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One on one with HESTA: Interpreting market signals
Super Review’s new one-on-one series aims to spotlight key investment insights from the superannuation sector.
This week, Dianne Sandoval, head of portfolio design at HESTA, discusses the fund’s approach to staying agile in the current market environment and interpreting market signals.
Given current market conditions, what strategies are you employing to manage risk in your portfolio?
HESTA is a long-term investor that focuses on longer-term signals. Our process tends to be countercyclical and allows us to be rigorous in avoiding short-term noise or behavioural biases.
Market volatility like we have recently experienced allows us to take advantage of mispricing away from our forecast fair value. We’re continuing to monitor market conditions.
Are there any significant changes or adjustments to your investment strategy that you plan to implement for the next year?
Our forward-focused total portfolio approach helps us gain deep insights across the portfolio. This aligns our investment strategy across asset classes, which supports better investment decisions. It is ultimately centred on improving retirement outcomes for our members over the long term.
We’re continuing to scale up internalisation of our investments, which will help us continue to enhance decision making right across the portfolio while also achieving long-term cost efficiencies for members.
HESTA is now managing over $9 billion – around 10.5 per cent of our portfolio – internally across equities, fixed income, and unlisted assets.
What is your thought process when it comes to macro considerations like inflation, interest changes, and geopolitics? What are other key trends on the fund’s radar?
The current environment is a very difficult one for forecasters and asset allocators. There are many reasons for this, including the emergence and uncertain impact of artificial intelligence, the implications of energy transition, the impact on global trade from changing geopolitical landscapes, and the potential policy implications following the outcome of the US election in November.
Staying agile in this environment is critical for HESTA and we utilise a dynamic asset allocation process across the portfolio to take advantage of any short-term volatility that presents good entrance or exit points because of their divergence from fair value. HESTA is rigorously managing our liquidity and resiliency to tail events.
We use scenario and Monte Carlo analysis to assess and confirm our comfort with the risks in our investment portfolios. While the US election outcome has the potential for large market impacts, we’re not positioning our portfolio for a certain election outcome given the short-term and binary nature of the event.
Climate change presents a financial risk to our investment portfolio, so we have already embedded the energy transition into our capital market assumptions.
Artificial intelligence has risen sharply in popularity over the past couple of years, although history appears to suggest the societal impact of new technology tends to be overstated in the near term and understated over the long term. We’re continuing to look for ways our members can benefit from new technologies.
What are some key opportunities you foresee in the next year, across asset classes and across global regions?
At around 2 per cent, US break-even inflation is looking increasingly attractive due to structurally higher inflation forces. Inflation hedging has also helped achieve our CPI+ investment objective.
What initiatives are you pursuing to enhance member outcomes and ensure that your fund remains competitive?
We’re always seeking innovative investment opportunities with the appropriate risk-return profile that can help us deliver strong investment performance for our members over the long term.
Climate solutions and affordable housing are two areas where we see opportunities for impact as a long-term responsible investor through linking our capital allocation, active ownership, and advocacy activities.
A rapid transition to clean energy – and away from fossil fuels – can help mitigate climate change-related risks to our members’ retirement savings and create new investment opportunities. HESTA is targeting 10 per cent of our portfolio invested in climate solutions by 2030.
Australia’s unmet need for stable, affordable, and secure rental accommodation presents an investment opportunity. We believe there’s potential to generate strong and stable long-term returns for members, while helping address Australia’s housing shortage.
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