Wednesday, 21 September 2016

If you’re a regular reader of this blog you’ll know that we believe global investors are likely to experience lower investment returns going forward than in the past.

However we don’t just passively accept this headwind. Instead we try to make investments to generate returns that exceed those available from straightforward exposures to listed share markets and bond markets.

These include significant investments in asset classes such as infrastructure, real estate, private equity and alternatives. In the past we’ve highlighted the very strong returns delivered by our private equity manager, Partners Group1, which has, and continues to deliver annualised returns well in excess of 20 per cent.

Some might think these returns look too good to be true. Indeed some of our members have commented to us that they wouldn’t be game to individually invest in something offering these kinds of returns. The phrase 'if it sounds too good to be true, it probably isn't true' springs to mind. And we’d definitely agree there is some truth to this saying.

So how do we get comfortable investing on behalf of our members in these typically higher return generating areas such as unlisted assets?

In part the answer is that we have an in-house, specialist team of eight individuals to undertake in depth research on every investment manager appointed by QSuper. The Funds Management team, as we’re called, undertakes the necessary work to identify and conduct thorough due diligence on QSuper’s investment partners. The team is very experienced with the five senior members having on average over 20 years of relevant investment experience.

The Funds Management team’s primary function is to ensure we have a high level of conviction that the external managers appointed have the necessary investment processes, specialist skillsets, policies and procedures in place to appropriately perform the functions. A critical part of this is to ensure appropriate governance and controls are embedded into each manager’s daily processes.

Indeed, the Madoff investment scandal is a prominent reminder that investors need to look beyond investment returns and understand every aspect of a prospective investment.

A benefit of QSuper’s size and scale is that it enables us to independently assess every aspect of the external manager’s business operations and investment approach.

The initial assessment can take several months and involves spending hours with the managers at their offices located around the world before determining whether to make an investment. An onsite visit allows us to meet with the relevant people (investment and operational staff), work through their systems and processes, and see for ourselves that processes are being followed.

Among other things, it’s also important for us to get a clear understanding of an investment management firm’s ownership structure and incentive programs to identify any potential conflicts. And of course we use our deep industry networks (for example consultants or peers) to perform reference checks. Without this level of insight and due diligence we too would find it difficult to invest!

Naturally some of these investments are riskier in nature than others. So it’s important to understand the risks involved, the purpose they play in the overall QSuper portfolio2 and invest in them at an appropriate size to reflect that risk.

While all these measures aren’t guaranteed to deliver strong performance outcomes, we employ industry-leading practices as well as highly experienced staff to increase our chances of achieving that goal.

If you would like to hear more about the type of topics we discuss and the level of detail that we get into during onsite visits with external managers and our ongoing due diligence efforts, please let us know.

1. The following investment options have exposure to Partners Group through the QSuper infrastructure portfolio: QSuper Lifetime, Balanced, Moderate and Aggressive.

2. The term ‘QSuper portfolio’ is used to refer collectively to the underlying portfolios of assets which in combination make up the individual asset allocations of the QSuper Lifetime and the Balanced, Moderate and Aggressive investment options.

The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of the QSuper Board. We’ve put this information together as general information only and you should get professional advice before relying on this information.

Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.

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