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Cbus changing the rules of the game

David Rowley




The assets of Cbus are projected to grow from $30 billion to $50 billion over the next five years. In that time, the fund faces diminishing returns from allocating this money to an optimal mix of quality fund managers, many of whom will not have the capacity in their strategies to take ever-larger mandates from Cbus.

The established solution for funds in this position is to use their scale to build teams and systems in-house to run vanilla strategies in domestic equity and property portfolios at a lower cost than the open market. Cbus has not ruled out such a solution, but it is exploring a bolder approach.

The leadership team at Cbus has come to realise that the fund has not yet fully taken advantage of its strong and positive cash flows for its investment strategy, which gives a greater ability to think long term and take illiquidity risk in investments such as property and infrastructure, but also to do the same for domestic equities.

“We can afford to lock away a portion of our investments for a longer period of time and not look at short term measures,” says Kristian Fok. “That is a differentiating factor.”

There is also the realisation that Cbus can take greater peer risk of underperforming over a short-term horizon, if it is for the long term good.

At member briefings Fok has heard greater interest in long-term outcomes than what appears in yearly league tables of investment performance for super funds. He says that much of the noise around the perils of underperforming peer benchmarks is generated by the super fund industry, and the media. “In my experience members do not ask how AustralianSuper is doing,” he says.

At a recent briefing he told members that the fund has dipped into negative returns over the financial year to mid-February 2016, but this generated few questions owing to the fund’s long-term positive track record.

The thinking reflects the time horizons of the construction industry where projects do not pay a return for several years until completion and where there is a period of development risk but also the prospect of significant returns. That Cbus Property returned 21.5 per cent to the end of December 2015 highlights the ease of communicating a greater property weighting to members.

Investing in property and infrastructure resonates with Cbus members for other reasons. “It is much easier to give them confidence around things that are tangible, a lot of the[other] investment activities tend to be seen as ‘paper shuffling’.”

All this feedback is leading to the realization that Cbus can have a different asset allocation and a longer term return horizon than its peers; a realization Fok describes as a “liberating feeling”.

Affordable housing

One of the first steps Cbus could take is in acting opportunistically as a provider of capital and as a partner in consortiums for construction projects, not least as the capital restrictions on banks mean that Cbus could now take a part of the debt or the preferred equity that is no longer attractive to banks.

“When companies think about investing in property they do not think about benchmarking against a market index,” says Fok. “They are thinking does this particular project stack up on returns, what are the risks involved, how do I mitigate them? It is a much more absolute way of thinking about investment.”

It is early days and he recognizes the need for internal skill sets and established consortium partners to allow the fund to be more fleet of foot in such deals.

“It requires a problem solving skill set on our side and a period of time establishing good relationships with partners. You need to know what you bring to the table and what they bring to the table,” says Fok. “If you could combine the finances and knowledge we have with someone who has the land and can operate and manage, then you have a group that can come together to provide a compelling proposal.”

As a measure of its commitment to be more prepared in such deals, the fund has hired Diana Callabaut from KPMG as its head of infrastructure. Her skills and experience will be used to identify, analyse and transact infrastructure co-investments and their ongoing management.

One idea currently on the table is partnering in consortiums to build affordable housing projects run with government support such as those tendered by Mike Baird’s government in New South Wales.

Cbus has already been in conversation with other state governments seeking funding for affordable housing. Sometimes the fund has made the initial overture sometimes the government has approached Cbus, and other funds.

David Atkin, chief executive of Cbus has already gone on record as stating another reason for getting involved in affordable housing.

He says the superannuation system was founded on the concept of members coming into retirement debt free, but that this premise was not a reality for many younger members, given the lack of affordable housing.

“We think there is an obligation on the industry and us to find ways to provide affordable housing opportunities for the community,” he has said.

He added that Cbus would take construction risk on such projects if it was “properly priced and provided the appropriate risk-adjusted return for the fund”.

(Continued below)
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    A new approach to equities

    This focus on partnerships, opportunistic lending, tangible investment stories and a longer term focus is also being applied to domestic equities.

    The investment team has been given the go-ahead to create a self-managed portfolio of Australian companies that are hand-picked for quality, good management and a focus on investing for the long-term.

    Fok wants his fund to recognise that when a company makes a decision to go ahead with a new business venture, it will not always see returns quickly, with some investments taking years to pay off.

    “If a company does not keep reinvesting in in its business, in the short term it may deliver higher returns, but it runs the risk of becoming smaller over time because it does not keep up as the environment changes around it,” he says. “We want to invest with companies in good industries, that have good management and be aligned with how they run their business with a longer term focus than what we see in the market.” He contrasts this approach, with the focus often given by the investment industry to half yearly reports from companies.

    What would be different about such a fund is that where Cbus has conviction over a company’s long-term focus, it is also prepared to act as a direct source of capital.

    Initial conversations with companies have already taken place through Kiran Singh, an experienced portfolio manager, who was appointed equities manager at Cbus in August 2015. The feedback is positive.

    “The response we have had is very strong,” he says. “Companies do not have enough conversations with investors that understand the business decisions they make are not about one quarter or a year’s results, some decisions take a while to pay off.”

    There is more work before the proposal can go live, but a proposal to make it a reality will be put forward to a future investment committee, which as of February is now chaired by ex-AMP Capital chief executive Stephen Dunne.

    Preparing for success

    To make such projects work, Cbus will have to expand its skill sets internally, and the numbers in its investment team have grown month-by-month over the last year to achieve this. “We are trying to build a team with a diverse set of skills that could be leveraged for different opportunities,” says Fok.

    The fund will also need to communicate clearly to all stakeholders and the superannuation industry on why it has taken such bold steps.

    “We are mindful of peer risk, but if we believe that there is strategy that gives a better outcome, we are not afraid to pursue it and communicate it,” says Fok. “The more you deviate away from peers, the better you need to be about communicating why you are doing that strategy.”

    Communication will be particularly important to the success of the equity fund proposal.

    “We need to be clear about when it should do well and when it won’t do well in the same way that a fund manager might communicate its strategy,” says Fok

    A third requirement is the backing of the board.

    Stephen Dunne has already encouraged Fok to be “bold and big” about where he wants the fund to be, not least as he is aligned to an innovative way of thinking, though he acknowledges that Dunne will also offer robust challenge to any ideas put forward.

    A culture of innovation is part of the DNA of Cbus. Fok cites the recent book Catch and Kill, which covers the years Steve Bracks, the current chair of Cbus, spent as premier of Victoria and his focus on innovating and then taking advantage of the opportunities that sprang from that.

    He also acknowledges the experience of the Cbus board, who are used to managing property projects. “That is really powerful, if you look at the composition in total. It’s useful to have a range of people who allow you to challenge conventional thinking.”

    As to the future, Fok is excited, but sees the reinvention of the approach as a step-by-step process. “I am hoping that it will inform our asset allocation decisions better, but it is early days,” he says. “The more we learn from it the more confidence and conviction we will get from this approach.”