Infovest21 Investor Focus

Australian superannuation assets (in US dollar terms) are the fifth largest pension pool assets in the world. At US$1.3 trillion, they represent about 4.8% of global pension assets, according to Towers Watson statistics.

Australia also has one of the fastest growing pension fund industries the world. Australian pensions grew by 17% (US dollar terms) in 2011 compared with 2001. The growth is largely due to the compulsory salary contribution made by every worker.

The superannuation sector is one of the most developed and sophisticated in the world at almost 100% of GDP. Australia also leads the world in the adoption of defined contribution funds.

In the December issue of Investor Focus, Infovest21 interviews one superannuation fund and two Australian consulting firms. The preference is to invest directly with hedge funds.

Mathew Jeremy of Caravel Asset Management says while they have used funds of funds, they prefer to use individual hedge funds and construct bespoke portfolios of them for our clients. Andrew Vallner of CPG Advisory says they generally invest in hedge funds. “We prefer higher volatility than the traditional funds of funds model.”

Jeremy observes that the key features of the Australian landscape at the moment are a strong desire for lower investment management fees and greater transparency of the investment product and process. “This helps to explain why fund of funds have found the Australian market more difficult in recent years. There is definitely a tendency for the larger institutional investors to choose hedge funds themselves and build their own portfolios,” says Jeremy.

Jeremy says the superannuation industry in Australia is still under-invested in hedge funds compared to other countries and compared to what is likely to be necessary given the demand for more consistent returns that are less dependent on equity markets.

Some estimate the average allocation to hedge funds in the 3-3.5% range.

Preferred strategies
Jeremy expects the macro environment to continue to be challenging over 2012 and 2013. He expects to see below trend growth with declining inflation and easier monetary policy around the world. Heightened levels of uncertainty among investors and volatility of risky assets are likely to continue. At the same time, he thinks global sovereign bond markets offer poor risk-adjusted returns.

In this environment, he is advising clients to consider emerging rather than developed equity markets, defensive or franchise stock portfolios in long-only equities, and selected hedge fund strategies. “The hedge fund strategies we prefer include global macro, equity market neutral, special event and orthogonal (fundamentally uncorrelated with equities) strategies not dependent on equity markets,” he says. “We think the environment over the next couple of years should be particularly favorable for good global macro managers. That and good emerging markets equity managers are top of our “must find” list at the moment.”
Vallner notes that high quality but smaller funds are generally preferred over mega funds, especially where the manager has a track record with large volumes and is unlikely to outgrow their abilities.

Full interviews are available in the December 2011 issue of Investor Focus.