The secrets behind UniSuper’s sparkling outperformance

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Shares of Australian stock exchange operator ASX Ltd, the fund’s fourth largest holding, have done even better, rocketing almost 50 per cent.

UniSuper is ASX’s largest shareholder, with its 23.2 million shares now worth $2 billion.

Other star performers include Sydney Airport, it’s second largest investment, and Australia’s largest natural gas infrastructure business APA Group, its fourth largest holding. Shares in both companies have gained more than 30 per cent in 2019.

If the bond market proves to be right, the equity of any company that is going to be around for the next 20 years is probably looking cheap

Mr Pearce said the fund’s strategy to purchase shares in such high-quality listed companies had enabled it to outperform over a sustained period of time.

“The market tends to label these assets as ‘bond proxies’ but we believe this is too limiting a label, as there is also inherent growth potential and pricing power that bonds don’t have.

“We’ve be fortunate to build large stakes in these companies at attractive prices, when the market wasn’t fully pricing the reality of an ultra-low interest rate environment,” he said.

UniSuper’s in-house investment management team of about 50 is seen by industry insiders as key to its financial strength.

Mano Mohankumar, senior investment research manager at Chant West, said most of UniSuper’s team had extensive experience in direct investing.

“In-house management now represents about 65 per cent of total assets through 27 listed market portfolios across equities, REITs, hybrids, infrastructure, fixed interest, credit and cash,” he said.

Kirby Rappell, executive director of rival fund researcher SuperRatings, said UniSuper was an early adopter of the internal management model and had spent a significant amount of time and effort building its capability and enhancing the range of assets it can manage.

“It has allowed the fund to access and respond to opportunities quickly and at scale,” he said.

Mr Pearce said UniSuper did not have a target for in-house versus external managers and would always run as a hybrid model.

“There are some asset classes, particularly global specialised strategies, that we cannot expect to do as well as other managers,” he said.

Despite sharemarkets in Australia and the US hitting historic highs, Mr Pearce said UniSuper would not stray from its path of seeking out quality listed assets when it saw reasonable valuations.

“We are a large fund with an excellent growth profile, so we are looking for assets that we can hold for the long term,” he said.

“No risk assets look cheap relative to historic levels but all risk assets look cheap relative to sovereign bonds,” he said.

“If you look at implied forward 10-year yields in 10 years time, you get to a number under 2.5 per cent.

“If the bond market proves to be right, then the equity of any company that is going to be around for the next 20 years is probably looking cheap,” he said.

Another factor distinguishing UniSuper from its contemporaries is its relatively low – about 7 per cent – allocation to unlisted assets.

“Apart from the fact that we have a conservative approach to liquidity, we have found that over the past 10 years the listed market has offered better-quality assets at lower prices than unlisted,” Mr Pearce said.

“However, that’s not necessarily the case now, as the listed market, particularly infrastructure assets, have rallied strongly.”

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