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Why the $175 billion man still likes the sharemarket (with UniSuper's John Pearce) · The Money Puzzle

• 0:10
  Speaker 1: Hello and welcome to the Australian's Money Puzzle Podcast. I'm
• 0:13
  Speaker 1: James Kirby. Welcome aboard, everybody. We all manage our investments
• 0:17
  Speaker 1: with a view to long-term success. How would you like
• 0:19
  Speaker 1: to manage $ 175 billion? That's the day job of my
• 0:25
  Speaker 1: guest today. It's John Pearce, Chief Investment Officer at Unisuper,
• 0:28
  Speaker 1: one of the biggest of the industry super funds. John's
• 0:31
  Speaker 1: very well known, as you can imagine, across investment markets,
• 0:34
  Speaker 1: not to mention he's 700,000 or so member investors. How
• 0:38
  Speaker 1: are you, John?
• 0:40
  Speaker 2: I'm good, James. Thank you very much for having me.
• 0:43
  Speaker 1: I'm delighted to have you on the show. I was
• 0:45
  Speaker 1: wondering where we might start with a job like yours,
• 0:48
  Speaker 1: and I thought maybe the first thing we would do
• 0:50
  Speaker 1: is we'd have a look at the wider share markets.
• 0:53
  Speaker 1: Just to talk about the share market, it seems to
• 0:54
  Speaker 1: me that the markets are, the share markets are red
• 0:58
  Speaker 1: hot and everything else is just basically tipping along. Is
• 1:01
  Speaker 1: that your view?
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  Speaker 3: Well, I think shares are fairly valued, okay? I think
• 1:07
  Speaker 3: the most common Concerned that we have our shares overvalued
• 1:10
  Speaker 3: because we've got a situation where, say, the U.S. equity
• 1:14
  Speaker 3: market at this time is around 2% off its highs,
• 1:17
  Speaker 3: yet we have U.S. bond yields at 20-year highs, right?
• 1:21
  Speaker 3: So something sort of doesn't feel right there. But if
• 1:26
  Speaker 3: you scratch beneath the surface, it's very interesting. The leadership
• 1:30
  Speaker 3: in the U.S. share market is quite concentrated. But here's
• 1:33
  Speaker 3: what's fascinating.
• 1:35
  Speaker 2: About pretty much the average share return of stocks in the.
• 1:39
  Speaker 3: Last year, they're about 20% off their highs on average,
• 1:44
  Speaker 3: their 52-week highs, which is quite remarkable given that the
• 1:47
  Speaker 3: whole market's only 2% off its highs.
• 1:50
  Speaker 2: The other point to note.
• 1:51
  Speaker 3: James, is the US has had remarkable earnings growth. The
• 1:55
  Speaker 3: last year, the S & P 500, up about 60%
• 1:58
  Speaker 3: in terms of earnings growth.
• 2:00
  Speaker 2: So what we've seen is quite a massive derating of valuations.
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  Speaker 2: So for that reason, I'm very comfortable with where the
• 2:07
  Speaker 2: share market is.
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  Speaker 3: Now, do I think it's a screaming buy at a
• 2:11
  Speaker 3: P multiple of around 18, 18 and a half?
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  Speaker 2: That's above its long-term average.
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  Speaker 3: But I think there's reasons why we can stay above
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  Speaker 3: its long-term average.
• 2:18
  Speaker 2: So I think it's all fairly evenly priced.
• 2:22
  Speaker 1: It's interesting. And one of the items that I saw
• 2:24
  Speaker 1: that made me actually seek you out to get you
• 2:28
  Speaker 1: on the show is that you said somewhere that you
• 2:30
  Speaker 1: didn't see the conditions now for a major market downturn,
• 2:35
  Speaker 1: or words to that effect. And here we are. I mean, obviously,
• 2:38
  Speaker 1: I don't know if you're superstitious, but, you know, it's October, right? September, October,
• 2:42
  Speaker 1: the most dangerous time historically for markets. There's no science
• 2:46
  Speaker 1: to that, but history shows that some of the worst
• 2:48
  Speaker 1: downturns have been in that time. So you're sufficiently comfortable
• 2:51
  Speaker 1: that you think that we aren't close to the edge, basically,
• 2:57
  Speaker 1: here in terms of share markets.
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  Speaker 3: Yeah, well, actually, if you want to look at history,
• 3:01
  Speaker 3: September's actually the weakest month on average. I know we've
• 3:04
  Speaker 3: had a couple of terrible Octobers.
• 3:07
  Speaker 2: Actually, September, we're.
• 3:08
  Speaker 3: Coming into a more seasonally strong period of the year,
• 3:12
  Speaker 3: according to history.
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  Speaker 2: And as a matter of fact, when there's a midterm
• 3:16
  Speaker 2: election on, October's not a bad month. So just keep
• 3:19
  Speaker 2: that in mind.
• 3:20
  Speaker 3: But let's get back to the original question, why I
• 3:23
  Speaker 3: don't see a larger market downturn. For there to be, say,
• 3:27
  Speaker 3: a 20% correction, you usually have to have a recession.
• 3:32
  Speaker 3: And I just can't see how we've got the makings
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  Speaker 3: of a recession, given that we are in one of the,
• 3:39
  Speaker 3: in the middle of the biggest capex super cycle in history.
• 3:43
  Speaker 3: And particularly, you know, it's really AI related, but there
• 3:47
  Speaker 3: are other super cycles going on. We've still got decarbonization,
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  Speaker 3: the energy transition.
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  Speaker 2: And of course, countries are spending a lot of money
• 3:54
  Speaker 2: on defense.
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  Speaker 3: So with that as a backdrop, it's very hard to
• 3:58
  Speaker 3: see a recession.
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  Speaker 2: And that's why I'm not overly concerned.
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  Speaker 3: Certainly, I attach a lower probability to a much larger
• 4:05
  Speaker 3: sell-off in the market.
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  Speaker 1: Right. And just to explain to listeners about your other
• 4:09
  Speaker 1: point about how there was such strong earnings and the
• 4:14
  Speaker 1: prices are not unreasonable in the context of those earnings.
• 4:18
  Speaker 1: So is it the case that we talk about the
• 4:20
  Speaker 1: price-earnings ratio? And what's really happened is it's that the
• 4:24
  Speaker 1: earnings have actually lifted so that you have these extraordinary
• 4:27
  Speaker 1: situations where companies that are making gigantic profits, their price
• 4:33
  Speaker 1: in relation to those profits is not exceptionally unreasonable. Is
• 4:38
  Speaker 1: that Leland's view of it?
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  Speaker 2: Absolutely, James. It's a good way of putting it.
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  Speaker 3: And if you actually look at, if you plotted price
• 4:46
  Speaker 3: growth with earnings growth, they follow a pretty similar pattern.
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  Speaker 2: So.
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  Speaker 3: And it actually, the story gets even stronger. It's not
• 4:53
  Speaker 3: just this year's earnings. It's also forecast earnings for next year.
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  Speaker 3: And if you look at the, once again, we talk
• 5:00
  Speaker 3: about the S & P 500 because it is by
• 5:02
  Speaker 3: far the most important market in the world. Next year's
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  Speaker 3: earnings growth is going to be somewhere between 20 and 30%.
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  Speaker 3: So once again, that's underpinned by this CapEx super cycle.
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  Speaker 2: So usually when you've got that as growth, you can
• 5:17
  Speaker 2: expect to see even stronger share markets.
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  Speaker 1: Right. Now, that's, of course, all those points that we're
• 5:24
  Speaker 1: making is on the US market being the locomotive that
• 5:27
  Speaker 1: drives the world, really. On our own ASX 200, we
• 5:32
  Speaker 1: don't have anything like those dynamics, do we, really? We've
• 5:36
  Speaker 1: trailed the US for a decade at least, maybe by
• 5:41
  Speaker 1: something in the order of 50% in terms of total return.
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  Speaker 1: What does that mean for the everyday investor? I mean,
• 5:47
  Speaker 1: should they be has need to give advice and we
• 5:50
  Speaker 1: never talk about advice on the show we talk about
• 5:52
  Speaker 1: information only but if american shares have done so much
• 5:56
  Speaker 1: better 50 better on total return year after year for
• 6:00
  Speaker 1: a decade do you see anything to disturb that looking
• 6:05
  Speaker 1: out forward it's hard to see.
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  Speaker 3: You know in the medium term a case for the
• 6:12
  Speaker 3: australian market versus the us market it's hard to see
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  Speaker 3: that because As I said, the CapEx super cycle is
• 6:19
  Speaker 3: very much focused on the IT sector, and we don't
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  Speaker 3: really have an IT sector to speak of.
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  Speaker 2: And we're not unusual in that sense.
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  Speaker 3: Outside the US, you've got China, you've got Japan, you've
• 6:31
  Speaker 3: got a bit in Korea, and you've got a bit
• 6:33
  Speaker 3: in Taiwan. Outside those countries, there's no real IT story
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  Speaker 3: to talk about.
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  Speaker 2: So then the question is, why? I guess, why bother
• 6:41
  Speaker 2: with Australia at all, right? A couple of points there, James.
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  Speaker 3: Firstly, Australia over a longer period, and I'm saying between
• 6:49
  Speaker 3: 20 and 30 years, believe it or not, even despite
• 6:52
  Speaker 3: what's happened in the last 10 years, we've actually held
• 6:54
  Speaker 3: our own in relation to the US. Another point to
• 6:58
  Speaker 3: make is that Australia is a more defensive market. So
• 7:04
  Speaker 3: If indeed your readers are concerned about a tech sell-off,
• 7:08
  Speaker 3: Australia is not a bad place to hide in that scenario.
• 7:12
  Speaker 3: If we look at when we saw the dot-com crash
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  Speaker 3: and we even saw a mini tech crash, I think
• 7:18
  Speaker 3: it was.
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  Speaker 2: In 2022 post-COVID, Australia strongly outperformed the US in both
• 7:23
  Speaker 2: of those periods. So it's a pretty good defensive play.
• 7:27
  Speaker 3: Australia obviously is a higher yielding market than the US,
• 7:30
  Speaker 3: which is important. which is really important for a lot
• 7:33
  Speaker 3: of older members looking for income rather than capital gains.
• 7:36
  Speaker 3: So I think Australia deserves this position in terms of
• 7:41
  Speaker 3: as a diversifier. But I agree, it's far less exciting
• 7:45
  Speaker 3: for those that can handle volatility.
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  Speaker 2: The US looks like a better bet at this point,
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  Speaker 2: for the medium term at least.
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  Speaker 1: And just on the issue of AI... And we take
• 7:56
  Speaker 1: it that most of the listeners understand that obviously AI
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  Speaker 1: is the sort of heart of the bull market that
• 8:01
  Speaker 1: is now clearly in place in the US and to
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  Speaker 1: some extent around the world. The big issue coming down
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  Speaker 1: the line is the IPOs of these AI companies. Interesting,
• 8:16
  Speaker 1: OpenAI perhaps is not going to do an IPO. That's
• 8:20
  Speaker 1: all fine. Anthropic, on the other hand, seems to be
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  Speaker 1: charging ahead with its one, which would be the biggest
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  Speaker 1: one in the US. And the biggest one in our
• 8:27
  Speaker 1: own market is Firmus, a company which is a different beast, obviously,
• 8:31
  Speaker 1: than Anthropic and perhaps less well understood. Where do you
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  Speaker 1: stand on those IPOs, if you can answer? On the Firmus,
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  Speaker 1: I know some super funds have declined the invitation.
• 8:43
  Speaker 2: If you like.
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  Speaker 1: Where do you stand on that one?
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  Speaker 3: Yeah, well, let's look at firms and Anthropic and OpenAI
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  Speaker 3: for that matter.
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  Speaker 2: Now, while I.
• 8:51
  Speaker 3: Certainly don't have concerns about valuations in the listed markets,
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  Speaker 3: I was struggling to come to grips with valuations of
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  Speaker 3: the unlisted markets. You think about the two big frontier
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  Speaker 3: models that Anthropic and OpenAI own. They're great models, but
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  Speaker 3: these companies are losing somewhere between.
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  Speaker 2: $ 15, $ 20 billion a year.
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  Speaker 3: They don't look like making a profit for another few years,
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  Speaker 3: and you've got valuations north of a trillion dollars.
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  Speaker 2: So I'm struggling to get my mind around that.
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  Speaker 3: Similarly, where you've got, we're talking, I'm hearing valuations between
• 9:27
  Speaker 3: 50 and.
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  Speaker 2: 70 billion US.
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  Speaker 3: You've got a company that's going to be bleeding cash
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  Speaker 3: flow for the next couple of years.
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  Speaker 2: And most importantly, with all of these companies, they're going
• 9:38
  Speaker 2: to keep.
• 9:39
  Speaker 3: Coming back to the market for capital, right? That's why
• 9:42
  Speaker 3: I have a concern, and that's why we're not participating.
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  Speaker 3: But obviously, others have a different view. And time will
• 9:50
  Speaker 3: tell who's wrong and who's right, James. Just as an
• 9:54
  Speaker 3: interesting aside, I remember in the late 90s when we're
• 9:57
  Speaker 3: looking at Amazon, and I was remember saying, well, to
• 10:02
  Speaker 3: believe these valuations, you've got to believe this and this
• 10:05
  Speaker 3: about Amazon and the market share, et cetera.
• 10:08
  Speaker 2: And And I said, so I can't believe that. Well,
• 10:10
  Speaker 2: guess what? I was wrong. You know, I haven't described it.
• 10:13
  Speaker 1: You were, but Amazon was the exception, wasn't it? For
• 10:16
  Speaker 1: every Amazon, there was 10 disasters. All right.
• 10:18
  Speaker 2: Very good.
• 10:19
  Speaker 1: Yes. Very clear. Take care.
• 10:21
  Speaker 2: You know, you can get it wrong, right? But, you know,
• 10:24
  Speaker 2: I'm going to sit down.
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  Speaker 3: Look, one thing I will say about Firmus, James, I'm actually,
• 10:28
  Speaker 3: even though we won't be getting involved, I'm absolutely delighted
• 10:33
  Speaker 3: that we're going to have another Australian company, you know,
• 10:36
  Speaker 3: an ASX listed company.
• 10:38
  Speaker 2: I think that's, That's good for the market.
• 10:40
  Speaker 1: Okay, we'll take a short break. We'll be back in
• 10:42
  Speaker 1: a moment. Folks, we're going to talk to John about
• 10:44
  Speaker 1: beyond the share market, which I think you'll find extremely interesting. Hello,
• 10:53
  Speaker 1: welcome back to the Australian's Money Puzzle podcast. James Kirby
• 10:57
  Speaker 1: here with John Pearce, Chief Investment Officer at the Uni Superfund. John,
• 11:03
  Speaker 1: I'm just thinking a lot of listeners will probably be
• 11:07
  Speaker 1: in a position where they're saying, well, the shares are
• 11:09
  Speaker 1: so good, they're almost, anyone who's been in the market
• 11:12
  Speaker 1: a long time knows that these are good years for
• 11:14
  Speaker 1: share investors. These are easy years. It doesn't really get
• 11:17
  Speaker 1: much easier than this. You can buy an ETF, close
• 11:19
  Speaker 1: your eyes, come back, and it's 10% a year. That
• 11:21
  Speaker 1: doesn't always happen. Looking at inflation, which seems to be
• 11:27
  Speaker 1: a persistent concern, there is a gradual elevation of bond
• 11:33
  Speaker 1: yields around the world. And a follow-up, if you like,
• 11:38
  Speaker 1: by central banks of rising interest rates. The key question
• 11:43
  Speaker 1: facing investors is whether this escalation of yields and rates
• 11:48
  Speaker 1: is mostly to do with inflation or mostly to do
• 11:52
  Speaker 1: with a healthier dynamic being the AI investment capex boom.
• 11:57
  Speaker 1: What's your view?
• 11:58
  Speaker 2: Well, it's both of those, isn't it?
• 11:59
  Speaker 3: And it's absolutely the right right question or right concern
• 12:04
  Speaker 3: to have. If there's one thing that is going to
• 12:07
  Speaker 3: kill a bull market, it's elevated.
• 12:09
  Speaker 2: Levels of inflation.
• 12:11
  Speaker 3: And when I say elevated, I think the world can
• 12:13
  Speaker 3: live with 3% and 3.5% inflation.
• 12:15
  Speaker 2: Everyone's fixated on 2%. But there's nothing magical about the 2% number.
• 12:20
  Speaker 3: And if you actually ask any economist or central banker,
• 12:23
  Speaker 3: where does this 2% come from?
• 12:25
  Speaker 2: The answers are pretty fluffy, to be honest. So let
• 12:28
  Speaker 2: me make that point.
• 12:29
  Speaker 3: Now, In terms of bond yields, you said they were
• 12:32
  Speaker 3: gradually rising. Well, it actually hasn't been too gradual, James.
• 12:36
  Speaker 3: It wasn't that long ago, about four years ago, when
• 12:39
  Speaker 3: we were talking about 10-year bond yields closer to 1%,
• 12:43
  Speaker 3: they're over 5%. So that is anything but gradual, right?
• 12:49
  Speaker 3: That's a very sharp sell-off. And that's, to me, the
• 12:52
  Speaker 3: big concern rather than the level per se. It's the
• 12:56
  Speaker 3: speed at which the bonds have actually adjusted. 5% bond yields,
• 13:01
  Speaker 3: I don't believe is an issue. You know, equity markets
• 13:03
  Speaker 3: can rally with 5% bond yields. They could probably handle
• 13:07
  Speaker 3: even slightly higher. It's if inflation gets to four, four
• 13:11
  Speaker 3: and a half and stays there and bond yields get
• 13:14
  Speaker 3: to six, seven, that's when, you know, I would start
• 13:17
  Speaker 3: getting very nervous. In terms of the driver's inflation, it's
• 13:21
  Speaker 3: both supply shocks and demand pressures. Demand coming from AI investment,
• 13:25
  Speaker 3: government spending, supply given energy prices and And of course,
• 13:29
  Speaker 3: we seem to have a supply shock every year. It's tariffs,
• 13:34
  Speaker 3: it's breakouts in Russia, Ukraine, it's happening in Iran, etc.
• 13:38
  Speaker 2: So supply shocks is going to be a feature of
• 13:41
  Speaker 2: this world of de-globalization.
• 13:45
  Speaker 1: If you had a choice between bond yields on the
• 13:49
  Speaker 1: floor at less than 1% or bond yields at 4%
• 13:52
  Speaker 1: or 5% as they are, which would you prefer as
• 13:54
  Speaker 1: an investor?
• 13:59
  Speaker 3: That's a no-brainer, James. Bond yields around these levels are
• 14:03
  Speaker 3: far more sensible. You think about four years ago when
• 14:08
  Speaker 3: we had about $ 20 trillion of bonds around the world
• 14:12
  Speaker 3: with negative yields.
• 14:14
  Speaker 1: How crazy that is.
• 14:16
  Speaker 2: When you've got bond yields at those sort of levels,
• 14:19
  Speaker 2: you're getting all sorts of distortions when it comes to
• 14:21
  Speaker 2: pricing of assets. So now we've.
• 14:23
  Speaker 3: Got a reasonable bond curve. we can get to rational
• 14:29
  Speaker 3: pricing of assets, and that makes for a much more
• 14:32
  Speaker 3: sustainable rally.
• 14:34
  Speaker 1: One of the things that, from an investment point of view,
• 14:38
  Speaker 1: as bonds return to this natural level, shall we say,
• 14:41
  Speaker 1: they had to climb. Obviously, the yields had to roll
• 14:45
  Speaker 1: up from nothing to 5%. And in the process, year
• 14:48
  Speaker 1: after year, total returns from bonds have been poor. Now,
• 14:54
  Speaker 1: One of the things that most investors, active investors listening
• 14:57
  Speaker 1: to the show might have a diversified portfolio, but generally
• 15:01
  Speaker 1: they don't have bonds. And so generally they probably did
• 15:05
  Speaker 1: not have the drag, actually, that bonds put on your
• 15:09
  Speaker 1: own investments and any other big super fund investments. Would
• 15:12
  Speaker 1: that be, first of all, do you think that is
• 15:14
  Speaker 1: the case? And from here on, what do you think
• 15:16
  Speaker 1: will happen?
• 15:17
  Speaker 2: Yeah, look, it clearly has been a drag.
• 15:19
  Speaker 3: And, you know, if everyone had their time again, they
• 15:21
  Speaker 3: would have loved to have had zero duration risk. And
• 15:24
  Speaker 3: we've got to be clear, though, when we talk about bonds,
• 15:26
  Speaker 3: we're talking about fixed rate bonds, right?
• 15:28
  Speaker 2: But, of course, at these levels now, firstly, at a
• 15:32
  Speaker 2: fixed rate, plus, you.
• 15:34
  Speaker 3: Know, if you're not buying government bonds, you add on
• 15:36
  Speaker 3: top of that five, five and a half, you're adding
• 15:38
  Speaker 3: a credit spread of, say, one and a half, two percent.
• 15:42
  Speaker 2: You're now getting to, you know, sort of high bonds.
• 15:46
  Speaker 3: Well, you're going to just hire single-digit returns for.
• 15:50
  Speaker 2: Really safe assets.
• 15:52
  Speaker 3: And if you also are worried about yields further rising, well,
• 15:56
  Speaker 3: you just buy floating rate bonds.
• 15:59
  Speaker 2: So you're not expected that duration. So look, I'm very
• 16:01
  Speaker 2: comfortable where it's sitting at the moment.
• 16:04
  Speaker 3: As I said before, I get less comfortable if inflation
• 16:09
  Speaker 3: goes higher from here.
• 16:10
  Speaker 1: What's the number you worry about?
• 16:13
  Speaker 3: Look, anything specifically above 3.5% would concern me. The world
• 16:18
  Speaker 3: doesn't stop inflation at 3.5%.
• 16:21
  Speaker 1: Right. Okay. I'm bouncing around here, John, but it's the
• 16:23
  Speaker 1: nature of the show. And these are the questions I'm
• 16:27
  Speaker 1: sure listeners would like to ask you. Hedging. I mentioned
• 16:30
  Speaker 1: how most of our listeners, independent investors, if they aren't
• 16:33
  Speaker 1: already in the big super fund, some of them would
• 16:34
  Speaker 1: be in a big super fund and have their own investments.
• 16:37
  Speaker 1: And generally, they don't have bonds. And generally, they don't hedge.
• 16:40
  Speaker 1: And it's never been an issue. Why would it be
• 16:42
  Speaker 1: an issue for most Australian investors? But now, each year,
• 16:46
  Speaker 1: with these returns, superior returns that we mentioned in the U.S.,
• 16:51
  Speaker 1: pure common sense tells you you should have more American-U.S.
• 16:55
  Speaker 2: Exposure.
• 16:56
  Speaker 1: But what people never had traditionally, individual investors just didn't have,
• 17:00
  Speaker 1: is hedging. I know the rule books, textbooks say you
• 17:03
  Speaker 1: should have about one-third of your exposure in hedged. I
• 17:08
  Speaker 1: think with big funds like you, APRA make you have
• 17:10
  Speaker 1: up to 50% hedged. Is that right?
• 17:12
  Speaker 2: No, not at all, James. Superannuation, we've got a fair
• 17:17
  Speaker 2: bit of license in terms of how we manage assets.
• 17:20
  Speaker 1: Is that a guideline that APRA has?
• 17:23
  Speaker 2: No, not even a guideline.
• 17:26
  Speaker 3: It's really up to the individual super fund. Typically, you'll
• 17:30
  Speaker 3: find Well, I can talk about any super, you know,
• 17:33
  Speaker 3: when we've got, depending on the asset class, we can
• 17:36
  Speaker 3: be anywhere between zero edge and 100% hedged. On equity,
• 17:42
  Speaker 3: which is, that's where your major exposure is for any
• 17:44
  Speaker 3: super fund, would be offshore exposure, that is.
• 17:47
  Speaker 2: Yeah, you're right.
• 17:48
  Speaker 3: Typically, the super fund will be around a third, and
• 17:51
  Speaker 3: we're slightly above that at the moment.
• 17:52
  Speaker 2: But there's certainly no, you know.
• 17:54
  Speaker 3: Sort of directive from the regulator in terms of the
• 17:56
  Speaker 3: optimal hedging ratio.
• 17:57
  Speaker 2: Okay.
• 17:59
  Speaker 1: Okay. On another issue, and pointy end of the questions,
• 18:04
  Speaker 1: private credit. Private credit has been a winner, particularly for
• 18:10
  Speaker 1: industrial super funds like yourself, for a long time. It's
• 18:14
  Speaker 1: currently going through a test, both here and overseas. So
• 18:18
  Speaker 1: I'll ask you a couple of questions about that. For instance,
• 18:21
  Speaker 1: in private credit, do you as a bond have exposure
• 18:23
  Speaker 1: to Australian private credit?
• 18:26
  Speaker 3: About 10% of our private credit portfolios in Australia. But
• 18:30
  Speaker 3: it's important to get this in. We've got zero exposure
• 18:33
  Speaker 3: to commercial property.
• 18:34
  Speaker 2: That's the mandate. We exclude investment in commercial property.
• 18:38
  Speaker 1: I see. Which basically, the industry is the other way around,
• 18:42
  Speaker 1: isn't it? Really, most private credit in Australia is property-backed.
• 18:46
  Speaker 2: That's right.
• 18:47
  Speaker 3: Yeah.
• 18:47
  Speaker 1: Why did you do that? I would have told, again,
• 18:49
  Speaker 1: common sense would suggest private credit. You'd want property because
• 18:52
  Speaker 1: it's asset-secured.
• 18:54
  Speaker 2: No, look, the problem with Australia is you just don't
• 18:56
  Speaker 2: have the diversification.
• 18:58
  Speaker 3: And we feel that we've got a lot of indirect
• 19:02
  Speaker 3: exposure to property via our massive holdings in the banks.
• 19:07
  Speaker 3: You think about the bank in Australia, depending on what
• 19:11
  Speaker 3: banks you include, you're talking about potentially 30% of the
• 19:14
  Speaker 3: index in those financials. And there's a lot of first
• 19:18
  Speaker 3: derivative exposure to property. So we don't want to double up.
• 19:23
  Speaker 3: We much prefer offshore exposure where we can get a
• 19:26
  Speaker 3: lot of geographical and sector diversification.
• 19:29
  Speaker 1: And even in the overseas private credit markets, you had
• 19:32
  Speaker 1: some exposure to Partners, which has locked up one of
• 19:36
  Speaker 1: its funds. What do you think? I'm not particularly interested
• 19:38
  Speaker 1: in Partners per se, but I'm just wondering how you
• 19:42
  Speaker 1: think the private credit market will go through this test
• 19:46
  Speaker 1: which it's facing right now and to what extent this
• 19:49
  Speaker 1: might happen more often. where you are frozen in a fund.
• 19:52
  Speaker 3: Yeah, sorry, just to be clear, we're not involved with
• 19:56
  Speaker 3: any fund that's locked up.
• 19:58
  Speaker 2: Okay, so, yeah.
• 19:59
  Speaker 1: I'm sorry, this was a report, obviously. It's a second-hand report.
• 20:03
  Speaker 1: I'm quoting reported reports. that you were reportedly in the
• 20:06
  Speaker 1: Partners Fund in Europe, which was one of the big
• 20:09
  Speaker 1: private credit funds, and they have locked up their funds.
• 20:11
  Speaker 1: You're in Partners, but you're not in one of the
• 20:13
  Speaker 1: funds that are locked. Is that it?
• 20:15
  Speaker 2: We don't know. I've gone and checked, but if it is,
• 20:19
  Speaker 2: it might be a tiny exposure.
• 20:21
  Speaker 3: It might be something that we've inherited through an acquisition,
• 20:24
  Speaker 3: but it would be absolutely.
• 20:25
  Speaker 2: Tiny to the point it would be immaterial.
• 20:28
  Speaker 1: What about private credit from here, John? Will you change
• 20:31
  Speaker 1: your allocation to private credit going forward, considering... maybe its
• 20:35
  Speaker 1: golden period has passed.
• 20:38
  Speaker 3: Look, we're allocating as we speak, James. If you look
• 20:42
  Speaker 3: at where the private credit has, there's been concerns. A
• 20:45
  Speaker 3: lot of it's been software-related names. We've got exposure to software.
• 20:49
  Speaker 3: All the companies, all the exposures that we have, all
• 20:52
  Speaker 3: the companies are actually meeting their commitments. So the operating
• 20:54
  Speaker 3: performance of those companies is absolutely fine.
• 20:57
  Speaker 2: They're not missing a bit.
• 20:58
  Speaker 3: So I think this whole concept, I believe that AI
• 21:02
  Speaker 3: is just going to ruin these software companies overnight.
• 21:05
  Speaker 2: It's just overblown, to be frank. We're still allocating.
• 21:09
  Speaker 3: We're looking at margins or spreads between 500 and 600
• 21:13
  Speaker 3: over base rates. So you're talking about high single-digit returns
• 21:17
  Speaker 3: for senior secured debt. What do you like returns for
• 21:22
  Speaker 3: senior secured debt?
• 21:26
  Speaker 1: Yes. So your view, your allocation setting sounds to me
• 21:31
  Speaker 1: like it's unchanged.
• 21:32
  Speaker 2: Pretty much.
• 21:34
  Speaker 1: Pretty much.
• 21:34
  Speaker 2: Okay.
• 21:35
  Speaker 1: Two quick ones for you. Cash, never a feasible investment,
• 21:38
  Speaker 1: probably never is an investment. Cash is cash. But it's
• 21:41
  Speaker 1: a lot more feasible than it used to be for
• 21:42
  Speaker 1: our investors. When independent investors are looking at cash, the
• 21:47
  Speaker 1: order of 5%, you wonder why would they go and
• 21:52
  Speaker 1: buy bonds for 4%?
• 21:53
  Speaker 3: Well, I think that's the same argument as going floating
• 21:58
  Speaker 3: rate versus fixed rate.
• 22:00
  Speaker 2: You're absolutely right. But let me just say about cash.
• 22:02
  Speaker 3: To me, cash has always got a role in portfolios,
• 22:07
  Speaker 3: regardless of the return. And the reason I say that is,
• 22:12
  Speaker 3: to me, it is the only genuine safe haven asset,
• 22:16
  Speaker 3: which is a big call.
• 22:17
  Speaker 2: But I'll give you the most recent example of the
• 22:21
  Speaker 2: outbreak of hostilities in Iran. Now, when war broke out,
• 22:26
  Speaker 2: what are your traditional safe havens?
• 22:28
  Speaker 3: Dolls?
• 22:29
  Speaker 2: And bonds, guess what? You would have lost a lot
• 22:34
  Speaker 2: of money on both, right?
• 22:36
  Speaker 1: Yes. They didn't do what they were supposed to do.
• 22:39
  Speaker 2: That's right. There was capital preserved in all your cash accounts.
• 22:44
  Speaker 3: So I always say, if you're looking for a genuine
• 22:47
  Speaker 3: safe haven, it's cash.
• 22:49
  Speaker 2: And cash gives you options, right?
• 22:50
  Speaker 3: When you do see pullbacks in the market, cash is
• 22:54
  Speaker 3: one thing that you can get your hands on immediately
• 22:56
  Speaker 3: to take advantage of opportunities.
• 22:59
  Speaker 2: There's always a role to play for cash.
• 23:00
  Speaker 3: And the beauty of 5% interest rates is the opportunity
• 23:04
  Speaker 3: costs of holding that cash is now much lower.
• 23:07
  Speaker 1: Is your allocation to cash risen in any way?
• 23:10
  Speaker 3: We've been building a bit of cash. We've taken a
• 23:12
  Speaker 3: bit of profit on our tech position. We've also sold
• 23:15
  Speaker 3: a bit of Japan. We've been building up cash levels.
• 23:19
  Speaker 3: Not because we're overly concerned. It's just that we think
• 23:21
  Speaker 3: markets are fairly priced. And when you see a pullback
• 23:24
  Speaker 3: now and again, we'll be deploying that cash.
• 23:27
  Speaker 1: I don't have a pie chart of UniSuper in front
• 23:29
  Speaker 1: of me, but what typically would you hold in cash
• 23:31
  Speaker 1: and what have you got now?
• 23:33
  Speaker 3: Oh, look, when we talk about cash, we put it
• 23:36
  Speaker 3: in the same bucket, cash and fixed interest. Fixed interest
• 23:39
  Speaker 3: is a long-duration cash.
• 23:41
  Speaker 2: I will typically hold around 20% in our balanced option.
• 23:45
  Speaker 2: And that? We've got high-growth options where we hold almost zero.
• 23:51
  Speaker 1: Okay, so you don't strip out cash holding in and
• 23:55
  Speaker 1: of itself? No.
• 23:57
  Speaker 2: Okay.
• 23:58
  Speaker 1: All right. We'll take a short break, folks. I want
• 23:59
  Speaker 1: to ask John a couple of last questions on the
• 24:02
  Speaker 1: nature of industry funds, because many of you, I'm sure,
• 24:05
  Speaker 1: are in industry funds, and he will come to the party,
• 24:09
  Speaker 1: I'm sure.
• 24:10
  Speaker 2: Talk in a second.
• 24:24
  Speaker 1: Hello, welcome back to the Australian's Money Puzzle Podcast. James
• 24:28
  Speaker 1: Kirby here talking to John Pearce, someone I've wanted to
• 24:31
  Speaker 1: have on the show for some time. He is, of course,
• 24:33
  Speaker 1: the Chief Investment Officer at Unisuper. Okay, John, the million
• 24:40
  Speaker 1: dollar question. If someone was listening to the show and
• 24:42
  Speaker 1: knew nothing at all about some of the alleyways we've
• 24:45
  Speaker 1: been walking down, they would simply say, those big industry funds,
• 24:48
  Speaker 1: they did very well for so long. And these, in
• 24:51
  Speaker 1: recent years, It's just been so good year after year,
• 24:55
  Speaker 1: double digits often. But the long-term average of a super
• 24:58
  Speaker 1: fund is about 6.7, 6.8. Do you believe in reversing
• 25:04
  Speaker 1: to the mean and will it apply to big funds
• 25:08
  Speaker 1: like yourself? Not just you, but all the big funds.
• 25:11
  Speaker 2: I can't predict what returns are going to be.
• 25:14
  Speaker 3: Look, we have delivered, Balanced Option has actually delivered double
• 25:17
  Speaker 3: digit returns for the last four years.
• 25:20
  Speaker 1: Yeah, that's exactly what I'm talking about.
• 25:22
  Speaker 2: Yes, which is a really good number, right?
• 25:24
  Speaker 3: And look, our long-term average is north of seven, but
• 25:28
  Speaker 3: it's low eight. So you could argue that we're over-earning.
• 25:30
  Speaker 3: I will also point out to people, the last time
• 25:34
  Speaker 3: we had a four-year stretch of double-digit returns for balance options, James,
• 25:38
  Speaker 3: it was from 2003 to 2007.
• 25:41
  Speaker 2: And we know what came next, right? Yeah.
• 25:44
  Speaker 3: But there's a lot of difference between today and 2008,
• 25:48
  Speaker 3: the GFC period. The biggest difference today is that we've
• 25:54
  Speaker 3: got a much healthier banking sector.
• 25:57
  Speaker 2: We've got a much healthier corporate sector with less leverage.
• 26:01
  Speaker 2: And we've got this genuine CapEx super cycle. We've got
• 26:04
  Speaker 2: this AI revolution. So plus, as you've mentioned, bond yields
• 26:08
  Speaker 2: are at 5%.
• 26:09
  Speaker 3: So you add credit return on credit margin onto that,
• 26:13
  Speaker 3: and you're getting 6%, 7% potentially from.
• 26:16
  Speaker 2: Your defensive assets.
• 26:17
  Speaker 3: So I wouldn't rule out another double-digit year, but If
• 26:21
  Speaker 3: you look over a long, long period of time, I'd
• 26:24
  Speaker 3: expect that that would be sort of higher single digits
• 26:29
  Speaker 3: rather than double digits.
• 26:31
  Speaker 1: Okay. All right. Now, something that I wanted to bring
• 26:34
  Speaker 1: up with you about big industry funds and all big
• 26:38
  Speaker 1: funds is, again, thinking of the listener who just once
• 26:41
  Speaker 1: a year or a couple of times a year takes
• 26:43
  Speaker 1: a look at how they're getting on. The idea of
• 26:46
  Speaker 1: a balanced fund, there's a misapprehension abroad, the wider market,
• 26:53
  Speaker 1: that balanced funds are all the same, but actually you
• 26:56
  Speaker 1: all define them differently. I don't think that's good. I mean,
• 26:59
  Speaker 1: I think it would be much better if all the
• 27:01
  Speaker 1: funds had a strict definition of what balanced was, and
• 27:06
  Speaker 1: then people couldn't play games around those numbers. What's your view?
• 27:10
  Speaker 2: Oh, look, the.
• 27:12
  Speaker 3: I think if you look at balance fund in the US,
• 27:14
  Speaker 3: I'll say it's a 60-40 fund. In Australia, it seems
• 27:17
  Speaker 3: to be a 70-30 fund, meaning that you're around 70%
• 27:20
  Speaker 3: in growth assets, 30% defensive assets. Look, I think that's
• 27:24
  Speaker 3: generally accepted in Australia. And the average Australian has done
• 27:29
  Speaker 3: very well by being invested in a balance fund. In
• 27:32
  Speaker 3: terms of standardizing definitions, I wouldn't be overly concerned about that.
• 27:37
  Speaker 2: I think they're It is different.
• 27:41
  Speaker 3: There has been different interpretations of what qualifies as a
• 27:44
  Speaker 3: defensive asset within that 30% component, but that's at the margin.
• 27:49
  Speaker 3: I think there's no perfect system, and I certainly would
• 27:52
  Speaker 3: not like to see a situation where a regulator is saying,
• 27:57
  Speaker 3: this has to be the number, this has to be
• 27:59
  Speaker 3: the definition, because we've got enough prescription with the Your Future,
• 28:04
  Speaker 3: Your Super test.
• 28:05
  Speaker 2: We certainly don't need any more.
• 28:07
  Speaker 1: Good. One last thing on that. Are we not all,
• 28:10
  Speaker 1: as Australian savers, pension savers, basically, are we not all
• 28:15
  Speaker 1: basically taking in more risk than they are in other
• 28:19
  Speaker 1: pension schemes around the world?
• 28:21
  Speaker 2: And isn't that been a good thing, James?
• 28:25
  Speaker 1: Thank goodness. It's been good so far.
• 28:27
  Speaker 2: It's been good so far. When you say so far,
• 28:28
  Speaker 2: it's been good for 30 years. That's a long period.
• 28:32
  Speaker 3: Now, why do stock markets rise over the long term, James?
• 28:35
  Speaker 2: It's because the world grows. economies grow, corporate profits grow.
• 28:41
  Speaker 3: So if you look at any long-term graph, it goes
• 28:44
  Speaker 3: from the bottom left to the top right. And so
• 28:47
  Speaker 3: why wouldn't people in superannuation be having a much higher
• 28:51
  Speaker 3: weighting to equities given the long-term nature of superannuation? And
• 28:56
  Speaker 3: that's not just for young people.
• 28:58
  Speaker 2: People that are retiring have still got 30 years to live.
• 29:00
  Speaker 3: So I would say Australians have been really well served
• 29:03
  Speaker 3: by having a higher allocation to growth assets.
• 29:08
  Speaker 1: Okay. Actually, segue is really good into something, the last
• 29:11
  Speaker 1: thing I want to ask you, which is about what
• 29:14
  Speaker 1: many of your big funds, like yourselves, have been under
• 29:17
  Speaker 1: criticism for being very good at basically accumulation and accumulating
• 29:22
  Speaker 1: investments for retirement, but not very good after retirement. I
• 29:26
  Speaker 1: wanted to ask you one thing just for our listeners.
• 29:28
  Speaker 1: You touched on it there, that you live and you
• 29:33
  Speaker 1: invest long after you retire. Traditionally, people used to sort
• 29:36
  Speaker 1: of bunker down on retirement and turn into conservative investors
• 29:41
  Speaker 1: at the age of 65. It sounds to me like
• 29:44
  Speaker 1: that's not what you would have in mind.
• 29:47
  Speaker 2: Absolutely not.
• 29:48
  Speaker 3: But can I just, I think it's a bit of
• 29:50
  Speaker 3: a myth that the industry hasn't served retirees well. 20
• 29:53
  Speaker 3: years ago, I was running Colonial First Aid, which is
• 29:56
  Speaker 3: a major retail fund. 30% of our business was actually
• 29:59
  Speaker 3: in retirement. a pension business. So we've been really serving Australians.
• 30:07
  Speaker 3: The industry's been serving Australians well for a long period
• 30:09
  Speaker 3: of time. If you talk to the average retiree and
• 30:15
  Speaker 3: ask them what they feel about Australian superannuation, I guarantee
• 30:18
  Speaker 3: you the vast majority of them would say they're very
• 30:21
  Speaker 3: happy with their lot. So I think there's a bit
• 30:25
  Speaker 3: of a myth that we haven't served retirees well.
• 30:28
  Speaker 2: In terms of Uniserv, we tick all the boxes.
• 30:30
  Speaker 3: We've got a comprehensive national advice business, and.
• 30:35
  Speaker 2: We've got general advice.
• 30:36
  Speaker 3: We do over 100 seminars, webcasts, and national roadshows every year.
• 30:45
  Speaker 2: And we've got the product suite.
• 30:47
  Speaker 3: We've got all the products that a retiree needs.
• 30:51
  Speaker 1: We'll give you the floor, and you've made your point
• 30:53
  Speaker 1: quite clearly. Very good. All right, just one last thing
• 30:55
  Speaker 1: before we go. So to investors, whether they're in big
• 31:00
  Speaker 1: funds or not, do you think they should actually keep
• 31:04
  Speaker 1: that investing, that growth aspect in mind always through your life,
• 31:08
  Speaker 1: that you don't bunker down to conservative investments on the
• 31:11
  Speaker 1: basis that you couldn't live for 30 years after 65?
• 31:13
  Speaker 1: Is that your view?
• 31:15
  Speaker 3: No.
• 31:16
  Speaker 2: Generally, that's my view.
• 31:17
  Speaker 3: But look, for some people, it really depends on lots
• 31:20
  Speaker 3: of other circumstances, James. For some people, volatility, it hurts.
• 31:26
  Speaker 2: That could be.
• 31:26
  Speaker 3: Just their risk appetite, but it could also be genuine
• 31:30
  Speaker 3: reasons that they need access to that capital to be
• 31:34
  Speaker 3: able to sell down to fund their lifestyle.
• 31:37
  Speaker 2: For those people, it's very much short term. I totally
• 31:40
  Speaker 2: get it.
• 31:41
  Speaker 3: But really, would that be the case for people certainly
• 31:45
  Speaker 3: under 60 or 65 and for a lot of people
• 31:49
  Speaker 3: that have just retired?
• 31:51
  Speaker 2: Okay. All right.
• 31:52
  Speaker 1: Very good. Very good to talk to you, John, and
• 31:54
  Speaker 1: splendid to have you on the show. Thanks very much
• 31:56
  Speaker 1: for talking to us today.
• 31:57
  Speaker 2: Absolute pleasure, James. Thanks for having me.
• 32:00
  Speaker 1: That was John Pearce, the Chief Investment Officer at Unisuper. Terrific.
• 32:05
  Speaker 1: I'm sure you'll have lots of questions about that. Keep
• 32:07
  Speaker 1: them coming. The Money Puzzle at theaustralian.com.au. Today's show was
• 32:13
  Speaker 1: produced by Leah Samaglou. Talk to you soon. Thank you.