It was one of the funniest moments of Infrastructure Investor’s Melbourne Summit in June: Adrian Best, head of infrastructure at Victorian Funds Management Corporation, seemingly endorsing the ‘2 and 20’ fee model before getting a good-natured ribbing from his fellow LP panellists, who did not share his apparent largesse.
One of those panellists was Jordan Kraiten, head of infrastructure at the A$25 billion ($19.5 billion; €17 billion) Hostplus, Australia’s top performing super-fund of the past three years, returning 9.5 percent, according to research firm SuperRatings. Hostplus – which draws members from the hospitality, tourism and sports industries – is currently overweight on infrastructure at close to 12 percent of its portfolio, from a strategic asset allocation of 10 percent. That, combined with the unique nature of its member base – “Our average demographic for the fund is in the early 30s,” Kraiten says – gives Hostplus the luxury of being patient.
“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.
Kraiten is a man with few red lines, but the closest he comes to one during our conversation is in his preference for open-ended funds. “Open-ended is on the verge of being a key requirement,” he admits, which is reflected in the managers it backs, such as IFM Investors, its primary manager, and QIC (Hostplus invests in infrastructure almost exclusively via blind-pool funds).
“Hostplus aims to invest for the long term on behalf of our investors, hence we do not see value in our member money coming back to us in 10 years’ time,” Kraiten argues. “The hardest thing to do is to deploy capital. If you’ve already invested in these great assets, why not just own them for as long as you can? Open-ended investment strategies are very attractive for accumulation funds that will continue to grow.”
Having said that, Kraiten is open minded about other strategies, but with a clear idea of what Hostplus wants. 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 about 10 percent for the asset class, 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.”
In that sense, net return is Kraiten’s North Star. Coming back to Best’s friendly ribbing, Kraiten does not want to pay ‘2 and 20’ fees to managers. But he could 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 concludes, laughing.