Why big super still sees opportunities in alternative assets

The global “wall of capital” which has rushed into alternative assets has not put off Australia’s two largest superannuation funds.

The $300bn AustralianSuper and $260bn Australian Retirement Trust are still on the hunt for alternative investments – it’s just that some of the opportunities are no longer as attractive.

AustralianSuper head of asset allocation Alistair Barker says the fund continues to seek investment opportunities outside the traditional bonds, cash and equities.

“We have teams in Australia, London and New York actively looking for opportunities in private equity, real estate, infrastructure and credit,” Mr Barker told The Australian.

“We’re certainly looking. Over the last two years we’ve probably done a bit less investment than we have in prior years, predominantly because the opportunities haven’t necessarily been as attractive as what we’re looking for.”

He sees the changing attractiveness of alternative investments as part of typical market cycles.

“Like every market they go through cycles of being more attractive or less attractive,” he said, speaking on the sidelines of this week’s Australian Institute of Superannuation Trustees’ superannuation investment conference.

AustralianSuper and ART both have about 30 per cent of their assets invested outside the traditional asset classes.

Australian Retirement Trust chief investment officer Ian Patrick.

ART chief investment officer Ian Patrick noted Australia generally, and its $1.9 trillion profit-for-member super sector in particular, had been long-term investors in alternative assets such as real estate, infrastructure, private equity, and hedge funds.

“Profit-for-member funds have been long-term investors there, so in terms of deployment of capital, in proportionate terms it hasn’t seen quite the uptick that it has in some other markets,” Mr Patrick said.

“There has been a real rush to those alternatives in some other markets as people have confronted a lower-return environment and sought to add different sources of risk to their portfolio to incrementally increase their target return.”

That has created a wall of capital as well as questions over some of the valuations.

“We look at this wall of capital or dry powder and we do question whether in some areas of the market that has inflated prices,” Mr Patrick said.

“It probably is in some of the more traditional sectors like buyout and private equity, vanilla core real estate, maybe even some elements of core infrastructure.

“But we still think that there’s plenty of attraction in and opportunity to invest in those alternatives.”

Within the alternatives space, ART has been doing more in what Mr Patrick described as non-core areas.

“In real estate, as an example, we’ve been doing more in self storage, in aged care, in student housing, in multi-family residential, because those are the more attractive and less well-trafficked areas for us,” Mr Patrick said.

AXA Investment Managers, whose alternatives investment arm AXA IM Alts manages $140bn of real estate globally, also sees opportunities in the non-traditional real estate, despite parts of the market being “very crowded”.

With the retail and office markets under pressure globally, AXA IM Alts Australian head Antoine Mesnage said AXA and many investors had been increasing their investments in non-traditional real estate.

“Alternative real estate can make sense; it’s all about portfolio construction, diversification and what it brings to the performance and the resilience of a portfolio,” Mr Mesnage said.

The alternative sectors encompass real estate such as data centres, student housing, and healthcare including aged care and private hospitals.

Other niche sectors attracting increased institutional capital are marinas, caravan parks, billboards, film studios, life sciences, medical offices, cold storage, and self storage.

Mr Mesnage said in terms of institutional capital, in markets such as Europe residential housing was perceived as not only a traditional real estate class but also the most defensive asset class.

“The allocation to residential from institutional capital is very low in Australia,” he said.

But residential was also where he said institutional investors and super funds should focus their attention in the Australian alternative real estate market.

“Number one is definitely residential,” Mr Mesnage said.

“There is actually a premium in Australia in the residential sector, so it’s kind of the opposite view of what you’re hearing in the market.”

He said housing in general was a big theme, whether it be student accommodation, senior housing or aged care, and affordable housing. Natural capital markets were another possibility.

“Some segments of the market that are considered pretty alternate elsewhere are very crowded, so when you look at it from a relative value perspective, we’re very big fans of data centres,” he said.

“It’s actually a very institutional market in Australia, the same way infrastructure is a huge market, also very crowded, so it makes it more difficult to get relative value.”