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He manages $120 billion, what keeps him awake? · The Money Puzzle

0:11
Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
0:15
Speaker 1: James Kirby, the wealth editor at The Australian. Welcome aboard, everybody.
0:18
Speaker 1: Have you ever wondered what it's like to manage or
0:22
Speaker 1: run a lot of money, say $ 110 billion, for instance,
0:27
Speaker 1: with maybe 2 million people or so depending on you?
0:30
Speaker 1: I wonder how you might sleep at night. Not just that,
0:33
Speaker 1: but the responsibility of managing that money when you've had
0:38
Speaker 1: a very strong track record. In fact, this fund and
0:43
Speaker 1: fund manager I'm going to talk to today has the
0:45
Speaker 1: number one performing super fund in Australia, bar none, over
0:50
Speaker 1: the last decade with an annual return of 8.3%. If
0:54
Speaker 1: you haven't guessed already, it is, of course, Sam Cecilia,
0:58
Speaker 1: the Chief Investment Officer at Host Plus. That's one of
1:02
Speaker 1: the big industry funds, of course. I've known Sam for
1:04
Speaker 1: quite a while. His opinions are as strong as his
1:08
Speaker 1: results in my experience, and I'm looking forward to talking
1:10
Speaker 1: to him today. How are you, Sam?
1:12
Speaker 2: I'm well, thanks, James. Thanks for the opportunity.
1:15
Speaker 1: Great to have you. Great to have you on the show.
1:17
Speaker 1: You might think I have lots of fund managers and
1:19
Speaker 1: super fund managers on the show. I don't. I don't, Sam.
1:23
Speaker 1: But occasionally I do when they're particularly interesting, and Host
1:27
Speaker 1: Plus is particularly interesting. It would be nice to introduce
1:31
Speaker 1: you to the listeners. many of whom would be in funds,
1:36
Speaker 1: some in your fund, some in running their own funds,
1:40
Speaker 1: and much younger listeners on the show than perhaps readers
1:45
Speaker 1: on the paper. That might just reflect the medium. But
1:48
Speaker 1: the point I'm making is that they probably haven't really
1:51
Speaker 1: made their minds up about how they're going to invest
1:53
Speaker 1: and which way they're going to do it. So you're
1:55
Speaker 1: running this fund, is it, what is it, 16 years
1:58
Speaker 1: or so?
2:00
Speaker 2: This is year 16, that's right.
2:03
Speaker 1: And How much did the fund have the day you
2:06
Speaker 1: walked in the door?
2:07
Speaker 2: It was $ 7. 6 billion.
2:13
Speaker 1: And today it's $ 110.
2:15
Speaker 2: Actually, it's $ 120. But who's quibbling?
2:20
Speaker 1: $ 120. Give or take $ 10 billion. I want to talk to,
2:23
Speaker 1: and I want to put it to the audience, because
2:25
Speaker 1: the first thing, if they don't know you... and what
2:28
Speaker 1: you do, what is it like? Is it something that you,
2:32
Speaker 1: I know I'm sure you have protocols and models and routines,
2:38
Speaker 1: but there must be times where it is more demanding
2:41
Speaker 1: than others managing that amount of money for that many people.
2:46
Speaker 2: So we have close on to 2 million members at
2:52
Speaker 2: Host Plus, average age 37. so not retiring anytime soon.
2:59
Speaker 2: The reason why I begin there is because we really
3:05
Speaker 2: need to establish as investors, whether it's a super fund
3:11
Speaker 2: investor or whether it's the listeners that are listening to
3:16
Speaker 2: this podcast at the moment, you do need to establish
3:20
Speaker 2: what type of investor you are in order to make
3:25
Speaker 2: appropriate comparisons. I think, let me leave it with that
3:29
Speaker 2: teaser at the moment, and I'll come back to that.
3:31
Speaker 2: But it matters, and I wanted to spend a bit
3:34
Speaker 2: of time today, if you indulge me, to basically argue
3:39
Speaker 2: that what really matters for long-term superannuation investments, or what
3:45
Speaker 2: is the objective here? The objective is to provide a
3:51
Speaker 2: retirement balance, so maximise returns, over a working lifetime, which
3:57
Speaker 2: is likely to be closer to 50 years. Maximise that
4:02
Speaker 2: return while at the same time controlling for risk. And
4:08
Speaker 2: even though those words are thrown around, if you are
4:11
Speaker 2: truly a long-term investor, the models to which you speak
4:16
Speaker 2: are far less useful than some other some other investment
4:22
Speaker 2: tools and investment beliefs. And so while it's a responsibility
4:29
Speaker 2: to do that, we can't lose sight that these are
4:35
Speaker 2: compounding returns over a lifetime, vastly different to single-year returns.
4:44
Speaker 1: It's interesting you said the average age in the fund
4:46
Speaker 1: is 37, which the point you're making there, of course,
4:49
Speaker 1: is that's pretty young. as funds go, as super funds go.
4:52
Speaker 1: The average age on our service, early service, we did
4:55
Speaker 1: a year or two ago on the show, was that
4:57
Speaker 1: the average listener was 35. So very similar, right? So
5:00
Speaker 1: a very similar cohort in terms of who's listening and
5:05
Speaker 1: your cohort, which happens to be nearly 2 million people,
5:09
Speaker 1: and their super is in your control. Now, I know
5:13
Speaker 1: you make this point, and of course it's a crucial
5:15
Speaker 1: point about long-term investing. But I'm old enough to know
5:19
Speaker 1: that the emphasis or the information flow, if you like,
5:22
Speaker 1: has become very short term. So when I was younger
5:27
Speaker 1: and I was in a super... I started working in Australia.
5:31
Speaker 1: I remember you used to get your super balance maybe
5:35
Speaker 1: once a year. And every year it would be higher
5:39
Speaker 1: than the year before. And you'd be saying, well, that's
5:41
Speaker 1: all right or whatever. And you might, if you were
5:44
Speaker 1: a bit more sophisticated, you might look at it in
5:45
Speaker 1: terms of what was the percentage return there. Now, I'm
5:49
Speaker 1: in the media and so I'm part of this, but
5:52
Speaker 1: we see, I'm seeing monthly reports on super. Super went
5:57
Speaker 1: up this month, it went down last month. This isn't annual,
6:00
Speaker 1: this is monthly. Whether you like it or not, Sam,
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Speaker 1: your clients, customers, members, and potential members They're also watching that.
6:09
Speaker 1: I don't think there's any, is there anything you can
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Speaker 1: do to stop that? Part of your reputation is based
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Speaker 1: on the fact of how well you did each year
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Speaker 1: in super.
6:19
Speaker 2: Sure. So again, let's look at that. A 20-year return
6:23
Speaker 2: is a series of 21-year returns, right? All we're saying
6:28
Speaker 2: is you can't get access to your money for retirement
6:34
Speaker 2: if that's the objective. you can't get access to it,
6:38
Speaker 2: all else being equal, until you retire. And so look
6:42
Speaker 2: at how long that runway is for you. Is it
6:47
Speaker 2: 30 years because you're currently 35? Or is it five
6:53
Speaker 2: years because you're currently 60? Even the latter. Super was
6:59
Speaker 2: designed at a time when people retired at 65 and
7:04
Speaker 2: conveniently died at 68. Today, they live to 98. How
7:11
Speaker 2: do you intend to live for 30 years after retirement
7:17
Speaker 2: without generating returns in retirement? Yep.
7:21
Speaker 1: So the emphasis is changing. And on you too, right?
7:25
Speaker 1: Tell us about that, how your funds like you The
7:29
Speaker 1: whole thing was to amass money for people in retirement.
7:35
Speaker 1: The pressure is changing now, isn't it? As the whole
7:38
Speaker 1: system grows, as Australians age, to provide deeper into retirement.
7:44
Speaker 1: Does that mean any change in the investment approach when
7:48
Speaker 1: the people between 60 and 90 compared to 30 and 60?
7:52
Speaker 2: That's a great question. So let's break it up using
7:55
Speaker 2: the terms the accumulation phase. followed by the decumulation phase.
8:02
Speaker 2: The question is, we know when accumulation happens, normally between
8:08
Speaker 2: during your working life, when you're contributing to super, your
8:12
Speaker 2: employer is contributing to super, or you are, and you
8:16
Speaker 2: get to a certain stage that you would call retirement,
8:20
Speaker 2: and then you would decumulate after that. All I'm saying
8:26
Speaker 2: here is, that decumulation function has an accumulation component in
8:33
Speaker 2: it still. Otherwise, you're going to run out of money. Sure.
8:37
Speaker 1: And is that accumulation, is that getting bigger and more important?
8:42
Speaker 2: It's getting bigger and more important because of ageing demographics.
8:47
Speaker 2: This is a global problem, not just an Australian problem.
8:50
Speaker 2: Because of the ageing demographics, but there's a lot of
8:54
Speaker 2: good people turning their... Good, smart people turning their minds
9:00
Speaker 2: towards how do you solve for longevity from a need
9:06
Speaker 2: to have income during that period of time. So a
9:09
Speaker 2: lot of good work is being done there. There are
9:12
Speaker 2: increasing products available that protect you from market volatility, etc.
9:18
Speaker 2: All I'm saying is that if you intend to live
9:19
Speaker 2: 30 years post-retirement, then you are essentially a 30-year-old that
9:25
Speaker 2: retires at 60. even though you're a 60-year-old who retires
9:28
Speaker 2: at 90, right? And so we need to change the
9:32
Speaker 2: frame of mind to avoid people having the possibility of
9:37
Speaker 2: running out of money well before their health runs out
9:41
Speaker 2: or well before their lifespan runs out.
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Speaker 1: Is there anything people listening to this show can do
9:48
Speaker 1: about that now, at their age, and we'll take it
9:51
Speaker 1: that the average age is 35?
9:54
Speaker 2: Sure. So again, let's separate superannuation, wealth creation in superannuation,
10:01
Speaker 2: and wealth creation outside of superannuation. If you can, you
10:06
Speaker 2: should do both, right? Wealth creation inside superannuation, there's a
10:12
Speaker 2: superannuation guarantee, there's a certain amount that gets contributed and
10:17
Speaker 2: invested on your behalf, And that's the bit that compounds
10:21
Speaker 2: until you get to a retirement age, or at least
10:24
Speaker 2: under the current legislation. In outside of superannuation, you can
10:29
Speaker 2: do other things. You may want to replicate what your
10:33
Speaker 2: super fund can do. Why are you replicating? Because you
10:37
Speaker 2: can't get access under the concept, at least of preservation,
10:42
Speaker 2: if not the legislation, under the concept of preservation, you
10:46
Speaker 2: can't really get access to that money until you qualify,
10:50
Speaker 2: you reach retirement age. But non-super money, you can get
10:54
Speaker 2: access to it at any stage you wish. So if
10:57
Speaker 2: you can, do both. Why wouldn't you do both? And implicitly,
11:01
Speaker 2: we do. We purchase a home, perhaps, purchase other assets,
11:07
Speaker 2: an investment property, or art, or whatever it is that
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Speaker 2: you you believe will appreciate in value, and that's wealth
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Speaker 2: accumulation outside of superannuation. So I think the two are
11:21
Speaker 2: vastly different.
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Speaker 1: Why?
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Speaker 2: Because the time horizons are different.
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Speaker 1: If people were replicating outside super, Sam, is... I often wonder,
11:30
Speaker 1: we often cover and people often correspond and say, oh,
11:34
Speaker 1: I've been looking at the Future Fund or I've been
11:36
Speaker 1: looking at Australian Super or Host Plus or whatever, and
11:39
Speaker 1: I'm going to try and learn from what they do.
11:42
Speaker 1: But I wonder, is it feasible to actually replicate what
11:45
Speaker 1: big super does like you? Because when you've got 120 billion,
11:50
Speaker 1: you're in a completely different planet than someone who's got
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Speaker 1: 120,000 and they want to try and manage that. Could
11:57
Speaker 1: you explain why? What would be different to the listeners?
12:01
Speaker 2: Okay, so perhaps by way of example, last financial year,
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Speaker 2: slightly more than $ 13 billion flowed into Hostplus. That's gross,
12:13
Speaker 2: so there are out benefits, deaths, transfers, etc. Close to
12:19
Speaker 2: somewhere between $ 7 and $ 8 billion of that $ 13 is net.
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Speaker 2: In other words, it needs to find an investment home.
12:28
Speaker 2: So we bat, if you like, with $ 7 billion. We
12:33
Speaker 2: can take advantage of every opportunity that we believe we
12:38
Speaker 2: want to, that is desirable, right? Personally, I don't have
12:44
Speaker 2: that capital and therefore I would behave differently. I can't
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Speaker 2: replicate as an individual, as Sam Sicilia, I can't replicate
12:54
Speaker 2: what San Cecilia the CIO can do inside of Hostplus.
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Speaker 1: Are there certain assets you just can't get at as
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Speaker 1: an individual?
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Speaker 2: Interestingly, increasingly no. You can get access to unlisted assets, airports,
13:12
Speaker 2: toll roads, shopping centres, logistics, etc. You can buy slices
13:17
Speaker 2: of those. You can buy slices of them that are
13:20
Speaker 2: listed on an exchange. But that behaves vastly differently to
13:27
Speaker 2: the underlying unlisted asset that's illiquid. And so it's your
13:34
Speaker 2: ability to tolerate illiquidity that's the problem. Outside of super
13:40
Speaker 2: or inside of super, it's not costless to liquidate positions
13:47
Speaker 2: in unlisted assets. You need to sell positions. your slice
13:51
Speaker 2: of the airport if it's unlisted. However, if it's listed,
13:56
Speaker 2: you can do that at any stage, but the two
13:58
Speaker 2: behave vastly differently, right? The listed vehicles are subject to
14:03
Speaker 2: the sentiment of listed markets.
14:05
Speaker 1: For the listener, can I just try and work this
14:08
Speaker 1: out with you? And I think it would be a
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Speaker 1: very good example, and it's really good that you've brought
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Speaker 1: it up. Airports Listed and unlisted. And listeners, if you're
14:15
Speaker 1: not familiar with the bigger debate out there, the big
14:18
Speaker 1: funds have explored, including the Future Fund, have explored unlisted assets.
14:23
Speaker 1: I'm always talking about this. They're not listed on the
14:26
Speaker 1: share mark. This is an essential point. They are behind
14:28
Speaker 1: the scenes. They are unlisted. A forest is a good example.
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Speaker 1: So you can't, if you were invested in a forest,
14:34
Speaker 1: you simply must wait years and years for the forest
14:38
Speaker 1: to grow, for the timber to grow. Now, in the airports,
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Speaker 1: Sam is talking about how listed and unlisted behave differently. Sam,
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Speaker 1: during the COVID close down, the airports were closed. Did
14:49
Speaker 1: the listed airports behave very differently than the unlisted ones?
14:55
Speaker 2: By behaviour, you're referring to the valuation of those airports, not.
15:00
Speaker 1: Yeah.
15:01
Speaker 2: So, yeah. So, the answer to that is yes. So,
15:06
Speaker 2: the real question is, what is the underlying root cause
15:10
Speaker 2: of the different behaviour. So let's just do an example.
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Speaker 2: Take Melbourne Airport, Perth Airport. These are unlisted vehicles, unlisted
15:24
Speaker 2: assets rather. And if you think about the operation of
15:28
Speaker 2: an airport, you get paid when the aeroplane lands, you
15:31
Speaker 2: get paid when the aeroplane takes off. That doesn't happen
15:34
Speaker 2: during COVID because there were no departures and arrivals if
15:40
Speaker 2: you are a long-term investor you have to believe that
15:45
Speaker 2: one day that airport's going to go back to functioning
15:49
Speaker 2: you you because it's illiquid you can't sell it which
15:53
Speaker 2: perversely is a good thing because if you could sell
15:57
Speaker 2: it no buyer would buy it off you at its
16:00
Speaker 2: current valuation they'll say well if you want to sell
16:03
Speaker 2: it now i need a 60 discount to its price right?
16:08
Speaker 2: And so, conversely, unlisted assets not only provide diversification to
16:14
Speaker 2: what is on the listed markets, but they also act
16:17
Speaker 2: as a mitigant against knee-jerk reaction about what's happening in
16:22
Speaker 2: listed markets. But you have to be able to tolerate
16:26
Speaker 2: that illiquidity. You have to be able to be a
16:29
Speaker 2: long-term investor to see through not just COVID, but the
16:33
Speaker 2: global financial crisis, the bird flu pandemic that threatened to
16:38
Speaker 2: shut down air travel all over the world. So public
16:44
Speaker 2: markets are a very small part of the overall economy.
16:48
Speaker 2: Nearly 90% of the world's assets are unlisted. Shopping centres, buildings, logistics,
16:57
Speaker 2: warehouse facilities are campus accommodation. I can just keep medical offices.
17:04
Speaker 2: Your house is unlisted. All the residential properties are unlisted globally.
17:10
Speaker 2: Imagine how many of that, compared to what, 400 stocks
17:14
Speaker 2: on the ASX, 2,000 stocks on the US stock market.
17:19
Speaker 2: It's like a handful of assets are listed and pretty
17:22
Speaker 2: much everything else is unlisted. But your ability to tap
17:26
Speaker 2: into those 90% is the difference between Sam Cecilia, the
17:31
Speaker 2: CIO of $ 120 billion fund, and Sam Cecilia, the individual
17:36
Speaker 2: that might dabble with $ 1, 000 or $ 5, 000 here and there.
17:40
Speaker 2: For the record, James, I do not own any assets
17:45
Speaker 2: or investments outside of my Host Plus account. It's cleaner
17:51
Speaker 2: that way.
17:52
Speaker 1: Well, I'm glad to hear it. So just finally on that,
17:55
Speaker 1: so as listeners would, and as you've articulated that idea,
17:59
Speaker 1: that the advantage and the distinction of the big fund
18:03
Speaker 1: is that it can go into unlisted assets. And you
18:07
Speaker 1: as a private investor or as an SMSF, you can,
18:11
Speaker 1: but it's very difficult to really get in there. And ironically,
18:16
Speaker 1: the main window of late investment is, perversely, unlisted markets,
18:22
Speaker 1: which by definition are unlisted assets, unlisted markets. It's a
18:25
Speaker 1: bit of an oxymoron. I just want to ask you
18:28
Speaker 1: one last thing about all that, Sam. And as long
18:30
Speaker 1: as I've known you and I've talked to you, you
18:31
Speaker 1: have been a passionate believer in unlisted assets and the
18:37
Speaker 1: advantage that they give and the price you pay is
18:40
Speaker 1: the liquidity that you can't sell small parts of them quickly.
18:43
Speaker 1: We understand that. I just want to ask you one thing, though.
18:46
Speaker 1: Has your perception of the appeal of the unlisted assets changed?
18:51
Speaker 1: Has anything changed them? I know the GFC didn't and
18:54
Speaker 1: COVID didn't, but I wonder as we see a rush
18:58
Speaker 1: into it now by all sorts, shapes and sizes and
19:01
Speaker 1: funds springing up everywhere, it is very much an open
19:05
Speaker 1: secret at this stage. Has any of that changed your
19:08
Speaker 1: attitude to it?
19:10
Speaker 2: The short answer is no. The rationale behind is that
19:15
Speaker 2: if you cut out all the unlisted assets, what's left
19:19
Speaker 2: is equities, listed equities, cash and bonds, three asset classes
19:25
Speaker 2: compared to 10 or so if you venture into unlisted markets,
19:31
Speaker 2: unlisted infrastructure, unlisted real estate, credit, private equity and venture capital,
19:39
Speaker 2: all unlisted asset classes. And so You want to be
19:44
Speaker 2: as diversified as possible because that's your one ticket to
19:49
Speaker 2: mitigating market risk be as diversified as possible.
19:55
Speaker 1: Okay very good we'll take a short break folks we'll
19:57
Speaker 1: be back in a moment i want to talk to
19:58
Speaker 1: sam about more topical issues but that was a very
20:02
Speaker 1: good introduction to his view of the world which is
20:05
Speaker 1: always worth hearing because not just, as I say, that
20:08
Speaker 1: he runs a large amount of money, but he is
20:10
Speaker 1: the top foreign manager in the nation over a 10-year period. Okay,
20:15
Speaker 1: back in a moment. Hello, welcome back to the Australian's
20:26
Speaker 1: Money Puzzle podcast. I'm James Kirby, Wealth Editor, talking to
20:29
Speaker 1: Sam Cecilia of Host Plus, Chief Investment Officer at Host Plus. Sam,
20:34
Speaker 1: you didn't quite answer my question about lying in bed
20:37
Speaker 1: at night with $ 110 billion out there. Are there times
20:40
Speaker 1: that's harder than others?
20:43
Speaker 2: There's a lot of short-term noise. And if you lose
20:47
Speaker 2: sleep over that short-term noise, you make life hard for yourself.
20:53
Speaker 2: As a superannuation fund investor. So if you have a
21:00
Speaker 2: good long-term investment strategy defined, and you have solid investment beliefs,
21:12
Speaker 2: and you are able to stick to both of those,
21:17
Speaker 2: long-term investment strategy, investment beliefs, then sleeping at night's pretty easy.
21:26
Speaker 2: So let's have a look at some, what am I
21:27
Speaker 2: talking about? Let's talk about inflation, interest rates going up. Yes,
21:34
Speaker 2: very painful for individuals, myself included, but not very painful
21:41
Speaker 2: for a 20-year investment horizon investor in a super fund.
21:47
Speaker 2: Lose no sleep over inflation or interest rates. Personally, lose
21:53
Speaker 2: a lot of sleep about individuals. There's a lot of
21:57
Speaker 2: pain out there, but the super funds still Ask yourself this,
22:02
Speaker 2: why is it that every year there's a forecast of
22:05
Speaker 2: doom and gloom and every year somebody comes out and
22:09
Speaker 2: says the super funds have survived again? The answer is
22:12
Speaker 2: because they're so well diversified that not much can happen
22:16
Speaker 2: globally that's going to permanently indent them. So I don't
22:20
Speaker 2: lose any sleep over that. Let's talk about geopolitics. War, again,
22:27
Speaker 2: the same vein. very painful for individuals, needless to say,
22:34
Speaker 2: especially those that are directly impacted, but not very painful
22:39
Speaker 2: for long-term investors. There are winners and losers in every
22:45
Speaker 2: aspect of life, and a long-term investor sees through all
22:49
Speaker 2: of those short-term noise cycles. So I'm not worried about
22:53
Speaker 2: war for the super fund. I'm not worried about inflation
22:57
Speaker 2: or interest rates for the super fund, right? The assets
23:02
Speaker 2: are often inflation linked. If they're infrastructure, there's parts of
23:06
Speaker 2: the portfolio that wins and there are parts of the
23:08
Speaker 2: portfolio that loses no matter what's happening on the plan.
23:13
Speaker 2: So what do I lose sleep over? There's probably one
23:19
Speaker 2: scenario that worries me a lot. And that's, it's a
23:26
Speaker 2: potential crisis byproduct of all of the things that I've mentioned, inflation,
23:31
Speaker 2: interest rates, war, climate change. Take climate change, for example.
23:38
Speaker 2: If climate change spooks enough people and they start to
23:43
Speaker 2: move because their current land is insufficient to grow food,
23:51
Speaker 2: if that were to happen, where do they move to?
23:56
Speaker 2: Someone else's land. There's no free land left. And when
24:00
Speaker 2: someone tries to move onto someone else's land, especially en masse,
24:06
Speaker 2: that never ends well. Never. And so the potential for
24:12
Speaker 2: civil unrest, for economic, for other environmental reasons, is something
24:19
Speaker 2: worthy of losing sleep about, because what's the point in
24:25
Speaker 2: retiring if you're headed towards that environment. If you're heading
24:31
Speaker 2: towards that environment, it's not very pleasant. So I kind
24:35
Speaker 2: of lose more sleep over that. The ability to have
24:39
Speaker 2: an impact there is at the margin.
24:42
Speaker 1: Can I just quickly, on that issue, on the broader
24:44
Speaker 1: issue of ESG, environmental, social and governance issues, which were
24:51
Speaker 1: front and centre and so dominant for a few years,
24:55
Speaker 1: and now there seems to be a backlash now There
24:57
Speaker 1: is a backlash against it, probably because it lacks definitions
25:01
Speaker 1: and standards. That's the main reason, I think. But where
25:06
Speaker 1: do you come from on that? What is your stance
25:09
Speaker 1: on that as a manager of a fund?
25:11
Speaker 2: So, again, let's separate personal views from being the chief
25:17
Speaker 2: investment officer of the supermarket. Our primary purpose is to
25:21
Speaker 2: generate a financial return for our members. while mitigating risk.
25:28
Speaker 2: So what kind of risks have an ESG flavor, right?
25:33
Speaker 2: So you would remember many years ago when Nike was
25:39
Speaker 2: using child labor to manufacture shoes, and there was a
25:43
Speaker 2: consumer backlash, a boycott. That results in the share price
25:50
Speaker 2: of Nike falling. That is a threat to the to
25:55
Speaker 2: the investments we have. So we need to make sure
25:58
Speaker 2: that companies are behaving in a sustainable way to protect
26:03
Speaker 2: their share price. These are not ideological positions. They can be,
26:08
Speaker 2: but that would be a personal view. But as a
26:11
Speaker 2: superannuation fund CIO, I'm more concerned about the share price
26:15
Speaker 2: and make sure you're not behaving in a way that
26:18
Speaker 2: would adversely impact that share price.
26:21
Speaker 1: And part of that is you're actually legally bound on that,
26:23
Speaker 1: aren't you, Sam, with a sole purpose set on superannuation?
26:27
Speaker 2: Yes, we need to make sure that what we do
26:29
Speaker 2: acts in the... Everything we do acts in the best
26:34
Speaker 2: financial interests of our members. But there are derivatives, right?
26:40
Speaker 2: So the derivative there is obvious. Is stopping that example...
26:46
Speaker 2: I'm going to have to labour it a little bit more,
26:48
Speaker 2: but asking Nike... to change their behaviour because it threatens
26:53
Speaker 2: you downstream, it will threaten the share price and therefore
26:57
Speaker 2: our members' best financial interest. So the nexus to the members'
27:01
Speaker 2: best financial interest test should be clear. If you need
27:05
Speaker 2: to sit there and scratch your head and wonder why,
27:08
Speaker 2: then you're not doing it for the right reasons.
27:11
Speaker 1: I'm going to get Sam to stay with us and
27:14
Speaker 1: go through some of our listeners' questions, which should be
27:17
Speaker 1: very interesting. We'll be back in a moment. Hello, welcome
27:30
Speaker 1: back to the Australian's Money Puzzle podcast. I'm James Kirby,
27:33
Speaker 1: Wealth Editor at The Australian. I'm talking to Sam Cecilia.
27:37
Speaker 1: the chief investment officer of Hostplus for 16 years, probably
27:41
Speaker 1: one of the longest serving chief investment officers out there
27:44
Speaker 1: in big super. And lots of changes actually of late
27:47
Speaker 1: in big super at the top, at the steering wheel,
27:49
Speaker 1: if you like, of some of the major funds. Now, Sam,
27:53
Speaker 1: I have a few questions. The first one, certainly you'll
27:54
Speaker 1: warm to, I'm sure. It's from Mike. What role do
27:57
Speaker 1: you think the decline in developed populations around the world
28:02
Speaker 1: that is currently happening will have on markets over the
28:06
Speaker 1: long term. Will long-term financial averages change due to the
28:11
Speaker 1: population no longer growing in the same way? Do you
28:14
Speaker 1: have some sort of formalized way where you cover these
28:17
Speaker 1: big picture issues? Do you have a committee that is
28:19
Speaker 1: literally dealing with big picture issues way beyond the daily
28:23
Speaker 1: or the quarterly issues? Or is it up to you
28:25
Speaker 1: as an individual, as the running the fund, to be
28:28
Speaker 1: abreast of all this?
28:28
Speaker 2: Cool. So the investment team at Hostplus and Hostplus' advisors
28:37
Speaker 2: at Financial Investment Advisors, JANA, and the board get briefings
28:44
Speaker 2: about a whole set of things that are not directly
28:49
Speaker 2: today impacting the decision to put a dollar in a
28:53
Speaker 2: market or an asset. Pending demographic changes, declining demographics, in China,
29:01
Speaker 2: but accelerating demographics in India. So the natural question that
29:07
Speaker 2: comes out of that is, should we add more to China,
29:12
Speaker 2: take away from China? Should we start investing in India?
29:16
Speaker 2: Should we put more in India? Is now the time
29:20
Speaker 2: to do that? Or are we waiting for other environmental
29:24
Speaker 2: factors to come into play? So I think all of
29:27
Speaker 2: those things are important considerations. for any investor, whether it's
29:32
Speaker 2: inside super or outside of super.
29:35
Speaker 1: Okay. Yeah. And the specific question was, do you think
29:39
Speaker 1: the decline of the populations, what's the impact it will
29:42
Speaker 1: have on global markets? Is there a theoretical big picture
29:47
Speaker 1: answer that would come to mind?
29:49
Speaker 2: We saw the countries that come to mind, Japan and
29:53
Speaker 2: China with deteriorating demographics, put stresses and strains on those
30:00
Speaker 2: economies in order to function. They need more people of
30:05
Speaker 2: working age. Equally, the social security issue, that is, how
30:09
Speaker 2: do you take care of a much older population that, again,
30:14
Speaker 2: is living longer, becomes a political problem. And those political
30:19
Speaker 2: problems ultimately impact the companies that are that are operating
30:24
Speaker 2: in those countries and ultimately has the possibility of impacting
30:29
Speaker 2: returns from investments in those areas. So I think it
30:33
Speaker 2: would be unwise to say nothing to do with us.
30:36
Speaker 2: That's their problem. Very unwise as an investor to understand it,
30:42
Speaker 2: even if you can't directly make an assessment of it today,
30:46
Speaker 2: you begin to understand it. Okay.
30:49
Speaker 1: All right, a question from Donna. This is not the
30:51
Speaker 1: sort of question that you'd get now at your high-level
30:55
Speaker 1: investment committees, but it's the sort of question I get,
30:58
Speaker 1: and I'm really interested to see how you would answer it.
31:00
Speaker 1: Donna says, I'm new to the stock market. I want
31:03
Speaker 1: to know if some shares can defy the stock market
31:06
Speaker 1: and retain or increase in value even when the majority
31:09
Speaker 1: of stocks have declined. Now, that's a question that you
31:14
Speaker 1: would probably ask when you're new to share market investing.
31:19
Speaker 1: But value investors, or what they call bottom-up investors, would
31:23
Speaker 1: actually very much take that point of view, Donna. And
31:25
Speaker 1: they would say, look, we don't really buy stocks. We
31:28
Speaker 1: buy companies. We buy parts of listed companies, bits of them.
31:34
Speaker 1: And we're interested in the company and how it performs.
31:38
Speaker 1: And if I have 20 stocks, I have 20 companies.
31:41
Speaker 1: slices of 20 companies. I'm not particularly interested in the
31:44
Speaker 1: market per se. I'm oblivious to the market. There's 2,000
31:48
Speaker 1: listed stocks on the ASX, and I don't care about that.
31:50
Speaker 1: I'm just interested in the 20 companies I bought. What's
31:54
Speaker 1: your approach, Sam? Do you have, as the CIO at
31:57
Speaker 1: a fund, is there like a bottom-up approach, a top-down approach?
32:00
Speaker 1: Does one dominate the other?
32:04
Speaker 2: So it depends on which markets we're talking about. In
32:07
Speaker 2: some markets... especially emerging markets. The bottom-up approach is that
32:15
Speaker 2: we're favoured by most of the investment managers we would use.
32:20
Speaker 2: They're on the ground. You need to go and kick
32:23
Speaker 2: tyres in India to purchase an emerging company. In developed markets,
32:30
Speaker 2: you can have a top-down view because there are certain
32:35
Speaker 2: events happening in the economy, certain parts of the cycle,
32:38
Speaker 2: which would be more favourable to some companies and not others.
32:41
Speaker 2: For example, in times of low interest rates, all companies
32:46
Speaker 2: do well, small companies do well, but when interest rates
32:49
Speaker 2: start to rise, small companies have difficulty servicing that debt
32:54
Speaker 2: and they would be expected to suffer more. So that
32:58
Speaker 2: kind of high-level analysis makes a lot of sense. Having
33:02
Speaker 2: said that, if you are an individual and you are
33:06
Speaker 2: new to the stock market, and you are thinking of
33:09
Speaker 2: buying companies that define the market overall. The answer is
33:17
Speaker 2: they actually exist. Unfortunately, it's not the same company every time.
33:22
Speaker 2: And what you then need to do is know when
33:25
Speaker 2: to time markets to go in and out. And unfortunately,
33:29
Speaker 2: market timing is a loser's game. You need to be
33:34
Speaker 2: there when lightning strikes. If you learn the game of
33:40
Speaker 2: going in and out of markets, unlearning that game is
33:45
Speaker 2: incredibly difficult. And what happens is, even if you are
33:49
Speaker 2: a lucky investor, you flip heads three or four times
33:54
Speaker 2: in a row, but eventually you flip tails and you
33:57
Speaker 2: hand all of your gains back to the market. And
34:01
Speaker 2: so market timing is not one of our investment beliefs.
34:06
Speaker 2: So we believe in the old adage, it's best to
34:09
Speaker 2: have to be to spend time in the markets rather
34:14
Speaker 2: than timing the markets. So if you must buy an
34:20
Speaker 2: ETF that's across the whole ASX 200 and just put
34:25
Speaker 2: it in the bottom drawer and see what happens after
34:27
Speaker 2: 20 years. But if your time horizon is only one year,
34:32
Speaker 2: then you are setting yourself up for disappointment. There is
34:35
Speaker 2: no quick path to getting rich.
34:39
Speaker 1: All right, I've got a final question. I'm going to
34:42
Speaker 1: take the one I think here from David. We often
34:45
Speaker 1: hear there is enough evidence out there to say that
34:47
Speaker 1: ETFs are index funds, exchange-traded funds, as that acronym suggests,
34:52
Speaker 1: regularly outperform fund managers. However, we then hear that if
34:57
Speaker 1: you're looking at small caps, it will be better to
34:58
Speaker 1: go with a fund manager because they can get in
35:01
Speaker 1: there and pick stocks one by one. I understand the
35:03
Speaker 1: idea that there is a lot of rubbish out in
35:05
Speaker 1: the market. So having someone wade through it should give
35:08
Speaker 1: better results. But is there actually any evidence that active
35:12
Speaker 1: managers outperform passive managers in small caps? Just to pick
35:19
Speaker 1: up on David's question, Sam, in the end, you are
35:22
Speaker 1: an active manager, aren't you? Would you agree with that?
35:27
Speaker 2: Yes.
35:28
Speaker 1: Okay, and then this whole theory that active managers can't
35:32
Speaker 1: beat passive managers. So someone might say, I wonder if
35:36
Speaker 1: the big super funds simply ran index funds, would they
35:41
Speaker 1: do as well? And I'm sure the ETF sellers and
35:46
Speaker 1: the index fund sellers out there would talk like that.
35:49
Speaker 1: What do you say to that core suggestion that, Passive
35:53
Speaker 1: investing wins in the end and beats all active managers
35:58
Speaker 1: over long periods of time.
36:01
Speaker 2: So in listed markets, you could mount that argument. But
36:06
Speaker 2: there is no passive strategy for airports and toll roads
36:11
Speaker 2: and seaports and buildings in infrastructure, in private equity, in
36:17
Speaker 2: venture capital, in credit. So you miss out on a
36:20
Speaker 2: substantial portion of the market. You could buy an ETF
36:26
Speaker 2: that has exposure to the listed versions of all of those,
36:30
Speaker 2: but that behaves very differently to the unlisted version. Having
36:35
Speaker 2: said that, there's an inefficiency in the small end of
36:40
Speaker 2: the market that's often exploited by fund managers. How do
36:44
Speaker 2: we know this? Well, because if you look at the
36:46
Speaker 2: small company index index, There are years where most of
36:52
Speaker 2: the managers outperform that index. How can that be? And
36:58
Speaker 2: the answer is because the index has everything in it
37:01
Speaker 2: and those managers have some skill at picking out smaller
37:06
Speaker 2: companies that are behaving in a particular way that's consistent
37:10
Speaker 2: with their own investment beliefs and believe that their share
37:13
Speaker 2: price will go up faster than it would otherwise be
37:16
Speaker 2: the case. It's horses for courses. There are times for
37:20
Speaker 2: passive strategies and areas that you would do passive management,
37:24
Speaker 2: index funds, etc. And there are areas where you just
37:28
Speaker 2: can't do that. And therefore, you have no choice to
37:31
Speaker 2: either do active management or miss out altogether.
37:35
Speaker 1: Okay, very interesting. And as David says, there is all
37:38
Speaker 1: sorts of rubbish out there, which is what the active
37:41
Speaker 1: manager is supposed to dodge. But as Sam is saying,
37:44
Speaker 1: it's really only applicable, even the debate is only applicable
37:47
Speaker 1: to listed managers. securities. And as he mentioned at the
37:51
Speaker 1: start of the show, the vast bulk of business activity,
37:54
Speaker 1: commerce in the world is not listed on the share market.
37:57
Speaker 1: Very interesting to talk to you today, Sam. Great to
38:00
Speaker 1: have you on. Thank you very much. Great for coming
38:02
Speaker 1: on the show.
38:03
Speaker 2: Thank you, James.
38:04
Speaker 1: That was Sam Sicilia, folks. He is the Chief Investment
38:07
Speaker 1: Officer at Host Plus. Do send some correspondence in. Love
38:12
Speaker 1: to hear from you. themoneypuzzle at theaustralian.com.au is the email.
38:17
Speaker 1: Do mention us to someone you know. Mention the show.
38:19
Speaker 1: We would love to spread the word. Maybe mention us
38:22
Speaker 1: to one person. And we will be talking to you soon.