One on one with TelstraSuper: Jumping on opportunities

Super Review’s one-on-one series aims to spotlight key investment insights from the superannuation sector.

This week, Kate Misic, head of alternative investments and real assets at TelstraSuper, explains where, and how, the fund is exploring new investment prospects.

Given the current market conditions, what strategies are you employing to manage risk in your portfolio?

In the realm of unlisted asset classes, a key part of managing risk is about building resilience through market cycles. One approach we lean on is favouring lower leverage. While a prudent amount of debt often makes sense in private markets, we prefer strategies that are not overly reliant on excessive leverage to deliver expected returns. 

We also seek out investment managers who have proven they have a number of value creation levers allowing them to add value across different market environments. We’re particularly interested in those with a track record that spans multiple cycles because it gives us insight into how they’ll perform in varied conditions. 

The identification of long-term risks is important both in terms of avoiding negative impacts, but also in identifying opportunities. An example of this is climate change transition. TelstraSuper asks its unlisted asset managers about the physical risk of climate change to underlying investments. We have also set a target to invest 1 per cent of the fund’s assets in climate change-focused opportunities by 2025 and we are on track to meet this goal.

Are there any significant changes or adjustments to your investment strategy that you plan to implement for the next year?

We’re not planning any big changes to our overall investment strategy in the coming year. However, we’re always fine-tuning the portfolio to align with where we see the best risk-adjusted returns. When you’re fully invested and cash flow neutral, you have to exit existing investments to make room for new ones. This naturally imposes a high bar for new investments, which keeps us disciplined.

Despite the more challenging environment for private market transactions, we’re pleased with how we’ve curated the portfolio. For instance, we’ve been underweight in office and retail property, but are planning to selectively increase our allocation to retail.

In infrastructure, we’ve focused on core developed assets and are looking to boost our exposure to development assets with strong tailwinds, like data centres and renewable power.

What is your thought process when it comes to macro considerations?

We believe in having a well-diversified, long-term portfolio that can weather various scenarios. But within that framework, we use our Opportunities portfolio to lean into themes that we think have strong tailwinds, such as AI and renewables.

TelstraSuper’s unique Opportunities Asset Class is another key part of our strategy. It’s designed to take an opportunistic approach. As a midsized institutional investor, we’re in a sweet spot – big enough to access global opportunities, but small enough to be nimble and make these investments really count. After the financial crisis, we set up this Opportunities Asset Class, which currently can flex up to 10 per cent of the fund if the right opportunities arise. Operationally and from a governance perspective, we’ve made sure we can move quickly when these opportunities come up, whether they’re in emerging asset classes like carbon markets or other areas.

We typically target investments in the Opportunities Asset Class that meet one or more of these criteria:

• Mispriced market sectors due to dislocation, like when we invested in REITs and credit during the COVID-19 sell-off.
• Sectors poised to benefit from structural changes, such as those aligned with the climate change transition or the rise of AI.
• Investments expected to thrive in the current environment, like private credit, which is delivering strong returns right now.
• Opportunities that don’t fit neatly into our existing asset classes, like buying 5G spectrum or carbon allowances. 

A good example of how we approach macro considerations is our investment related to inflation. Over two years ago, we partnered with one of our fund managers to develop a strategy that would perform well if inflation turned out to be higher and more sustained than expected. That investment proved valuable during what was a tough time for more traditional investments in the year that followed.

What are some key opportunities you see in the next year?

One of the key opportunistic themes we’re focusing on is AI. Specifically, we’re taking a “picks and shovels” approach by investing in the development of data centres, which are essential infrastructure as AI continues to grow.

What initiatives are you pursuing to enhance member outcomes and ensure that your fund remains competitive?

Beyond our investment strategies, which are designed to deliver strong performance, there are a few other areas we focus on to enhance member outcomes:

Value for money on investment fees: When selecting our investment managers, we aim to deliver our members a minimum percentage of any alpha generated over the life of an investment. Or to put it another way, we aim to pay investment managers a maximum percentage of any alpha generated over the life of an investment.

This value-for-money approach gives us the flexibility to consider a wide range of fund and fee structures to suit different investment types.

Changes to our investment offering: In the previous financial year, there were some exciting developments to our investment offering, designed to optimise member returns and streamline our investment menu.  
Recognising that many of our members are likely to live longer and work for longer periods than previous generations, we’ve increased the age-based thresholds at which members of our MySuper Lifecycle investment strategy are transferred into more defensive investment stages. A member’s exposure to growth assets still reduces as they age, just more gradually than before. 

We have also successfully launched a new High Growth investment option for members seeking to maximise their returns over a longer time horizon. Compared to our other investment options, High Growth has a higher allocation to shares and private markets and also has a tilt towards technology and other innovative companies in their early stage of growth, providing opportunities for potentially higher long-term returns.

Although past performance is not a reliable indicator of future returns, the High Growth option enjoyed a strong start, returning 12.24 per cent in its first nine months of operation to 30 June 2024.