultancy McKinsey to develop a five-year strategy which found some complexity was a competitive advantage in a crowded market, Graham says.

“The way we’re investing – internalisation as part of the portfolio, infrastructure and property, an internal macro strategy-style offering – those sorts of things are slightly more at the complex end but that’s a better way to apply risk where you want to be different,’’ he says.

The fund is investing in greenfield infrastructure and social housing, less in retail, with its property portfolio makeup of 35 per cent industrial, 30 per cent residential and less than 12 per cent in retail and some in office.

“That’s an active position for us. Do you think we can add value? Yes we’re happy to build greenfields assets rather than buy,’’ he says.

“ What we’re trying to do is reduce where we don’t want to be different or we don’t have a conviction – we are trying to close down those areas.”

Aware’s aim is to grow from A$160 billion to A$250 billion funds under management in four years, energized by mergers, with private market investment managers around the world in different locations, Graham says.

Aware expects to double its portfolio manager workforce to 200 as it increases its areas of excellence around real income and growth assets and supporting teams on property infrastructure, cash and trading.

Meanwhile, award-winning fund UniSuper has inhouse management experience that is a competitive point of difference, says its CIO John Pearce.

With industry heavyweights Chris Cuffe, Mark Armour and Felicity Gates among its investment committee, the fund runs a significant inhouse asset management business, Pearce says.

“It’s not simply a case of a board saying: ’we better pay higher remuneration and get the best people and away we go’. It’s governance structures and governance mindset that’s what’s really important,’’ Pearce says.

The fund has more than 450,000 members and A$100 billion in funds under management, while significant fallout expected for its university sector members was not as bad as predicted. Opening up to the public this year meant inflows have been “really strong”, Pearce says.

Yet to announce a merger, UniSuper is talking to seven funds and in due diligence with two, Pearce says.

Macroeconomic views

On a macroeconomic view, Pearce says bonds have become irrelevant for funds to match pension liabilities.

“If you started matching liability you would guarantee insolvency down the track,’’ Pearce says.

“There was no other option but to risk it. That’s what we’ve done and that’s what the central banks want us to do – to take more risk.”

In terms of digital and cryptocurrency strategies, Pearce says there is no “crypto seeping into UniSuper portfolios”.

“We’ve now got a $3 trillion market with no adult supervision and its definitely in need of that. The fundamental basis of crypto is flawed,’’ Pearce says.

However blockchain, the basis of cryptocurrencies, was “the real deal” and a reason why UniSuper is the largest shareholder in the ASX, a blockchain pioneer, Pearce says.

The direction of inflation is also front of mind at UniSuper.

“The questions that investment managers have to address will be the bond market and the central banks’ response to different scenarios. That’s the debate we’re having at UniSuper,” Pearce says.

“I find it hard, being an old timer that’s lived through inflationary periods, to hold bonds at two per cent and inflation’s travelling at four. What I’m saying is we’ll be a lot wiser by the end of the second quarter next year, but at the moment we’re playing things from the short side.”