1 00:00:03,000 --> 00:00:06,479 Sean Aylmer: Welcome to the Fearing and Greed Business interview. I'm Sean Aylmer. We 2 00:00:06,480 --> 00:00:09,959 Sean Aylmer: talked recently about the performance of superannuation funds across the 3 00:00:09,960 --> 00:00:13,769 Sean Aylmer: last financial year. The best performing mega fund was UniSuper 4 00:00:13,770 --> 00:00:18,960 Sean Aylmer: with its default balanced option returning 10.3%. Remember, this is 5 00:00:18,960 --> 00:00:22,320 Sean Aylmer: in a year dominated by high inflation, the fastest rate 6 00:00:22,320 --> 00:00:26,280 Sean Aylmer: hike cycle in decades, and the ongoing war in Ukraine. 7 00:00:26,460 --> 00:00:29,759 Sean Aylmer: Having delivered positive returns across all its investment options, I 8 00:00:29,759 --> 00:00:32,370 Sean Aylmer: wanted to talk to UniSuper about where the market's heading, 9 00:00:32,610 --> 00:00:35,968 Sean Aylmer: what that means for investors, and of course asset allocation. 10 00:00:36,180 --> 00:00:38,729 Sean Aylmer: This is a big fund investing more than $120 billion 11 00:00:39,360 --> 00:00:43,530 Sean Aylmer: on behalf of over 615,000 members. And of course, this is 12 00:00:43,530 --> 00:00:46,800 Sean Aylmer: general information only and you should seek professional advice before 13 00:00:46,800 --> 00:00:52,440 Sean Aylmer: making any investment decision. Rob Hogg is the Head of Fixed Interest and Macro Research at UniSuper. Rob, 14 00:00:52,440 --> 00:00:53,460 Sean Aylmer: welcome to Fear and Greed. 15 00:00:53,609 --> 00:00:55,379 Robert Hogg: Thank you very much. It's a great pleasure to be here. 16 00:00:56,010 --> 00:00:59,100 Sean Aylmer: So last year was a good year, all in all. 17 00:00:59,100 --> 00:01:01,590 Sean Aylmer: I mean, a particularly good year for UniSuper, but generally 18 00:01:01,590 --> 00:01:05,009 Sean Aylmer: superannuation funds and fund managers had a better year last 19 00:01:05,010 --> 00:01:07,289 Sean Aylmer: year than the one before, but it was a little 20 00:01:07,289 --> 00:01:11,459 Sean Aylmer: bit unusual in terms of how fixed income and equities 21 00:01:11,459 --> 00:01:13,680 Sean Aylmer: worked, I was going to say with each other, but 22 00:01:13,680 --> 00:01:16,140 Sean Aylmer: maybe it was against each other. Just tell me the 23 00:01:16,140 --> 00:01:17,940 Sean Aylmer: number that you come up with, is that mostly in 24 00:01:17,940 --> 00:01:20,220 Sean Aylmer: the back of equities, kind of the roles that fixed 25 00:01:20,220 --> 00:01:21,900 Sean Aylmer: income played versus other assets? 26 00:01:22,590 --> 00:01:25,259 Robert Hogg: Yeah, look, in terms of the contributions then to the 27 00:01:25,259 --> 00:01:29,069 Robert Hogg: return of the balance fund, the key contributions really came 28 00:01:29,069 --> 00:01:33,869 Robert Hogg: from the equity side and in particular to a number 29 00:01:33,870 --> 00:01:38,280 Robert Hogg: of the global equity exposures that the fund has. We 30 00:01:38,340 --> 00:01:41,069 Robert Hogg: as a fund for quite some time, so more than 31 00:01:41,069 --> 00:01:45,000 Robert Hogg: a decade, have had very significant holdings to the theme 32 00:01:45,000 --> 00:01:47,969 Robert Hogg: of tech and during the course of the financial year 33 00:01:47,969 --> 00:01:50,550 Robert Hogg: that's just finished as you'd be very well aware, a 34 00:01:50,550 --> 00:01:54,480 Robert Hogg: number of those larger tech companies did extremely well. So 35 00:01:55,020 --> 00:01:58,950 Robert Hogg: companies along the lines of Apple and Microsoft, for instance, 36 00:01:58,950 --> 00:02:02,160 Robert Hogg: were really key drivers of that performance. So it's really 37 00:02:02,160 --> 00:02:06,810 Robert Hogg: that orientation towards the tech equity sector globally, particularly in 38 00:02:06,810 --> 00:02:09,870 Robert Hogg: the United States. That was certainly one of the key 39 00:02:09,870 --> 00:02:13,410 Robert Hogg: drivers of our performance in the financial year just finished. 40 00:02:14,130 --> 00:02:17,490 Sean Aylmer: Okay. So what sort of role did bond markets and 41 00:02:17,490 --> 00:02:20,008 Sean Aylmer: credit markets play in the fund last year? And I 42 00:02:20,008 --> 00:02:22,799 Sean Aylmer: suppose what I'm heading towards is are we going to 43 00:02:22,799 --> 00:02:28,169 Sean Aylmer: have a more traditional equity bond market trade off going 44 00:02:28,169 --> 00:02:30,570 Sean Aylmer: forward than we've had kind of in the last year 45 00:02:30,570 --> 00:02:30,930 Sean Aylmer: or so? 46 00:02:32,099 --> 00:02:35,669 Robert Hogg: Yeah, look, I would expect that to be the case. Of course, 47 00:02:35,880 --> 00:02:40,048 Robert Hogg: one of the key themes last year was the inflation upside 48 00:02:40,049 --> 00:02:45,090 Robert Hogg: surprise in the sense that inflation globally probably and still 49 00:02:45,480 --> 00:02:49,320 Robert Hogg: remains higher than expected and it's been a more elongated 50 00:02:49,320 --> 00:02:52,770 Robert Hogg: inflation cycle and expected. So of course that drove up 51 00:02:52,889 --> 00:02:56,519 Robert Hogg: interest rates, both official and longer term rates, bond rates 52 00:02:56,910 --> 00:03:01,139 Robert Hogg: both in Australia and globally. So we had a situation 53 00:03:01,139 --> 00:03:05,820 Robert Hogg: where certainly earlier in the year, that negative relationship between 54 00:03:06,450 --> 00:03:10,410 Robert Hogg: bond yields and equity prices was key. But then as 55 00:03:10,410 --> 00:03:13,379 Robert Hogg: bonds sort of leveled out around the beginning of the 56 00:03:13,380 --> 00:03:16,829 Robert Hogg: calendar year, we've then seen equities really start to pick 57 00:03:16,829 --> 00:03:19,530 Robert Hogg: up more so in some markets than others, particularly the 58 00:03:19,530 --> 00:03:26,369 Robert Hogg: United States. But looking out with global bonds at current levels, 59 00:03:26,370 --> 00:03:29,489 Robert Hogg: they're not that far away from what I think a 60 00:03:29,490 --> 00:03:31,500 Robert Hogg: lot of investors would regard as a sort of a 61 00:03:31,500 --> 00:03:36,090 Robert Hogg: long-term fair value. We are more likely to see that 62 00:03:36,150 --> 00:03:42,750 Robert Hogg: trade off, if you like, between bonds and equities and 63 00:03:42,750 --> 00:03:44,939 Robert Hogg: that'll be a little bit different, but that'll be normal 64 00:03:44,940 --> 00:03:48,780 Robert Hogg: compared to the selloff we had with inflation and equity 65 00:03:48,870 --> 00:03:50,190 Robert Hogg: a year or so ago. 66 00:03:50,610 --> 00:03:53,850 Sean Aylmer: Just before we jump into asset allocation, where are we 67 00:03:53,850 --> 00:03:57,480 Sean Aylmer: up to do you think in terms of the macroeconomic 68 00:03:57,480 --> 00:04:01,320 Sean Aylmer: cycle? Certainly, in recent weeks we've seen inflation, it's still 69 00:04:01,320 --> 00:04:04,559 Sean Aylmer: too high, but the momentum's going the right way downwards 70 00:04:04,559 --> 00:04:08,820 Sean Aylmer: in terms of inflation. We're seeing rate cycles peak or 71 00:04:08,880 --> 00:04:12,510 Sean Aylmer: head towards a peak, lots of conjecture around that. Where 72 00:04:12,510 --> 00:04:14,250 Sean Aylmer: do you think we are up to in terms of 73 00:04:14,250 --> 00:04:17,099 Sean Aylmer: the global rate cycle and inflation and then what's that 74 00:04:17,100 --> 00:04:18,270 Sean Aylmer: mean for asset allocation? 75 00:04:19,260 --> 00:04:21,539 Robert Hogg: Well, I think one thing we can be reasonably sure 76 00:04:21,540 --> 00:04:23,580 Robert Hogg: of is that we are closer to the end of the 77 00:04:23,580 --> 00:04:27,419 Robert Hogg: tightening cycle than the beginning, but just how close we are 78 00:04:27,420 --> 00:04:30,299 Robert Hogg: to the end of the interest rate cycle will really 79 00:04:30,299 --> 00:04:35,070 Robert Hogg: depend on the inflation profile. So what we're tending to 80 00:04:35,070 --> 00:04:38,759 Robert Hogg: see exactly as you said is that in Australia and 81 00:04:38,760 --> 00:04:42,630 Robert Hogg: globally inflation momentum, so whether that's month to month or 82 00:04:42,630 --> 00:04:47,910 Robert Hogg: quarter to quarter and certainly annual change is starting to ease, 83 00:04:48,420 --> 00:04:53,099 Robert Hogg: but globally inflation is still generally at quite a high level. 84 00:04:53,790 --> 00:04:57,508 Robert Hogg: And that along with the fact that the unemployment rate 85 00:04:57,870 --> 00:05:03,150 Robert Hogg: globally is still quite low, the trade-off between the two 86 00:05:03,240 --> 00:05:07,080 Robert Hogg: will be key really in driving inflation from here. And 87 00:05:07,080 --> 00:05:09,240 Robert Hogg: that of course will be key in driving what central 88 00:05:09,240 --> 00:05:14,309 Robert Hogg: banks do from here. In terms of what that means 89 00:05:14,309 --> 00:05:20,039 Robert Hogg: for asset allocation, we as a fund are a little 90 00:05:20,040 --> 00:05:24,090 Robert Hogg: more comfortable with bond yields at their present levels. But 91 00:05:24,330 --> 00:05:26,880 Robert Hogg: in fact what we've intended to do on the interest 92 00:05:26,880 --> 00:05:32,279 Robert Hogg: rate side of the fund is take advantage of opportunities 93 00:05:32,279 --> 00:05:36,210 Robert Hogg: that have come past over the last probably nine or 94 00:05:36,210 --> 00:05:39,690 Robert Hogg: 12 months. So for example, if we cast our minds 95 00:05:39,690 --> 00:05:44,520 Robert Hogg: back to October, November last year when in the UK 96 00:05:44,550 --> 00:05:49,950 Robert Hogg: they had that linker gilt, so inflation protected gilt or 97 00:05:49,950 --> 00:05:54,089 Robert Hogg: UK bond sell off, that threw up opportunities really across 98 00:05:54,089 --> 00:05:58,229 Robert Hogg: the globe and it's certainly threw up investible opportunities here 99 00:05:58,230 --> 00:06:02,610 Robert Hogg: in Australia that the fund was able to take advantage of. And 100 00:06:02,910 --> 00:06:07,380 Robert Hogg: more recently, so over the last six months or so, the fund's 101 00:06:07,380 --> 00:06:11,160 Robert Hogg: been able to take advantage of the very significant bank 102 00:06:11,460 --> 00:06:15,480 Robert Hogg: bond issuance and in particular, I mean, bank Tier Two 103 00:06:15,750 --> 00:06:19,920 Robert Hogg: bond issuance. Some of the all in yields or total 104 00:06:20,070 --> 00:06:24,060 Robert Hogg: yield that those bonds have initially traded at have been 105 00:06:24,060 --> 00:06:27,420 Robert Hogg: extremely attractive and tick quite a number of the boxes 106 00:06:27,420 --> 00:06:32,640 Robert Hogg: that we look for in terms of investments that fit 107 00:06:32,730 --> 00:06:34,470 Robert Hogg: the risk return perspective. 108 00:06:34,859 --> 00:06:38,670 Sean Aylmer: So just delineating here between government bonds and credit markets, 109 00:06:39,150 --> 00:06:44,700 Sean Aylmer: do you think credit markets, effectively being non-government bonds, there 110 00:06:44,700 --> 00:06:46,560 Sean Aylmer: are attractive opportunities out there at the moment? 111 00:06:47,339 --> 00:06:51,779 Robert Hogg: Look, there are, one of the intriguing things about the 112 00:06:51,779 --> 00:06:56,820 Robert Hogg: current environment is that we tend to find what we 113 00:06:56,820 --> 00:07:00,120 Robert Hogg: feel the better risk return trade off lies within these 114 00:07:00,120 --> 00:07:03,960 Robert Hogg: bank Tier Two bonds rather than, for example, things like 115 00:07:03,960 --> 00:07:08,250 Robert Hogg: high yield bonds. We had expected that at this stage 116 00:07:08,250 --> 00:07:13,199 Robert Hogg: of the cycle we would be investing again in global 117 00:07:13,380 --> 00:07:17,489 Robert Hogg: and certainly US high yield bonds, but their spreads, which 118 00:07:17,490 --> 00:07:21,989 Robert Hogg: is to say the way investors assess their riskiness is 119 00:07:22,170 --> 00:07:26,009 Robert Hogg: not quite to the level that we think they provide 120 00:07:26,009 --> 00:07:29,369 Robert Hogg: the right risk return trade off. So I think another 121 00:07:29,369 --> 00:07:32,190 Robert Hogg: way of putting that is that investors are perhaps not 122 00:07:32,190 --> 00:07:35,580 Robert Hogg: pessimistic enough about the outlook. So the holders of these 123 00:07:35,580 --> 00:07:40,290 Robert Hogg: bonds, the yields available relative to the government bond of 124 00:07:40,290 --> 00:07:43,860 Robert Hogg: a similar maturity, the spreads and the yield differentials still 125 00:07:43,860 --> 00:07:48,660 Robert Hogg: not at attractive enough level for us to think that 126 00:07:48,660 --> 00:07:49,890 Robert Hogg: now is the right time. 127 00:07:50,340 --> 00:07:52,290 Sean Aylmer: Tier One, Tier Two, we better explain that one too. 128 00:07:52,290 --> 00:07:55,350 Sean Aylmer: So Tier One essentially... I'll leave it to you. You 129 00:07:55,350 --> 00:07:55,830 Sean Aylmer: are the expert. 130 00:07:55,980 --> 00:07:59,580 Robert Hogg: Well, yeah, Tier One are hybrids they're often described as 131 00:07:59,580 --> 00:08:02,759 Robert Hogg: so down toward the very, very bottom of a bank's 132 00:08:02,759 --> 00:08:06,029 Robert Hogg: capital stack down with common equity. And above that we 133 00:08:06,029 --> 00:08:09,480 Robert Hogg: have these so-called Tier Two bonds. Now, one of the 134 00:08:09,480 --> 00:08:13,560 Robert Hogg: big differences between the two markets is that the hybrids 135 00:08:13,650 --> 00:08:17,849 Robert Hogg: are really in Australia, very much a retail market, whereas 136 00:08:17,849 --> 00:08:21,689 Robert Hogg: these Tier Two bonds in which we've been particularly interested 137 00:08:21,690 --> 00:08:24,809 Robert Hogg: and where we've worked very closely with bank treasury teams, 138 00:08:24,809 --> 00:08:28,080 Robert Hogg: they're really very much a wholesale market. But the difference 139 00:08:28,080 --> 00:08:31,290 Robert Hogg: between the two, there are some tax differences, but it's 140 00:08:31,290 --> 00:08:33,809 Robert Hogg: really in terms of where they sit on the capital 141 00:08:33,809 --> 00:08:36,090 Robert Hogg: stack for banks. 142 00:08:36,270 --> 00:08:38,100 Sean Aylmer: Stay with me, Rob, we'll be back in a minute. 143 00:08:44,189 --> 00:08:48,868 Sean Aylmer: I'm speaking to Rob Hogg, Head of Fixed Interest and Macro Research at UniSuper. I just want to 144 00:08:48,870 --> 00:08:52,620 Sean Aylmer: quickly mention alternative investments as well, real assets, things like 145 00:08:52,620 --> 00:08:55,889 Sean Aylmer: property and infrastructure and then you go out to private 146 00:08:55,889 --> 00:08:58,258 Sean Aylmer: equity and all sorts of things. I mean, many of 147 00:08:58,260 --> 00:09:01,440 Sean Aylmer: us think about investing in terms of bonds and equities, 148 00:09:01,440 --> 00:09:05,910 Sean Aylmer: but of course the alternatives space seems to be growing very, 149 00:09:05,910 --> 00:09:08,250 Sean Aylmer: very quickly and kind of getting a lot more attention. 150 00:09:08,550 --> 00:09:13,858 Robert Hogg: Yeah, look, it has, certainly for UniSuper, compared with a 151 00:09:13,860 --> 00:09:17,578 Robert Hogg: lot of other industry funds, we have tended to have 152 00:09:17,580 --> 00:09:22,679 Robert Hogg: lower exposures to infrastructure and property. Well, in terms of 153 00:09:22,679 --> 00:09:27,599 Robert Hogg: the unlisted infrastructure, unlisted property. That however is starting to 154 00:09:27,599 --> 00:09:31,500 Robert Hogg: change, we're starting to see more and more opportunities in 155 00:09:31,500 --> 00:09:35,909 Robert Hogg: those areas. So for example, with infrastructure, earlier in this 156 00:09:35,910 --> 00:09:40,078 Robert Hogg: year we were involved with the consortium purchasing in Europe, 157 00:09:40,500 --> 00:09:43,620 Robert Hogg: an investment called Vantage Towers, which are towers that are 158 00:09:43,620 --> 00:09:48,120 Robert Hogg: used for data carriage and streaming and mobile phones and 159 00:09:48,120 --> 00:09:51,270 Robert Hogg: so on. So the fund spent about a billion dollars 160 00:09:51,330 --> 00:09:55,200 Robert Hogg: on that opportunity and infrastructure earlier in the year. And 161 00:09:55,200 --> 00:09:57,630 Robert Hogg: really just more recently, in fact, only just this week 162 00:09:58,200 --> 00:10:02,910 Robert Hogg: the fund purchased some industrial property assets here and in 163 00:10:02,910 --> 00:10:06,780 Robert Hogg: so in Melbourne and in Sydney. So these are particular 164 00:10:06,870 --> 00:10:11,129 Robert Hogg: opportunities that have arisen and we think they're very, very 165 00:10:11,129 --> 00:10:15,059 Robert Hogg: high quality assets that we've been very, very keen to 166 00:10:15,059 --> 00:10:19,890 Robert Hogg: add to our investment options for the benefit of the UniSuper members. 167 00:10:20,520 --> 00:10:23,340 Sean Aylmer: Rob, quite a serious question. How do you keep across 168 00:10:23,340 --> 00:10:23,730 Sean Aylmer: it all? 169 00:10:24,300 --> 00:10:24,750 Robert Hogg: Well- 170 00:10:24,900 --> 00:10:27,449 Sean Aylmer: You work hard probably, but it's a very big investment 171 00:10:27,450 --> 00:10:28,080 Sean Aylmer: world out there. 172 00:10:28,500 --> 00:10:32,190 Robert Hogg: Well, look, it is, and we have one of the 173 00:10:32,190 --> 00:10:36,990 Robert Hogg: higher proportions of the fund being internally managed. About three 174 00:10:36,990 --> 00:10:42,030 Robert Hogg: quarters of the fund is internally managed. Almost all the staff, 175 00:10:42,090 --> 00:10:45,299 Robert Hogg: about one or two, work in the Melbourne office in 176 00:10:45,299 --> 00:10:48,780 Robert Hogg: open plan in the office most of the days of 177 00:10:48,780 --> 00:10:52,890 Robert Hogg: the week. So there's an awful lot of flow that 178 00:10:52,890 --> 00:10:57,958 Robert Hogg: goes between all of the asset classes. So that information flow 179 00:10:58,110 --> 00:11:02,639 Robert Hogg: moves I think very, very well. But plainly, there are 180 00:11:02,639 --> 00:11:07,080 Robert Hogg: areas where we really can't claim to have any comparative advantage. 181 00:11:07,080 --> 00:11:10,590 Robert Hogg: So for example, I was mentioning before high yield in 182 00:11:10,590 --> 00:11:14,250 Robert Hogg: the US and when we do decide to invest there, 183 00:11:14,250 --> 00:11:17,730 Robert Hogg: we certainly won't be doing that from Australia. We have 184 00:11:17,730 --> 00:11:21,299 Robert Hogg: managers that do that kind of thing for us with 185 00:11:21,509 --> 00:11:25,290 Robert Hogg: a number of these other global unlisted opportunities, particularly infrastructure 186 00:11:25,290 --> 00:11:30,480 Robert Hogg: where we're tending to co-invest with other investors that have 187 00:11:30,929 --> 00:11:35,610 Robert Hogg: their organisations and their personnel in the local market. So 188 00:11:36,179 --> 00:11:38,819 Robert Hogg: that's how we stay on top, if you like, or 189 00:11:38,820 --> 00:11:43,980 Robert Hogg: seek and source and fund global opportunities. Really what we 190 00:11:43,980 --> 00:11:47,910 Robert Hogg: do internally in many ways is really just sticking to 191 00:11:47,910 --> 00:11:52,890 Robert Hogg: our knitting, doing mainly Australian assets across the investment team 192 00:11:53,429 --> 00:11:57,029 Robert Hogg: where we do do global assets, say in equities. There's 193 00:11:57,030 --> 00:12:02,040 Robert Hogg: a significant quantitative overlay to what we do. So I think 194 00:12:02,040 --> 00:12:06,270 Robert Hogg: it's just thinking sensibly about comparative advantage, what makes sense 195 00:12:06,660 --> 00:12:10,348 Robert Hogg: to manage internally, but what makes sense to work in 196 00:12:10,349 --> 00:12:14,309 Robert Hogg: a co-partnership arrangement with global investors. 197 00:12:14,370 --> 00:12:16,230 Sean Aylmer: Rob, thank you for talking to Fear and Greed. 198 00:12:16,410 --> 00:12:16,679 Robert Hogg: Pleasure. 199 00:12:17,039 --> 00:12:21,809 Sean Aylmer: That was Rob Hogg, Head of Fixed Interest and Macro Research at UniSuper. This is the Fear and 200 00:12:21,809 --> 00:12:24,780 Sean Aylmer: Greed business Interview. Remember, this is general information only and 201 00:12:24,780 --> 00:12:28,530 Sean Aylmer: you should seek professional advice before making investment decisions. Join 202 00:12:28,530 --> 00:12:30,630 Sean Aylmer: us every morning for the full episode of Fear and Greed, 203 00:12:30,630 --> 00:12:34,199 Sean Aylmer: Australia's best business podcast. I'm Sean Aylmer. Enjoy your day.