Exclusive interview with Andrew Major, Strategic Advisor, HESTA
Global Investment Insights
with Andrew Major, Strategic Advisor, HESTA
Andrew Major is a Strategic Advisor at HESTA. He is responsible for leading development of the forward-looking strategy for the Investments function (including considering further internal management of investment strategies and establishing an international presence) and identifying enterprise-wide strategic considerations arising from the evolution of HESTA's investment strategy.
Andrew joined HESTA in 2009 and his previous roles at the organisation include Chief Risk Officer and General Manager - Unlisted Assets within the Investment Management team.
In this exclusive interview with Global Investment Institute, Andrew explores the significance of internal management of unlisted assets within super fund portfolios, the opportunities and trends in public vs private markets and the implications of fund consolidation. He shares how the internalisation of investment management is unfolding at HESTA, which asset classes they’ve internalised and which will remain externally managed, as well as the potential benefits of international expansion and HESTA’s offshore strategy.
Q. There has been, and remains, significant focus on the valuation of unlisted assets within super fund portfolios? Based on your experience, is this a significant issue for funds, particularly with the growth in internal management of unlisted assets?
A. One of the key areas of interest for regulators is oversight and governance of valuation and ensuring there is a robust process in place for reviewing external valuations and being prepared to challenge or consider revaluation where necessary.
There has been significant progress made in this area over the last few years, through arrangements with external fund managers, and also through more structured and independent valuation review mechanisms at management, board and committee level within super funds.
This has included setting triggers around valuation movements that prompt consideration of whether an out of cycle valuation for an investment exposure is warranted.
Whilst it is important for unlisted assets to be valued fairly (for all fund members), there is also a risk around false precision and false equivalency to listed markets, given that valuations are often based on assumptions which may or may not bear out in time and, although less frequent, are more comprehensive. It is also important to understand who has the best/most accurate information to undertake a valuation.
Where investments are directly held by an investor, the investor has access to more accurate information and insights to undertake a valuation itself (or, more likely, through an investor-appointed independent valuer), bringing confidence in the valuation outcome.
For exposures held indirectly, the level of information required for a valuation is often held at the underlying fund-level and so the fund manager is better able to undertake the valuation, and the investor has to rely on its due diligence undertaken around the manager’s valuation process and oversight of application of the valuation process.
Q. How do you view the opportunity set in public vs private markets? Where are you seeing allocations trending and what’s driving the trend?
A. As a long-term private markets practitioner, I think private markets investments have an important role in an institutional portfolio and it is important to maintain a meaningful allocation to private markets, broadly defined, to generate long term alpha in a diversified portfolio.
At the current time, public market valuations seem at an elevated level, driven by a small number of global stocks exposed to high-level technology and AI thematics. This makes it challenging to significantly increase allocations to broad public markets strategies, although there should still be pockets of value available in less obvious parts of the listed markets.
At the same time, liquidity in private markets, particularly private equity, has been challenged over the last few years, creating a build-up of value in existing portfolios, which ideally should be realised before allocations can increase significantly. Within other asset classes, allocations are trending towards exposures that capture long term themes, such as data/AI, the transition to a low carbon economy and increasing supply of housing stock.
This is seen in the focus of infrastructure investments on data centres, digital/ communications infrastructure and renewables. In property, we are seeing a focus on building scale portfolios in multi-family residential housing under the build to rent operating model, which has historically had lower penetration in Australia compared to the US and Europe and currently benefits from accommodative government policy.
Q. Consolidation has been a constant in our industry that has seen the number of funds shrink, while assets under management have continued to grow. How do you see this trend unfolding over the coming decade and what implications will it have on the industry and its people?
A. We have seen significant consolidation over the past decade, driven in large part by changes in the regulatory framework which have targeted this outcome through the performance test and other initiatives, with a significant number of smaller funds merging with each other or with a larger fund.
Sector consolidation is broadly positive, as larger funds can leverage the benefits of scale from an operational perspective and continue to invest in improving member service and engagement outcomes, ideally at lower cost.
Greater funds under management also creates opportunities to evolve investment strategies and consider internalisation and globalisation, similar to the experience of global peers. On the other hand, scale creates complexity in managing larger business operations, dominant positions in certain investment markets and concentration risk in the small number of providers of critical services to funds, such as administration, custody and technology platforms. This potentially increases systemic risk and could reduce overall resilience of the sector to a significant external shock.
Recent insights and analysis from APRA have focused on how super funds can deliver member outcomes into the future through optimising operational efficiency, growth and competitive positioning. Given this focus and the smaller number of larger funds remaining in the market, we will likely see fewer fund mergers, and mergers that do take place will more likely be between larger funds and driven more by strategic imperatives around ability to deliver growth and operational efficiency for members over the long term.
Q. How is the internalisation of investment management unfolding at HESTA? Which asset classes have you internalised and what is in the process of being internalised? What asset classes will remain externally managed and why?
A. HESTA has implemented a ‘hybrid’ investment model, managing some investment assets and risk internally while continuing to partner with leading global external investment managers, providing balanced access to opportunities. Our internal strategies provide benefits through market intelligence, investment capacity, greater ability to execute responsible investment themes and information/insights to support our total portfolio approach. Our external manager relationships allow us to access global opportunities at scale which we may not otherwise be able to access.
Internalisation of investment strategies at HESTA has been undertaken in a methodical and measured way. We started our journey back in 2016 with an operating model review, followed by a more detailed internalisation business and investment case and then a roll-out of strategies in an agreed order. HESTA currently manages approximately 20% of the total portfolio internally, through strategies in Australian Equities, Australian Fixed Interest & Cash and a small number of internally governed unlisted investments.
Going forward, our strategy for the next phase of growth is being developed and we are actively considering further internalisation of listed strategies and how we better capture global opportunities, whilst also leveraging our hybrid model.
The hybrid approach is especially beneficial for our unlisted assets investments, where investment opportunities are best captured through local sourcing, due diligence and investment management, which we can access through investment managers. By building long-term, multi-asset class relationships with these managers, we can leverage access to high quality and meaningful co-investments and direct investments.
Q. A number of Australia’s mega-funds, like HESTA, are opening offices globally. What are the benefits of international expansion and do you see this as a pathway for HESTA to pursue?
A. The decision to build a global presence is a fund-specific decision and there is no right or wrong approach here. We have seen funds expand offshore (both aggressively and in a more staged manner), and we have seen other funds building globally focused internal strategies from Australia.
Ultimately, the decision comes down to factors such as asset class investment strategy and investment exposures, desired approach to asset oversight and governance, the cost of executing an offshore strategy relative to sensitivity to investment costs, investment governance and decision making, people and culture, and broader risk/risk appetite, compliance and other enterprise considerations.
Each fund considering international expansion will weigh these factors and decide whether the benefits from a global presence outweigh the cost, governance, operational complexity, culture and other considerations which must be taken into account.
HESTA is currently considering the next 10-year strategy for the Investments function, with further consideration of internalisation and offshore presence being important components of this strategy process. HESTA’s scale (funds under management are expected to more than double over the next 10 years) and offshore investment focus (assuming that a majority of new capital will be allocated to offshore opportunities) will play a big part in developing this strategy.
At the same time, a decision to build an offshore presence has broader enterprise impacts, so it’s really a whole of fund decision rather than an investments-specific decision. Therefore, it is critical that other parts of the business which will enable and support execution of the long-term strategy are deeply involved in such an important strategic decision.
Andrew Major, Strategic Advisor, HESTA
Andrew Major is a Strategic Advisor at HESTA. Andrew joined HESTA in 2009 and his previous roles include Chief Risk Officer and General Manager – Unlisted Assets in HESTA’s Investment Management team.
Before joining HESTA, Andrew worked for the Macquarie Group, in investment banking, investment management and as in-house legal counsel.
Andrew is currently a director of Basketball Australia and Assemble (a property development platform focused on multi-family residential developments). He has previously served as Chair of the Australian Investment Council, Co-Chair of the UN PRI Infrastructure Advisory Committee, and as a director of ISPT Pty Ltd, the Climate Bonds Standards Board and Australian Institute of Superannuation Trustees.
He has undergraduate degrees in Economics and Law, a Masters in Applied Finance, and is a Graduate of the Australian Institute of Company Directors.
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