UniSuper chief investment officer John Pearce spoke to Financial Standard earlier this month about market opportunities, building the fund's in-house investment team and CIPRs.
Pearce said the fund doesn't particularly see a need to pull back from equities, a move that AustralianSuper announced at its member briefing in November.
"We've already done that to a certain degree. We are sitting on more cash than we normally would have. So I think we are well positioned to take advantage of further volatility in the market," Pearce said.
He added future opportunities will be dictated by a few macro factors, the most dominant of which will be the path that the US Fed takes with interest rates.
"Obviously everyone is concerned about the trade wars with China and the US but I think that is a much smaller consideration than the path of US interest rates. If indeed the Fed signals that they are at a neutral point in the interest rate cycle, I think that is actually the time to have a look at the markets that have been most adversely impacted by the tightening cycle in Asia, for example," Pearce said.
Pockets of opportunities in retail property
The industry superannuation fund has a $370 million property option. All its investments are held as listed securities which Pearce thinks are better than unlisted property - both in valuations and maintaining enough liquidity to allow members to move in and out.
"Property is interesting because you've got a massive discrepancy in the market in terms of what sector of the market you are in. So commercial office property looks very expensive and retail property -depending on what retail you are looking at - looks potentially on the cheap side. In unlisted, everything looks expensive," Pearce said.
The fund has screened for tobacco, armaments, gambling and fossil fuels for more than seven years. Pearce said the fund is content with its ESG and has no immediate plans in the area.
Emerging markets, direct lending
When asked about emerging markets exposure, the chief investment officer said the super fund was looking to allocate to an Asian debt mandate to invest in general Asian debt. He added UniSuper already has exposure to India through an outsourced investment management agreement.
Pearce said the super fund doesn't feel a need to go into direct lending. As where banks have pulled out, debt funds have filled the gap, he said.
"We have typically done all our exposures to fixed interest and debt via funds. At this stage we are pretty happy to do it that way and it is a more efficient way for us to get access to that type of exposure," he added.
Building the in-house investment team
UniSuper has built up a team of about 50 investment professionals from none almost eight years ago.
It is managing 65% of its investments in-house. Most core assets classes like global and Aussie equities, Aussie fixed income, Aussie property and cash are managed in-house.
It does outsource more specific strategies within these asset classes, such as the recent $250 million Aussie small cap mandate to Lennox Capital.
Pearce says the in-housing of investments hasn't been a grand plan, but has been shaped by the investment talent that comes on the market.
"We probably put on half a dozen staff in the last three to four years. So it hasn't expanded as fast as the assets have expanded and that is because we are running a very scalable model," he said.
"We don't have any grand plans. The way we built out the team, I use the term logical incrementalism. We just sort of do things that make sense in an incremental way," he said.
"When good people come on the market, we meet them, we have a look at them and every now and then something works out. That's how we've been building the team. We will build a strategy around a good person that we will hire and we will continue to in the future."
CIPRs a misconceived idea
About 20% of UniSuper's member base is currently in retirement phase and the fund expects the number to grow in future.
One change affecting future retirees and pre retirees would be the Treasury's requirement for all funds to offer a comprehensive income product for retirement (CIPR).
"I think CIPRs was a very misconceived idea and we have done very little work on it," he said.
"It is very misconceived because if you look at it, it's trying to achieve the impossible. You can't have a product that at the same time gives you high returns and gives you a capital guarantee and allows you to pass something on as inheritance and [beats] the inflation index."
Pearce also said the inflation-linked returns requirement for CIPRs may not always work out.
"It's very easy to implement any one or two facets of [the] product but it's nearly impossible to implement them all. So you [can] have something that is inflation linked but that means you might have to compromise on returns . If inflation stays low, inflation-linked can give you lower returns. But you can't have something that performs really well in high inflation and low inflation environments," he said.
"If it becomes legislation, we will comply with that. But at the moment our member base has been well served by our advice business and the current suite of products that we have."