Hospitality industry super fund Hostplus results in the black

Comments made as the $90bn hospitality industry super fund ekes out positive return amid difficult global investment markets.

Hospitality industry super fund Hostplus has booked a positive annual return, despite market turbulence around the world.

Hostplus chief executive David Elia has warned of a “significant flight” towards passive investment in the Australian superannuation industry as a result of last year’s introduction of the Your Future, Your Super performance test.

“We have seen a significant flight towards the passive style of investing and focusing on cost as distinct from net outcomes for members,” he said in an interview with The Australian, announcing the fund’s 1.57 per cent positive investment return for its My Super balanced option for the financial year to June 30.

He said he felt that some funds were now “a bit fearful” in taking investment risks in the wake of the introduction of the performance test.

Hostplus’ positive result for the financial year comes at a time when industry analysts Chant West are predicting super funds will report a median investment loss of around 3-4 per cent this year.

The positive return, which follows Hostplus’ record gain of 21.3 per cent for the financial year ended June 2021, is above that reported last week by the $260bn AustralianSuper which announced a loss of 2.73 per cent on its balanced option for the 2022 financial year.

The $90bn Hostplus, which has its roots in the hospitality industry, is crediting its active management strategy for delivering its higher than average return.

Mr Elia said he felt that there were now super funds who were “a bit fearful in taking risks” following the advent of the Your Future, Your Super performance tests which measure fund investment performance against specific benchmarks.

Funds which underperform over an eight-year period can be banned from accepting new members and their money.

“Super funds are long term investors but the test horizon for the regulator is eight years,” he said.

“I would argue that our investment horizon is actually 30 years.”

Mr Elia said Hostplus now had some $7bn in cash which it has accumulated over recent years as it felt market prices for some assets were too high.

He said Hostplus’ consistently strong investment performance meant that it was not worried by the Your Future, Your Super tests.

But he said he was supportive of last week’s announcement by Federal Financial Services Minister Stephen Jones for a review of the regime which is currently focused on the low cost My Super sector.

Mr Elia said there had been too much focus on reducing costs in the superannuation sector in recent years and not enough on investment performance.

He said the difference in investment approaches would “come to the fore in the next two or three years when there is going to be an enormous amount of volatility in the market.”

He warned that “funds which have just adopted cheap, passive based strategies” could find themselves vulnerable to sharp falls in the market.

“With passive management, if the market collapses by 25 per cent, member returns are going to collapse by 25 per cent.”

“Active management, where you pay managers to effectively outperform the market, gives greater flexibility and greater capabilities,” he said.

He said the superannuation industry had had a strong decade when share markets boomed but this was now changing.

“There is going to be a real distortion in the types of returns that funds are going to be able to generate,” he said.

“What is the purpose of someone saying: ‘We are really low cost, but we have lost your money?”

Mr Elia said super funds faced a “very different set of circumstances” this year than last, “with global investment markets afflicted by heightened political tensions, rising inflation and rising interest rates.”

He said Hostplus had been able to deliver a positive return for its members at a time when the industry median for balanced options was expected to be in the red across the sector.

“Against this challenging backdrop, we are very pleased that our active investment style and diversified portfolio has once again delivered favourable investment outperformance relative to our peers.”

More than 80 per cent of Hostplus’ 1.5 million members are invested in its balanced option.

The latest results mean the Hostplus balanced (My Super) Option has delivered an average annual return of 8.78 per cent since it was launched in March 1988.

Mr Elia said the fund’s active approach to its investment management would be the key to “managing the continued volatility we expect to see over the coming years.”

“Actively managing and applying strategic asset allocation to perform under difficult market conditions enables us to smooth out returns over the longer term, as opposed to some of the lower cost, passive products in the market place where investors are more exposed to market movements.”

“With more volatility forecasted in the years ahead, we encourage superannuation members to clearly understand their funds’ underlying investment strategies and not to focus on cost alone and consider this when choosing superannuation funds and products,” he said.

Hostplus chief investment officer Sam Sicilia said the fund had made a decision in 2015 to actively reduce its exposure to bonds “in the belief that bond portfolios would not provide downside protection to market volatility during the low interest rate period.”

He said the 2022 financial year had seen equity and bond markets deliver negative returns not seen since the global financial crisis.

“We instead chose to invest in mid-range defensive assets such as infrastructure and unlisted assets,” he said.

“Being overweight in assets such as property and infrastructure provided all important inflation protection.

“As a result, we now find ourselves well positioned to avoid the negative returns suffered by bonds this financial year.”

Hostplus also achieved a positive return of 2.36 per cent for its Socially Responsible Investment Option.

Mr Elia said the positive return showed that when investing sustainably it was not just what was excluded from the portfolio but was what included which played a key role in delivering the returns.

He said Hostplus was one of the largest institutional investors in world changing environmental technology with more than $3 billion invested in companies such as Commonwealth Fusion Systems and First Light Fusion.

“We are glad to be able to let members choose what they invest their money in, while also providing a positive return in the 2021-22 financial year,” he said.