Keeping faith: under-fire Hostplus investment chief Sam Sicilia sticks to his path

Sam Sicilia says Hostplus was in weekly contact with regulators and employers as fears of a run on the fund increased, but never eventuated.

Sam Sicilia, the CIO at Hostplus. Aaron Francis/The Australian

The Camino Frances is the most famed of a large network of ancient pilgrim routes stretching across Europe, joining at the tomb of St James in the city of Santiago de Compostela in northwest Spain.

Last year Sam Sicilia celebrated the first sabbatical of his business life by walking the 700km trek with wife Robyn, starting at the city of Roncesvalles on the Spanish side of the Pyrenees mountains. Together they spent 42 days in almost near isolation. It prepared them for what was to come.

“Probably in hindsight it was good prep work. It was a bonding. We may have been in a weaker situation had this happened without that event,” Sicilia tells The Weekend Australian.

The “this” he speaks of is the storm that raged around the Hostplus chief investment officer in late March and throughout April as the COVID-19 pandemic allegedly crippled the leading industry superannuation fund whose performance had made him a rock star of the sector.

Sicilia, who boasts a PhD in mathematical modelling from Melbourne’s Monash University, joined Hostplus in March 2008 when it was only $7bn in size. Twelve years later, in March this year, it was worth $54bn.

The Hostplus balanced fund had been named the best-returning fund of its kind in the market over three, five and seven years by ratings agency SuperRatings. But by mid-April, its performance had been trounced by the sharemarket sell-off.

There were serious questions being asked about its exposure to riskier, illiquid assets — specifically infrastructure, property, private equity and venture capital.

Hostplus had also handed industry super fund-owned IFM Investors the bulk of assets to manage in its infrastructure option, allegedly creating a “conflict of interest” that critics claimed put members unreasonably at risk.

The doomsday scenario for ­Sicilia painted by the headlines was truly shocking: here was an industry fund for the hospitality and tourism industries that were completely shut down, with the youngest demographic of members, with the highest level of unlisted investments of any fund and a zero allocation to cash.

The headlines called him “Sam Silly”, the leader of “Hostminus”. As one writer put it, Sicilia was ­getting “a painful lesson in crisis ­finance”.

In the first week of April, Hostplus told investors it had reduced the value of its property and infrastructure holdings by 7.5 per cent to 10 per cent, and private equity and venture capital investments by an average of 15 per cent.

Later that month it notified property fund ISPT that it wanted to redeem $1.5bn. Its request was refused.

Even the disclosure that 13.4 per cent of Hostplus’s $44bn in assets were cash, after it lifted its reserves from $2bn to $6bn in the space of a few days, couldn’t arrest the spiral.

Sicilia, a former mathematics lecturer who grew up aspiring to be an astronomer and has never backed away from a fight, came out swinging. He took to Twitter to take on his enemies and to defend his reputation.

Even Superannuation Assistant Minister Jane Hume was in his sights over the government’s early super release scheme, which ­allows people who have lost their jobs or most of their income to withdraw $20,000 tax free.

As the requests from members started flowing in, Sicilia’s greatest fear in his darkest moments was that the storm would trigger a genuine run on the fund.

“I am 58 years old and I have had a good career. It has been ­varied, I have done a lot. In my mind at least I am content. But it took every effort I had, every inch of me to put that aside and get on with that job. It took a big effort,’’ Sicilia now says, reflecting on the toughest weeks of his life.

“I’m not sure the 15-year old Sam Sicilia would have survived it. Imagine you are a 15-year-old girl or a 14-year-old boy and you read stuff about you that your peers write. And you come to the conclusion that your career is over or you will never get a job or a future employer would dig up all this stuff.”

Sicilia’s wife is now retired, but in her working life she was a ­mediator working on dispute resolution with the Department of Defence.

“Put those ingredients together, you are not going to get someone easily dented by an article or two,’’ Sicilia says.

Sicilia also shared some of the media and his Twitter battles with his children, 30-year-old Ashton, 25-year-old Horatio and 23-year-old Anna. Two are Hostplus ­members.

Their responses gave him valuable perspective.

“We eat and breathe it. But unless they eat and breathe it, they can’t jump into it. An article is an article. They are divorced from it. To be honest, I’m not sure when was the last time they picked up a newspaper,’’ he says.

Today Sicilia is talking publicly again after what he calls a period of “self-muting”. He denies speculation he was gagged by his board and chief executive David Elia after his Twitter misadventures.

In May, Elia claimed the fund and Sicilia were victims of the tall poppy syndrome. And Sicilia himself now reels off the numbers to prove Elia’s point.

The total amount that has flowed out of Hostplus in the government’s early release scheme to the middle of October is $3bn, leaving the fund with $4.2bn of cash, topped up by inflows and distributions over the past six months.

The minimum inflows into the fund from March to now were ­between $450m and $610m per month, down from the normal $1.1bn.

“But it wasn’t zero. That alone would have paid for early release,” Sicilia says.

“Now we are seeing greater flows come in as hospitality staff return to work.”

He claims that since the initial weeks of the scheme not one of Hostplus’s 1.2 million members have contacted him about anything to do with early release and claims the fund has more members and employers today than it did at the start of the pandemic.

“How could it be that people were saying ‘you should have known, you should have provisioned’. For an unknown event in the future for an unknown legal event by a government? The next event, when is it?” he says.

Sicilia points out that almost half (574,000) of Hostplus members have an account balance of less than $2200, meaning they couldn’t take out the maximum early release amount allowed ($20,000) even if they tried.

Sam Sicilia and his wife Robyn on Camino trail October 2019

“We asked if every Hostplus member tapped into the early release and took out the most they could, what would that amount be. The answer was $14bn,” he says.

“That was the absolute upper limit that we could ever have come out of the system with the early ­release as it was announced.

“Since we had $26bn in equities alone, there could be no crisis.’’

Questions have remained. Did Hostplus really have access to the full $26bn portfolio to liquidate in a crisis? Liquidating share port­folios also comes at a significant cost, crystallising capital gains or losses.

Hostplus also has higher exposure to illiquid, unlisted assets than most funds, which some in the industry say was one of the reasons it sought to redeem its ISPT holding at the height of the storm.

Sicilia says Hostplus was in weekly contact with regulators and employers as fears of a run on the fund increased, but never eventuated.

Returning to one of his infamous Twitter rants, he puts down the scaremongering at the time to long-held agendas in the industry.

“I hate even the thought of saying the media is bad. The media is not bad. There was an organised effort there that wasn’t targeting Sam Sicilia. Who cares about one individual. Why would you bother?” he says.

“There is an ideological attack on superannuation. Bringing down one super fund achieved nothing unless you bring down the system. Collectively, there are vested interests out there — a bunch of financial planners out there who have lost because of the existence of superannuation. Bring it on. You want to fight us on performance? You lost. Fight us on remuneration? You lost. Where else do you want to take us on?”

(On the remuneration point, Sicilia was paid $967,624 in 2019, including a $343,505 bonus, putting his among the top 20 pay packets in the super sector. Unlike some other big super funds, Hostplus does not manage money in house.)

Sicilia says his biggest regret of the Hostplus crisis was his foolishness in trying to change people’s views through debates on Twitter.

“Thinking I could engage in an intellectual debate to change people’s views, to use Twitter like you would a panel conference session, is regrettable,” he says. “That was something that was never going to work in hindsight. The stakes were being increased over and over and then it descended into personal ­attacks. So self-muting was the best thing I would have done.”

Sicilia is still to return to the ­social media platform.

To this day he says he still hasn’t spoken to Hume.

“I don’t have any issues with Jane. I would welcome the opportunity,” he says. “I have always had the view that super funds outlive governments. Governments cycle. It doesn’t make sense to be at war with any political party ever. There is no room for political ideology in your day-to-day job as an investor. What you need to do is the right thing all the time. Focused on the outcome you want — which in my case is great returns for Hostplus members.”

Sicilia still believes that society will end up counting the cost of the early-release scheme.

“Arguably it becomes a question of whether the cost was worth it given the circumstances they are in,” he says. “Even if the answer is yes, was there a better mechanism? Could the government have given them the money and instructed us to repay it at a better time?”

Questions remain on whether Sicilia’s external fund managers for its flagship balanced fund offering still have portfolios too exposed to risky stocks and unlisted assets.

In June, Hostplus increased its allocation to cash in its default balanced option from zero to 5 per cent and cut its alternatives allocation from 8 per cent to 5 per cent.

“More than 90 per cent of our members are in this fund,” Sicilia says. “This is our best ideas. One hundred per cent of our investments are in this fund. Call it what you like, the investment strategy stays the same. Get rid of the name — I am not hung up on the world balanced.

“We set our investment strategy for the fund based on the demographics of the fund. We have 1.2 million members with an average age of 34. Over a 30-year investment horizon, you would want to be in unlisted assets and equities. Why can’t other funds do it? They don’t have the demographics and inflows. If I was the CIO of another super fund, I wouldn’t be having this strategy for the fund. That is crazy.”

Hostplus posted a -1.74 per cent return on its balanced option for the 12 months to the end of June, well below the top performing fund and worse than even the ­median return of -1.2 per cent, putting it in the bottom quartile of funds, according to data from research house SuperRatings. But by the end of September the fund was up 2.3 per cent for the year, compared to 0.28 per cent for the index, putting it back in the top quartile.

Sicilia’s critics might argue the sharemarket recovery gave him the ultimate get-out-of-jail card. But he says volatility is here to stay, as shown in the weakness in the market in recent weeks sparked by COVID-19 case spikes in Europe and the US.

“Get used to volatility, this is forever,” he says. “I have been saying that for a while. So I don’t feel like I got a ‘get out of jail’ card. The fund is in an incredibly strong position today. I can’t reiterate how these types of environments show how resilient a fund like Host is.’’

Asked if he feels his reputation has been restored, Sicilia pauses. “On what measure?” he eventually asks in reply.

“By the volume of unsolicited calls and emails of support? Do you have the support of your board colleagues and family? Or do you measure it from the number of people that you know that publicly have criticised you that matter? I don’t think my reputation has been dinted at all.

“It is about standards of behaviour. Did I misbehave at any stage? I certainly don’t think I did. I certainly haven’t done anything improper. So far I think we are OK. Reputation is an intangible. Ultimately it manifests itself in ways we may not be aware of.

“Do I sleep well at night? Yes I do. Because I know this fund is strong and I know what I have done has contributed to that.”