Meet Australia’s top-performing super-fund

Hostplus head of infrastructure Jordan Kraiten tells us how its young member base gives it the luxury of patience, as it finds itself newly underweight on the asset class.

It’s good to be the king – and at present Hostplus is very much the king of Australian superannuation funds. Not size-wise: AustralianSuper, about four times larger than the A$25 billion ($19.5 billion; €17 billion) Hostplus, easily takes that crown. But Hostplus has consistently achieved the best returns over one, three, five and seven years, according to research firm SuperRatings and consultancy Chant West. In late July, it announced an interim net return of 13.2 percent.

It’s even better when the king sees infrastructure (and illiquids in general, but more on that later) as integral to its performance.

When we first caught up with Jordan Kraiten, Hostplus’s head of infrastructure, at our June Melbourne Summit, the super fund – which draws members from the hospitality, tourism and sports industries – was overweight on infrastructure at close to 12 percent from a strategic asset allocation of 10 percent. Since then, the tables have turned, with the infrastructure SAA officially increased to 12 percent.

“I’m slightly underweight for the first time in my life,” Kraiten quips when we next catch up, adding: “I was very comfortable being overweight.” In reality, though, Hostplus’s SAAs act more as “directional guidance”, which means that you will not see a major change to its long-term approach to investing in the asset class.

Patient investor

That approach can best be described as ‘patient’. That is partly because of its unique member base, but also because of the open-ended nature of the funds it employs to invest in the asset class.

“Some of the defined-benefit funds in the US and Europe, they are liability matching so they know they need to meet a payment of X percent and, as a result, may be prepared to accept a certain base-case return that fits that payment. Hostplus, being an accumulation-based fund with a very young demographic, has the ability to really assess things over the long term.

“In infrastructure, that means we are more capital yield-focused and less cash yield-focused. We’ve got very strong inflows into the fund and we are very much in favour of investing in open-ended funds where we have a dividend reinvestment plan – more of a distribution reinvestment plan, really – whereby we can keep investing into the quality pool of assets that is being developed,” Kraiten explains.

He offers an example: “IFM Investors is our primary manager and both their domestic and international funds are open-ended. The real benefit for our members occurs when IFM makes a distribution, because we can activate our reinvestment plan and acquire more of the quality portfolio they keep growing. In a world and an asset class where competition makes capital deployment very hard, we have the luxury of having open-ended funds where we can grow our exposure to assets that we already own.”

Kraiten is a man with few red lines, but the closest he comes to one during our conversations is in his preference for open-ended structures. “Open-ended is on the verge of being a key requirement,” he admits, which is reflected in the managers it backs, such as IFM and QIC.

“If you look at QIC, their fund is open-ended from an asset-ownership perspective, but closed from a capital-commitment perspective. We also like this model, as it means our members will continue to benefit from the long-term ownership of Fund I’s assets and we can commit new equity to Fund II. Both models provide long-term benefits, but IFM will eventually have to make some hard decisions about the assets [it owns], because you cannot have a never-ending open-ended fund that just keeps growing and growing. But we trust them to do that,” Kraiten says.

The infrastructure chief is in no rush to talk sales, though. “Hostplus aims to invest for the long term, hence we do not see value in our member money coming back to us in 10 years’ time,” he explains. “Open-ended investment strategies are very attractive for accumulation funds that will continue to grow.”

They also offer their LPs unique opportunities. “Just look at Brisbane Airport’s privately funded runway, the biggest aviation project in Australia – that never would have happened if open-ended funds weren’t developing it,” Kraiten says, referring to the A$1.3 billion project to build a new, 3.3km-long runway and more than 12km of taxiways, among other improvements. The airport, Australia’s third-largest hub by passenger numbers, was privatised in 1997 and is majority owned by QIC, Colonial First State Global Asset Management, IFM and several superannuation funds.

Hostplus invests in infrastructure almost exclusively via blind-pool funds, but that does not necessarily mean it is a passive partner. “We are a very active co-investor alongside our investment partners. It’s a strategic decision to outsource active management, as opposed to brining it in-house,” Kraiten explains, adding he sees that decision as a big part of the fund’s strong performance over the past decade.

As it grows in size and its need for geographic and sector diversification increases, Hostplus is also happy to assist its managers to achieve those objectives. For example, chief executive David Elia was part of a high-profile delegation to the US, spearheaded by IFM chief executive Brett Himbury, to sell the Trump administration on the benefits of Australia’s ‘asset recycling’ initiative – or “public-pension partnerships,” as Kraiten terms the long-term leases that have seen everything from ports to poles and wires move into the hands of Australian pension fund members.
The long-term ambition is obvious: “When you look at the larger direct investors in the world, they are now in the rolodex of governments looking to sell assets. Hostplus will no doubt become one of those investors.”

It’s all about net return

Despite Hostplus’s unequivocal preference for open-ended structures, Kraiten is open-minded about other strategies. Not open-minded because he is looking to diversify away from Hostplus’s current infrastructure managers – in fact, he is at pains to underline the super-fund is not currently looking for more managers. Just open-minded in the way of someone who appreciates the many ways into the asset class.

Take the hybrid assets in vogue in infrastructure right now – or the “weird and the wonderful,” as Kraiten puts it. He will look at them, but admits Hostplus rarely ever invests in them. “We’ve got approximately 60 percent of Hostplus’s portfolio invested in some pretty ‘weird and wonderful’ stuff in the listed markets, riding out that volatility. We want infrastructure to be boring, like the camel slowly crossing the desert, because it provides the bedrock return for our members,” he says.

That translates into a net return of around 10 percent, mostly on the back of core-type investments. “Our flagship offering, where 85 percent to 90 percent of all our member money is in, has got a benchmark return objective of CPI plus 3.5 percent and CPI plus 4 percent over 10- and 20-year targets. When we achieve these benchmark returns, we’re meeting members’ expectations. However, we’ll always aim to do one better and achieve a net return of 10 percent or above.”

One better sounds about right, considering its infrastructure portfolio returned 11.4 percent for the financial year ending 30 June.

Still, Kraiten finds infrastructure a tricky asset class to benchmark. “Property has its Mercer and IPD indexes; the listed equity markets have got the ASX, the Dow Jones and the FTSE. But infrastructure is such a unique asset class. Someone might see a vending machines business as infrastructure. Others will say it’s got to be an airport or a seaport, which makes it very difficult to develop an index that is able to fully track performance, particularly because each airport and seaport have their own unique characteristics.”

In that sense, net return is Kraiten’s North Star. For example, he does not want to pay ‘2 and 20’ fees to managers, but he could – hypothetically – be persuaded to change his mind:

“Say you have a manager charging ‘2 and 20’ on committed capital and the hurdle is 5 percent – Hostplus will never invest in them. But here’s the kicker: if they say they have a direct line of sight, bilateral negotiations to deploy $5 billion worth of capital gradually over three years, guaranteed, and the net returns of the portfolio we are going to be investing into are all 9 percent and above – and on a weighted average basis it’s 10 percent – then we’ll do that deal.

“No one’s offering that to us,” he says, laughing.

Watch it grow

Performance is integral to the Hostplus story and Kraiten pegs the super-fund’s strong bet on unlisted assets – which make up just under half of its portfolio – as a key part of its success.

“Since the fund’s inception in 1988, Hostplus has been a significant investor in infrastructure and direct property, recognising that both asset classes require continual long-term investment. The unlisted asset classes provide predictable, long-term yields and diversification from the more traditional and volatile listed exposures. In that sense, infrastructure and superannuation are an obvious pairing,” Kraiten explains.

That strong performance, in turn, is helping to boost its AUM. “We expect to roughly double our funds under management over the next five years. We have very strong cashflows and a high tolerance to illiquidity driven by our young member demographic, which includes 16-year olds working in cafes and 18-year olds working in pubs. As a result, we have seriously long investment horizons. In addition, we are seeing our strong long-term performance being recognised with other superannuants transferring into Hostplus, including many high net worth members,” Kraiten says.

Of course, it’s one thing to be a strong performer at A$25 billion – it’s quite another to maintain that as your AUM doubles or triples. To his credit, Kraiten recognises “it’s going to be a real challenge” keeping that level of performance, but believes Hostplus’s existing “best-in-class” managers, its willingness to embrace promising new industries (the super-fund is the largest backer of Australia’s venture capital sector) and the fact that it is constantly eyeing new relationships, should keep it in good stead.

“The reality is that A$100 billion [in AUM] is out there. It may be a speck on the horizon at the moment, but it’s going to be coming in thick and fast.”