UniSuper, 2023’s best performing mega fund, delivered a 10.3% return on its default Balanced option – in a year dominated by high inflation, the fastest rate hikes in decades and the ongoing war in Ukraine.
Rob Hogg, Head of Fixed Interest and Macro Research at UniSuper, talks to Sean about the result, as well as the outlook and what it means for asset allocation.
This is general information only. You should seek professional advice before making investment decisions.
Find out more: https://fearandgreed.com.au
See omnystudio.com/listener for privacy information.
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Sean Aylmer: Welcome to the Fearing and Greed Business interview. I’m Sean Aylmer. We
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Sean Aylmer: talked recently about the performance of superannuation funds across the
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Sean Aylmer: last financial year. The best performing mega fund was UniSuper
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Sean Aylmer: with its default balanced option returning 10.3%. Remember, this is
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Sean Aylmer: in a year dominated by high inflation, the fastest rate
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Sean Aylmer: hike cycle in decades, and the ongoing war in Ukraine.
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Sean Aylmer: Having delivered positive returns across all its investment options, I
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Sean Aylmer: wanted to talk to UniSuper about where the market’s heading,
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Sean Aylmer: what that means for investors, and of course asset allocation.
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Sean Aylmer: This is a big fund investing more than $120 billion
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Sean Aylmer: on behalf of over 615,000 members. And of course, this is
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Sean Aylmer: general information only and you should seek professional advice before
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Sean Aylmer: making any investment decision. Rob Hogg is the Head of Fixed Interest and Macro Research at UniSuper. Rob,
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Sean Aylmer: welcome to Fear and Greed.
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Robert Hogg: Thank you very much. It’s a great pleasure to be here.
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Sean Aylmer: So last year was a good year, all in all.
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Sean Aylmer: I mean, a particularly good year for UniSuper, but generally
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Sean Aylmer: superannuation funds and fund managers had a better year last
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Sean Aylmer: year than the one before, but it was a little
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Sean Aylmer: bit unusual in terms of how fixed income and equities
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Sean Aylmer: worked, I was going to say with each other, but
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Sean Aylmer: maybe it was against each other. Just tell me the
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Sean Aylmer: number that you come up with, is that mostly in
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Sean Aylmer: the back of equities, kind of the roles that fixed
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Sean Aylmer: income played versus other assets?
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Robert Hogg: Yeah, look, in terms of the contributions then to the
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Robert Hogg: return of the balance fund, the key contributions really came
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Robert Hogg: from the equity side and in particular to a number
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Robert Hogg: of the global equity exposures that the fund has. We
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Robert Hogg: as a fund for quite some time, so more than
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Robert Hogg: a decade, have had very significant holdings to the theme
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Robert Hogg: of tech and during the course of the financial year
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Robert Hogg: that’s just finished as you’d be very well aware, a
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Robert Hogg: number of those larger tech companies did extremely well. So
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Robert Hogg: companies along the lines of Apple and Microsoft, for instance,
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Robert Hogg: were really key drivers of that performance. So it’s really
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Robert Hogg: that orientation towards the tech equity sector globally, particularly in
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Robert Hogg: the United States. That was certainly one of the key
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Robert Hogg: drivers of our performance in the financial year just finished.
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Sean Aylmer: Okay. So what sort of role did bond markets and
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Sean Aylmer: credit markets play in the fund last year? And I
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Sean Aylmer: suppose what I’m heading towards is are we going to
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Sean Aylmer: have a more traditional equity bond market trade off going
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Sean Aylmer: forward than we’ve had kind of in the last year
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Sean Aylmer: or so?
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Robert Hogg: Yeah, look, I would expect that to be the case. Of course,
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Robert Hogg: one of the key themes last year was the inflation upside
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Robert Hogg: surprise in the sense that inflation globally probably and still
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Robert Hogg: remains higher than expected and it’s been a more elongated
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Robert Hogg: inflation cycle and expected. So of course that drove up
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Robert Hogg: interest rates, both official and longer term rates, bond rates
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Robert Hogg: both in Australia and globally. So we had a situation
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Robert Hogg: where certainly earlier in the year, that negative relationship between
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Robert Hogg: bond yields and equity prices was key. But then as
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Robert Hogg: bonds sort of leveled out around the beginning of the
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Robert Hogg: calendar year, we’ve then seen equities really start to pick
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Robert Hogg: up more so in some markets than others, particularly the
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Robert Hogg: United States. But looking out with global bonds at current levels,
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Robert Hogg: they’re not that far away from what I think a
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Robert Hogg: lot of investors would regard as a sort of a
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Robert Hogg: long-term fair value. We are more likely to see that
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Robert Hogg: trade off, if you like, between bonds and equities and
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Robert Hogg: that’ll be a little bit different, but that’ll be normal
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Robert Hogg: compared to the selloff we had with inflation and equity
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Robert Hogg: a year or so ago.
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Sean Aylmer: Just before we jump into asset allocation, where are we
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Sean Aylmer: up to do you think in terms of the macroeconomic
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Sean Aylmer: cycle? Certainly, in recent weeks we’ve seen inflation, it’s still
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Sean Aylmer: too high, but the momentum’s going the right way downwards
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Sean Aylmer: in terms of inflation. We’re seeing rate cycles peak or
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Sean Aylmer: head towards a peak, lots of conjecture around that. Where
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Sean Aylmer: do you think we are up to in terms of
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Sean Aylmer: the global rate cycle and inflation and then what’s that
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Sean Aylmer: mean for asset allocation?
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Robert Hogg: Well, I think one thing we can be reasonably sure
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Robert Hogg: of is that we are closer to the end of the
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Robert Hogg: tightening cycle than the beginning, but just how close we are
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Robert Hogg: to the end of the interest rate cycle will really
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Robert Hogg: depend on the inflation profile. So what we’re tending to
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Robert Hogg: see exactly as you said is that in Australia and
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Robert Hogg: globally inflation momentum, so whether that’s month to month or
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Robert Hogg: quarter to quarter and certainly annual change is starting to ease,
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Robert Hogg: but globally inflation is still generally at quite a high level.
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Robert Hogg: And that along with the fact that the unemployment rate
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Robert Hogg: globally is still quite low, the trade-off between the two
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Robert Hogg: will be key really in driving inflation from here. And
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Robert Hogg: that of course will be key in driving what central
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Robert Hogg: banks do from here. In terms of what that means
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Robert Hogg: for asset allocation, we as a fund are a little
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Robert Hogg: more comfortable with bond yields at their present levels. But
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Robert Hogg: in fact what we’ve intended to do on the interest
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Robert Hogg: rate side of the fund is take advantage of opportunities
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Robert Hogg: that have come past over the last probably nine or
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Robert Hogg: 12 months. So for example, if we cast our minds
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Robert Hogg: back to October, November last year when in the UK
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Robert Hogg: they had that linker gilt, so inflation protected gilt or
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Robert Hogg: UK bond sell off, that threw up opportunities really across
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Robert Hogg: the globe and it’s certainly threw up investible opportunities here
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Robert Hogg: in Australia that the fund was able to take advantage of. And
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Robert Hogg: more recently, so over the last six months or so, the fund’s
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Robert Hogg: been able to take advantage of the very significant bank
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Robert Hogg: bond issuance and in particular, I mean, bank Tier Two
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Robert Hogg: bond issuance. Some of the all in yields or total
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Robert Hogg: yield that those bonds have initially traded at have been
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Robert Hogg: extremely attractive and tick quite a number of the boxes
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Robert Hogg: that we look for in terms of investments that fit
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Robert Hogg: the risk return perspective.
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Sean Aylmer: So just delineating here between government bonds and credit markets,
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Sean Aylmer: do you think credit markets, effectively being non-government bonds, there
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Sean Aylmer: are attractive opportunities out there at the moment?
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Robert Hogg: Look, there are, one of the intriguing things about the
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Robert Hogg: current environment is that we tend to find what we
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Robert Hogg: feel the better risk return trade off lies within these
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Robert Hogg: bank Tier Two bonds rather than, for example, things like
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Robert Hogg: high yield bonds. We had expected that at this stage
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Robert Hogg: of the cycle we would be investing again in global
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Robert Hogg: and certainly US high yield bonds, but their spreads, which
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Robert Hogg: is to say the way investors assess their riskiness is
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Robert Hogg: not quite to the level that we think they provide
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Robert Hogg: the right risk return trade off. So I think another
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Robert Hogg: way of putting that is that investors are perhaps not
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Robert Hogg: pessimistic enough about the outlook. So the holders of these
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Robert Hogg: bonds, the yields available relative to the government bond of
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Robert Hogg: a similar maturity, the spreads and the yield differentials still
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Robert Hogg: not at attractive enough level for us to think that
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Robert Hogg: now is the right time.
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Sean Aylmer: Tier One, Tier Two, we better explain that one too.
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Sean Aylmer: So Tier One essentially… I’ll leave it to you. You
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Sean Aylmer: are the expert.
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Robert Hogg: Well, yeah, Tier One are hybrids they’re often described as
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Robert Hogg: so down toward the very, very bottom of a bank’s
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Robert Hogg: capital stack down with common equity. And above that we
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Robert Hogg: have these so-called Tier Two bonds. Now, one of the
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Robert Hogg: big differences between the two markets is that the hybrids
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Robert Hogg: are really in Australia, very much a retail market, whereas
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Robert Hogg: these Tier Two bonds in which we’ve been particularly interested
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Robert Hogg: and where we’ve worked very closely with bank treasury teams,
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Robert Hogg: they’re really very much a wholesale market. But the difference
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Robert Hogg: between the two, there are some tax differences, but it’s
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Robert Hogg: really in terms of where they sit on the capital
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Robert Hogg: stack for banks.
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Sean Aylmer: Stay with me, Rob, we’ll be back in a minute.
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Sean Aylmer: I’m speaking to Rob Hogg, Head of Fixed Interest and Macro Research at UniSuper. I just want to
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Sean Aylmer: quickly mention alternative investments as well, real assets, things like
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Sean Aylmer: property and infrastructure and then you go out to private
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Sean Aylmer: equity and all sorts of things. I mean, many of
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Sean Aylmer: us think about investing in terms of bonds and equities,
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Sean Aylmer: but of course the alternatives space seems to be growing very,
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Sean Aylmer: very quickly and kind of getting a lot more attention.
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Robert Hogg: Yeah, look, it has, certainly for UniSuper, compared with a
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Robert Hogg: lot of other industry funds, we have tended to have
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Robert Hogg: lower exposures to infrastructure and property. Well, in terms of
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Robert Hogg: the unlisted infrastructure, unlisted property. That however is starting to
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Robert Hogg: change, we’re starting to see more and more opportunities in
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Robert Hogg: those areas. So for example, with infrastructure, earlier in this
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Robert Hogg: year we were involved with the consortium purchasing in Europe,
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Robert Hogg: an investment called Vantage Towers, which are towers that are
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Robert Hogg: used for data carriage and streaming and mobile phones and
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Robert Hogg: so on. So the fund spent about a billion dollars
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Robert Hogg: on that opportunity and infrastructure earlier in the year. And
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Robert Hogg: really just more recently, in fact, only just this week
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Robert Hogg: the fund purchased some industrial property assets here and in
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Robert Hogg: so in Melbourne and in Sydney. So these are particular
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Robert Hogg: opportunities that have arisen and we think they’re very, very
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Robert Hogg: high quality assets that we’ve been very, very keen to
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Robert Hogg: add to our investment options for the benefit of the UniSuper members.
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Sean Aylmer: Rob, quite a serious question. How do you keep across
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Sean Aylmer: it all?
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Robert Hogg: Well-
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Sean Aylmer: You work hard probably, but it’s a very big investment
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Sean Aylmer: world out there.
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Robert Hogg: Well, look, it is, and we have one of the
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Robert Hogg: higher proportions of the fund being internally managed. About three
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Robert Hogg: quarters of the fund is internally managed. Almost all the staff,
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Robert Hogg: about one or two, work in the Melbourne office in
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Robert Hogg: open plan in the office most of the days of
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Robert Hogg: the week. So there’s an awful lot of flow that
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Robert Hogg: goes between all of the asset classes. So that information flow
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Robert Hogg: moves I think very, very well. But plainly, there are
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Robert Hogg: areas where we really can’t claim to have any comparative advantage.
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Robert Hogg: So for example, I was mentioning before high yield in
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Robert Hogg: the US and when we do decide to invest there,
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Robert Hogg: we certainly won’t be doing that from Australia. We have
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Robert Hogg: managers that do that kind of thing for us with
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Robert Hogg: a number of these other global unlisted opportunities, particularly infrastructure
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Robert Hogg: where we’re tending to co-invest with other investors that have
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Robert Hogg: their organisations and their personnel in the local market. So
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Robert Hogg: that’s how we stay on top, if you like, or
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Robert Hogg: seek and source and fund global opportunities. Really what we
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Robert Hogg: do internally in many ways is really just sticking to
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Robert Hogg: our knitting, doing mainly Australian assets across the investment team
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Robert Hogg: where we do do global assets, say in equities. There’s
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Robert Hogg: a significant quantitative overlay to what we do. So I think
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Robert Hogg: it’s just thinking sensibly about comparative advantage, what makes sense
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Robert Hogg: to manage internally, but what makes sense to work in
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Robert Hogg: a co-partnership arrangement with global investors.
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Sean Aylmer: Rob, thank you for talking to Fear and Greed.
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Robert Hogg: Pleasure.
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Sean Aylmer: That was Rob Hogg, Head of Fixed Interest and Macro Research at UniSuper. This is the Fear and
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Sean Aylmer: Greed business Interview. Remember, this is general information only and
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Sean Aylmer: you should seek professional advice before making investment decisions. Join
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Sean Aylmer: us every morning for the full episode of Fear and Greed,
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Sean Aylmer: Australia’s best business podcast. I’m Sean Aylmer. Enjoy your day.