Annual Investment Update - Your Questions Answered

QSuper’s Annual Investment Update provides insights and information about the way QSuper manages your investments.
QSuper Chief Investment Officer Brad Holzberger explores some of the common questions he was asked by members during this year’s investment update roadshow.

Meeting shareholders at QSuper’s annual investment updates is always one of my favourite parts of the job. I never know what questions members will ask, so it’s fun and surprising, a bit like a quiz show. More importantly, members always ask insightful questions, showing our members are careful stewards of their retirement savings.

At this year’s investment updates, members asked questions from why we don’t invest in gold to why we do invest in Times Square. I’d like to share some of the most popular questions from these meetings.

Why did I refer to QSuper’s Diversified Bond investment option as the canary in the coal mine?

Canaries, of course, once helped detect dangerous gases in coal mines. Similarly, the rates of return on a diversified bond fund signal the health of the economy. The reason is that interest rates move in the opposite direction of bond prices. When rates rise, bond prices fall, generating capital losses. As interest rates fall, bond prices rise, generating capital gains. That may sound a bit counterintuitive, but it makes sense if you think about owning a bond that pays, say, 5%. When rates fall to 4%, the 5% bond offers a higher return, and investors will bid up its prices. It works the same way in reverse.

In recent years, central banks around the world cut interest rates to try to stimulate the economy. Bond prices have risen in response, so returns on our Diversified Bond investment option have been rising.¹ But interest rates are now so low that they can’t fall any farther. In the United States, the Federal Reserve has started raising rates, and we expect to see increases elsewhere. As a result, QSuper’s Diversified Bonds investment option is no longer generating capital gains because bond prices are no longer rising. The fund continues to earn the interest on the bonds, but that’s just a few percentage points. It’s not great news for bond investors, but it does mean that our canary, the Diversified Bond investment option, is signalling an improving economy. Perversely, if returns on the Diversified Bond investment option fell into negative territory, that would be a sign of an even better economy.

Fun fact: Canaries were still working in coal mines as recently as 1986, when the last bird was replaced by a carbon monoxide detector.

What is the Queensland Government’s relationship with QSuper? Is it intending to use some of the QSuper fund for its own investments?

I understand why there has been confusion about this question, but the answer is no. The Queensland Government has no control over the fund’s assets. That responsibility lies completely with the QSuper Board.

The confusion arises because the media occasionally writes about money that the Queensland Treasury has to set aside to pay defined benefit pension plans. Those dollars are completely separate from the QSuper. When a member who gets those benefits retires, the government has to transfer those funds to QSuper so that we can pay the member. It’s a pass-through arrangement that, let me repeat, gives the government no control over QSuper’s assets or operations. That power lies solely with the QSuper Board.

What is the significance of QSuper’s investment in Times Square?

I love looking up at those billboards at Times Square, and you should too. QSuper owns about 20% of One Times Square, home to those billboards and to the New Year’s Eve ball drop. Businesses pay huge sums to put their name in lights there. The building is so old that they couldn’t put people in it, so they created space for advertising and turned it into an icon. One Times Square represents less than 1% of the Balanced investment option, but has generated returns in the high teens.¹ Every time you see that building, remember that those billboard owners are paying you rent.

Why doesn’t QSuper invest in agriculture?

Every time some part of the Kidman cattle empire goes up for sale, people ask us if we want to buy. We say no to those offers and to agriculture in general for two reasons. One is that it’s a highly regulated industry with returns dependent on government subsidies. That can create a lot of risk when subsidies change. The second reason is that our portfolio has indirect exposure to agriculture. When we buy Queensland Government bonds, for example, we are purchasing a security whose value depends, in part, on farm revenues.

Why don’t we invest in gold?

Gold has held allure for centuries, but it doesn’t make sense as a QSuper investment. It earns no income. In fact, you have to pay to store gold if you own a lot of it. Its value rests completely on the prospect that someone will pay more for it tomorrow. Everything that QSuper invests in generates a cash flow. With a share, those cash flows are earnings and dividends. With a bond, they’re interest payments. At Times Square, they’re billboard revenues. Those cash flows help our members enjoy their retirements. Gold offers hope but not much else.

How can members learn more about what we invest in, beyond the largest holdings listed on QSuper’s member site?

We own thousands of assets in multiple asset classes, and the mix changes from time to time. In addition, like all investment firms, we have to manage disclosure so as not to telegraph our thinking to the markets in ways that might reduce our returns. Listing everything is not a practical or wise option. But we want to be as transparent as possible with our members, so if you have questions, please contact us here.

Does QSuper take climate change into account in investment decisions, including assessing what is likely to happen to stranded assets?

Firstly, on the matter of stranded assets: stranded assets are assets such as oil refineries that are expected to lose value as the world moves away from carbon-based sources of fuel, and we do analyse that as we invest.

In addition, the QSuper Socially Responsible option², managed by AMP Capital, assesses the carbon footprint of the investment portfolio. Our Socially Responsible option is heavily geared to this question.

However, in the broader fund, while climate change and stranded assets is not a dominant theme, there is a growing involvement.

We have recently hired analysts dedicated to thinking about this question and are developing policy.

It is also handled at a specific asset level. An example is in infrastructure assets. We own a number of airports, which are intensively carbon oriented. Each of those assets has their own carbon and environmental mitigation plan which is assessed by our investment managers at the time of purchase and is also assessed on an ongoing basis.

So, regarding climate change and stranded assets, we are a work in progress: it’s currently centralised in the Socially Responsible option, it’s handled at asset level, and we are working on a policy by which we are questioning the issue of how we would apply a thesis like stranded assets to the whole fund.

On top of this we are looking to form a very solid position on Environmental, Social and Governance (ESG).

Furthering this aim, QSuper Chief Executive Officer Michael Pennisi sits on the Australian Council of Superannuation Investors (ACSI) Board, which is an industry board that is looking at all ESG matters and how it can influence social policy through public companies.

QSuper’s Annual Investment Updates are held throughout Queensland to ensure members hear first-hand from senior members of the QSuper Investments Team, and have the chance to ask questions.

QSuper conducts updates, seminars and webinars throughout the year to keep you updated, informed and prepared. Find details of our seminars here.

The views of the author 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. Each of our investment options has a different objective, risk profile, and asset allocation.

1 Past performance is not a reliable indicator of future performance.
2 The QSuper Socially Responsible option invests in the Responsible Investment Leaders Balanced Fund, which is managed by AMP Capital Investors.