In December 2016, AustralianSuper made one of the biggest infrastructure investments ever in Australia when, with IFM Investors, it acquired a 50.4 per cent stake in electricity distribution and transmission business Ausgrid from the NSW government. You may have read about the acquisition in the November 2016 issue of SuperBusiness.
Ausgrid delivers electricity to around 1.7 million homes and businesses in NSW, and its network covers over 48,000 kilometres of total circuit and AustralianSuper now has a $2.2 billion direct equity holding in the 99-year lease of Ausgrid.
You might be wondering what electricity wires and poles have to do with super.
Infrastructure investing is an unlisted asset class that diversifies the returns from listed asset classes, such as shares, and fixed income assets like bonds. These returns can provide members’ super with what could be called insulation: by delivering growth and income when other asset classes aren’t performing well.
“We’ve been investing in infrastructure since the mid-1990s, although early on it was generally through fund managers,” says head of infrastructure at AustralianSuper Nik Kemp.
“About four or five years ago we expanded our in-house team and started investing directly.”
Along with Ausgrid, some of AustralianSuper’s larger infrastructure holdings include direct stakes in Transurban Queensland (a network of toll roads) and NSW Ports.
What we look at
The role of infrastructure across AustralianSuper’s broader portfolio is to provide steady investment returns through most economic cycles.
“Generally, we look at core infrastructure assets, which have lower volatility and lower risk,” Kemp says.
Core infrastructure assets are those which keep the country running, such as airports, ports, and regulated utilities.
AustralianSuper’s infrastructure team assesses hundreds of opportunities each year, and of these, only pursue a select few of the more attractive ones.
“We do look around the world in core geographies – North America, Australia and northern and western Europe,” Kemp says.
“We then take into consideration the competitive dynamics, why the asset is being sold and the quality of the investment.”
Like most asset classes, infrastructure returns can fluctuate depending on the phase of the economic cycle. During a growth phase, listed shares tend to do better; when the economy is taking a downward turn, fixed interest often outperforms. Last year AustralianSuper’s infrastructure portfolio was its best returning asset class, which was partly due to an environment of low and stable interest rates.
The big advantage of AustralianSuper’s size is that it can invest directly in infrastructure assets. This has a number of benefits: AustralianSuper can buy and sell assets at times of its own choosing, and there is also a cost saving of around 1 per cent of returns because it doesn’t have to pay a fund manager to manage the asset.
AustralianSuper has built a strong cross-functional team, which consists of around a dozen people dedicated to infrastructure origination, and a team of internal legal and tax experts who assist in the due diligence of potential opportunities. The Ausgrid acquisition, for example, had around 20 to 25 people involved in the transaction.
Kemp says it was AustralianSuper’s size and capability that got it in the door for that purchase in the first place.
“The NSW government’s acceptance of our unsolicited proposal was a sign that they recognised AustralianSuper’s size and capabilities,” he says.
Asset prices in the infrastructure space are relatively expensive at present. As a result, AustralianSuper may not expand its infrastructure portfolio as rapidly as in the recent past. But it continues to keep an eye out for exceptional value.
AustralianSuper members can access infrastructure through our Balanced, High Growth, Conservative Balanced, Capital Stable and Socially Aware PreMixed options.
Want to know more?
Find out more about AustralianSuper’s investment approach.
Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.