Hostplus: Avoid bonds and cash

From Bloomberg:

Australia’s best-performing superannuation fund is going against the grain by avoiding cash and bonds, betting the 30-year investment horizon of its youthful members means it can ride out looming economic shocks.

Hostplus, which represents swathes of the country’s baristas and restaurant waiters, had about 53 per cent of its $40 billion invested in the sharemarket, and the remainder in unlisted assets including airports and water-cleaning plants, chief investment officer Sam Sicilia said.

Hostplus beat local peers with a 10 percent return over three years ended Jan. 31, according to Lonsec Group. It’s also top ranked over five years, up 8.9 percent and outpacing the country’s largest pension fund AustralianSuper Pty, the data show. Hostplus has held no cash since at least 2011 and bonds in its portfolios were effectively zero over the past three years, according to Hostplus. The firm prefers stakes in office buildings, pipelines and emerging technology.

Part of that success was due to the fund’s ability to stomach less liquid unlisted assets, Mr Sicilia said.

Risk and Reward

There are a few ways to read this.

I think the implication of the article is meant to be that the fund that has done the best over the past 5 years did so because it shunned low-risk assets like cash and bonds and loaded up on high-risk assets, and therefore the same strategy will work going forward. Which is why ASIC require everyone to add a disclaimer “Past performance is not an indication of future performance”. You do need to give Hostplus credit for taking a more risk over a period where stock markets performed well relative to other assets. If it were a conscious tactical decision to allocate to more risk assets (I don’t know) then the decision was a good one.

However, the way the article is written seems to imply that Hostplus is simply taking more risk because its members are younger. Which is concerning. The implication would then be:

  • Hostplus will go up more when markets rise and down more when they fall as Hostplus has structurally higher risk. Suggests the recent outperformance was circumstance rather than good judgement
  • You don’t want to be in this fund if you are older because they are tailoring the asset allocation for younger members

Are unlisted assets less risky than listed ones?

Another implication of the article is that unlisted assets are similar to cash and bonds. They aren’t.

AQR’s recent spoof of unlisted asset funds has more than a grain of truth to how it plans to value unlisted assets:

This proprietary process involves implementing our normal hedged liquid alternative process, but only marking to market occasionally, and then reporting some combination of the weighted average of the prior few years’ prices, with a healthy weight also given to our own unaudited estimates of what the Fund is likely worth (based on how we think it should’ve performed).

This is the issue when comparing funds that invest in listed assets vs ones that invest in unlisted assets – you have no way of knowing the actual value of the unlisted assets. A great example is unlisted property funds during the financial crisis. Unlisted property funds invest in effectively the same assets as listed property funds, the underlying properties are worth the same, the performance differs because of how it is reported:

The problem with unlisted asset valuations

Do you really think that while listed property prices fell almost 60% over a year, unlisted property prices had increased slightly over the same year? They both own the same buildings, it is just that unlisted assets don’t get valued regularly and so the values being reported were the values from prior years and didn’t reflect the actual market value.

By this stage, unlisted property funds weren’t trading anyway and so you couldn’t sell your unlisted asset at the inflated made-up prices – who would want to buy unlisted property assets at last year’s prices when you could get listed property assets at almost 60% off?

So, this is the trillion dollar question. Is an unlisted property trust less risky than listed property? There are a lot of people who say yes as the reported prices are less volatile – but my emphasis on the word “reported”.

For me, if it is the choice between owning an asset:

  1. in a listed vehicle where I can see what is happening, how much it is worth and buy/sell at any time, or
  2. in an unlisted vehicle where I don’t know what is happening, the asset can only be sold at infrequent intervals and the valuation is a mix of prices from prior years and management estimates

then I will take option 1 every time. Just because I can’t see the price move doesn’t mean that it hasn’t.

The other problem is that I can be diluted by other investors coming and going. To illustrate with an extreme example, let’s say:

  • You and I are the only investors in a fund with $100 each invested
  • The fund owns 50% an unlisted asset and 50% cash. So, the total value of the fund is $200 made up of $100 in the asset and $100 in cash.
  • The asset falls 60% ($60) in price, so our fund is now only worth $140 ($70 each for you and I) but the fund doesn’t revalue the asset and so reports the fund still being worth $200.
  • I decide to redeem my holding in the fund.
  • The unlisted asset can’t be easily sold, and so the fund pays me $100 cash being half of the $200 that the fund is still being officially valued at.
  • This leaves you with $40 of unlisted asset – double the loss that you should have taken.

Is now the right time to have no cash and bonds?

Assets move in cycles.  Ordinarily, towards the end of a ten-year bull market in risk assets you would want to be increasing your holdings of cash and bonds, leaning into the cycle so that when the bull market in risk assets ends you can cushion the downside and you have a war chest to look for bargains. That is my strategy at the moment, but Hostplus has taken the opposite strategy – they are suggesting that now is the time to own more risk assets and to abandon cash and bonds.

Hostplus may be right. Recessions may be avoided, central banks might hit the printing presses, growth and inflation might return and risk assets might continue to go up.

I’m hoping the Bloomberg journalist has mis-represented the Hostplus investment process – a cynical view of the Bloomberg article would be that Hostplus simply loads up on risky assets with a plan to outperform in rising markets and then use unlisted assets to “smooth” the reporting of losses when markets fall. I’m hopeful that Hostplus has a more nuanced view about the value of risk assets vs cash and bonds – they are a big fund with lots of investment managers and you would expect that to be the case.

The net effect is if you are looking to replicate the Hostplus asset allocation and abandon cash and bonds, do it because you genuinely think that risky assets will continue their streak, not because you think that unlisted assets have some magical ability to provide stability while their listed brethren fall.

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Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

Comments

  1. Too deadly bruv

    Australia’s best-performing superannuation fund is going against the grain by avoiding cash and bonds, betting the 30-year investment horizon of its youthful members means it can ride out looming economic shocks.

    You forgot to mention the significance dollar cost averaging has over a 30 year period. Therefore you could argue that “the 30-year investment horizon of its youthful members means it can ride out looming economic shocks” is largely correct.

      • Too deadly bruv

        Would you say it is a reasonable assumption that the share market will be a lot higher in 30 years time? Or are you one of those ‘end of the world is coming’ prepper types?

    • I recall the best performing funds prior to the GFC ended up being the worst performing funds during the GFC. Being leveraged on banks stocks seemed like a masterstroke at the time.

      • Too deadly bruv

        Yeah and? Have the majority of banks since recovered from GFC lows? Would dollar cost averaging over another 20 years ensure that you will still come out ahead?

      • Just saying that too much being made out of “best performing fund” tag. Those who switch over to this fund now are IMO more likely to get burnt in next crash.

        Dollar cost average a different story.

    • Damien KlassenMEMBER

      I have no problem with your statement that if you have a 30 year time horizon and you are dollar cost averaging then you will probably be able to recover from most investment mistakes.
      In the funds we run, at the moment we hold lots of cash and bonds because we think being underweight cash and bonds will be an investment mistake.

  2. Kind of like real estate valuations these joint ventures with huge infrastructure companies aren’t they ? This is why I loathe the pooled fund structure……..it is hard to separate out the discounted cash flow effects over such long periods of time. They should report like mutual funds now they have no reserves ( which any pooled fund should have or it is really a tontine. )

  3. Many listed REITs were overleveraged. Some went broke (Centro), others close to it (GMG). Many / most had rights issues at deep discounts. The underlying real estate definitely did NOT fall by 60% (or anything like it) on average.

    Unlisted was priced relative to valuations but generally lower leverage. Some unleveraged. Makes a massive difference.

    • the listed reits have learnt that lesson and are on average a lot lower geared then unlisted funds. A few concerning unlisted funds i’ve seen are highly geared and interest only with the intention of selling at the end of the 5 year IO period and playing a low interest (4.5%) high rent (7-8%) “arbitrage” in the meantime. It will end in tears.

    • Retail syndicates are typically higher leverage (eg 40–50% LTV) vs wholesale funds (typically 20-30%).

  4. If anyone here is with HostPlus, this is the top ticking – take note and get out.

    ‘The firm prefers stakes in office buildings, pipelines and emerging technology.’ – Translation: HostPlus is basically a levered momentum play. That is, their investment strategy is exceptionally well fitted to the prevailing orthodoxy, and the CIO has convinced himself he is a genius. This strategy will only work as long as the Fed can keep control of the markets, and nothing interferers with the transmission of leverage from Wall St -> Martin Pl.

    That is a big bet to make right now.

    Have a look: https://hostplus.com.au/super/about-us/leadership-team/group-executive-team/sam-sicilia – there is absolutely nothing here which suggests he actually knows a god-damn thing about finding alpha. Please understand that the only utility of asset consultants, (like most consultants) is to play mercenary when you want to fire your current AM and replace them with someone else. In Australia, a asset owner changing the management team means someone has not paid off whichever union is calling the shots.

    Your primary risk currently is not economic, but rather political. There is value in understanding where one sits historically, and where we all sit right now is not a happy place.

    ‘Part of that success was due to the fund’s ability to stomach less liquid unlisted assets, Mr Sicilia said.’ – Translation: Organic growth due to compulsory superannuation means we can ride out losses over time. Note: This is only true till it isn’t. Also, because the gods have a sense of humour, this generally stops being true when you can least afford it.

    ‘I’m hoping the Bloomberg journalist has mis-represented the Hostplus investment process – a cynical view of the Bloomberg article would be that Hostplus simply loads up on risky assets with a plan to outperform in rising markets and then use unlisted assets to “smooth” the reporting of losses when markets fall. I’m hopeful that Hostplus has a more nuanced view about the value of risk assets vs cash and bonds – they are a big fund with lots of investment managers and you would expect that to be the case.’

    The above is too polite. Waaay too polite.

  5. 1. REIT’s included significant leverage, that at least partially explains their 60-70% loss re unlisted holdings (SOME of which had no leverage or minimal leverage).

    2. HostPlus chooses to categorise many of these assets as ‘defensive’. Not hard to be a “top performing fund” in a bull market when you run significant unlisted property and infrastructure assets and then compare yourself to funds holding govt bonds and credit!

    3.When HostPlus’s strategies are re benchmark against the more aggressive end of the market, their performance is far closer to that of an average fund.

  6. DefinitelyNotTheHorribleScottMorrisonPM

    All the best assets are unlisted. Keeps the peasants away. Same Sydney property and good massage places.

  7. Given Hostplus have a range of investment options (below), I’m assuming the Bloomberg article was talking about their default “Balanced (MySuper)” investment option?
    https://pds.hostplus.com.au/5-how-we-invest-your-money#a38cce86-7cbc-44f4-b220-b8f6bfd29656

    The above link does reflect a 0% cash/fixed interest allocation and 10.2% return over 3-years. Other options (e.g. capital stable and their other balanced options) do have an allocation to cash/fixed interest.

    But as the default fund, I assume it would hold the majority of Hostplus member funds (one article I saw suggested 85%).

    “Pre-mix options” (capital stable, balanced, shares plus etc…)
    “Sector investment options” (cash, fixed interest, property, shares)
    “Individual manager options” (fixed interest, property, infrastructure, shares).

    Or are they pooling all their members funds and choosing to invest it all aggressively?

    • Excellent question @rmf. I have some of my super with Hostplus and it is all in their cash and fixed interest investment options. So far, results seem to indicate that it is performing as I would expect (i.e. I have been making money as bonds go up and interest rates look to be weakening). But how would you ever know what happens internally? Maybe what you suggest might be right. Maybe they are pooling it all into some great slush fund and paying out results they determine entirely on their own whim according to members’ investment choices. Sounds cynical and probably illegal, but how would I actually know??

    • So is HostPlus’s balanced fund, the equivalent of other fund’s ‘growth’ options?

  8. “Assets move in cycles. Ordinarily, towards the end of a ten-year bull market in risk assets you would want to be increasing your holdings of cash and bonds, leaning into the cycle so that when the bull market in risk assets ends you can cushion the downside and you have a war chest to look for bargains.”

    Yes, but cash and bonds are not the same. I can see that holding cash in USD and US Treasury notes will be a good strategy at this point of the cycle.

  9. run to the hillsMEMBER

    I have all my super in Hostplus’ indexed balanced fund which is about 40% international shares, 30% Australian shares and the remainder allocated to bonds/cash, the fees are ridiculously low, less than $100 a year, I understand it’s all in ETFs, I’m 43 and happy with the returns to date and risk profile.