MTAA responds

The central contention of Scott Francis' article Why MTAA's wheels fell off is that poor returns for MTAA Super in 2008-09 and early 2009-10 mean the alternative asset model is flawed. His analysis is shallow and his conclusion unwarranted. He secures his contention on short-termism.
There are a number of reasons (set out below) for reaching the view that, notwithstanding the GFC, MTAA Super’s investment strategy is most likely to deliver strong returns over the long term.

While the GFC is far from over, it is increasingly likely that the end of the first week of March 2009 marked the low point for listed markets. Listed markets have picked up ahead of valuation gains for alternatives. Nonetheless, over the decade to 30 June 2009, MTAA Super’s alternative assets generated a return of 11.2% per annum, approximately 3.7% per annum more than the return for Australian equities, 14.2% per annum more than overseas equities (unhedged), 5.0% per annum more than Australian fixed interest and 5.5% per annum more than cash. Over this period, the standard deviation for MTAA Super’s alternatives was midway between that of Australian fixed interest and listed equities. As a result, the overall risk for MTAA Super is below the median of balanced funds by a useful margin.

That is, over the past decade to 30 June 2009, which includes the ravages of the once in a lifetime GFC, alternative assets have performed exactly as expected by the alternative assets model.

The two hundredth anniversary of the birth of Charles Darwin happens to have coincided with the most severe global financial crisis (GFC) for 80 years. One of Darwin’s most powerful dictums was that “It is not the strongest of the species that survives '¦ nor the most intelligent that survives. It is the one that is the most adaptable to change.”

For decades, superannuation funds in Australia invested in cash, fixed interest, listed equities and maybe some unlisted property. Indeed, that was how MTAA Super invested until things began to change in the mid-1990s. The most important change was the emergence of infrastructure as an asset class. MTAA Super made its first infrastructure investment in Sydney’s Eastern Distributor in 1998 and, as such, was one of the first funds in Australia to invest in infrastructure. Prior to that, there were simply very few opportunities to invest in infrastructure. Similarly, private equity, hedge funds and commodities emerged as investible asset classes only in relatively recent times.

Early on, MTAA Super and some other industry funds, recognised the attraction of investing in infrastructure. Infrastructure assets vary but often involve concession arrangements that run for decades, commercial activities that enjoy some degree of market power (sometimes actually coming with protections from competition as part of the concession), with prices charged sometimes set by a regulator, generally with CPI protection and public patronage driving real growth. In short, these assets generate long term cash flows that can be expected with a high degree of confidence, that grow in real terms and produce an average cash yield over the longer term that is better than fixed interest. For a generational investor, that’s precisely what’s needed by it.

In interpreting funds’ performances it is important to recognise that, while commentators refer to 'the’ alternative asset model, in practice there is no single model. To propose as Francis has, that MTAA Super has a such, single one, is just self-serving. We don’t. All our acquisitions are rated on risk/return, quality, sustainability and durability of return and duration of these. In reality, there are myriad ways of investing in alternatives. Even among funds that have adopted alternative assets, the allocation to listed assets versus alternatives varies from fund to fund, the allocation among alternatives varies, the individual asset selection varies, the method of investing (direct versus pooled funds) varies, the proportion going into greenfield versus brownfield varies, return objectives vary, the vintage of investment varies and the fees paid vary. And similar variations occur for the listed assets and overall risk settings and currency hedging arrangements.

MTAA Super adapted to the opportunities that emerged for investing in alternatives in the second half of the 1990s by making meaningful allocations to alternative investments before any other Australian superannuation fund, with perhaps the exception of UniSuper and Australia Post, and more comprehensively and consistently than any other fund. While MTAA Super has been the leading edge exponent of alternative assets, industry funds generally have seen the benefits of investing in alternatives. Most retail funds have been slow to invest in alternative assets. While this situation is changing (that is, more retail funds are making allocations to alternatives than ever), MTAA Super’s willingness to adapt to change has served its members very well.

MTAA Super’s Growth Option was the top ranked fund and its Balanced Option ranked in the top quartile in the year to 30 June 2008. It has also been a consistent top performer over longer term periods, which most observers regard as more meaningful than the short-termism of your correspondent Scott Francis of last Friday. MTAA Super was the top fund over the rolling three years to 30 June 2008 it was also top fund over the rolling three years to 30 June 2007; and top fund over the rolling three years to 30 June 2006. This consistent outperformance made MTAA Super the top fund in Australia over the rolling 10 years to 30 June 2008.

Last financial year MTAA Super was the worst performing fund in the SuperRatings survey of major funds (but not of all funds at large). Does this prove the alternative asset construct is broken as proposed by Scott Francis? Hardly! The rationale for investing in alternative assets is that alternative assets are more likely to generate higher returns than the listed asset classes, with a level of risk that is higher than fixed interest but less than listed equities. Over the course of the GFC alternative assets have mirrored the movement in listed equities, whereas in the dot.com crash alternatives continued to generate double digit returns.

The key to successful adaptation is the ability to distinguish between true and false signals of a change in the environment. The GFC was undoubtedly a tough time for alternative assets. If we thought the GFC was heralding a new environment characterised by extreme risk aversion, permanently wider credit spreads and the drying up of liquidity, then MTAA Super would adapt its current model. However, we are more inclined to the view that the GFC was entirely unique – a once in a (long) lifetime event. We are basing our investment strategy on the basis of a gradual return to normal; not on the persistence of the freakish and unique conditions of the GFC. The only safe havens in the GFC were cash and government bonds. If we are correct about the longevity of the GFC, these asset classes will not generate returns that will satisfy members when conditions return to normal. Moreover, if conditions do return to normal, it is likely that alternative asset valuations will lift compared with valuations at 30 June 2009.

Lest MTAA Super be accused of being fixated through its continued adherence to the alternatives asset model, I will conclude by making clear that MTAA Super is putting major effort into making sure it learns the lessons that should be learned from the GFC and incorporates them into its strategy. It is a fallacy to think of alternatives as static. They never have been for MTAA Super; and we have frequently adjusted over time to our great advantage. Rather, the markets for alternative assets themselves are forever changing as opportunities and government policies change. For example, when MTAA Super started investing in alternatives virtually all investments were domestic. Over the last few years they have virtually all been offshore.

The inconvenient truth we all have to live with is that there is no asset allocation that performs well in every investment climate. It is also very difficult to predict asset class returns from one year to the next. The reality for investors is the need to select a strategy that involves what they consider to be the optimal trade-off between risk and return. MTAA Super has shown that the alternative asset construct is optimal in most investment climates. As the investment climate improves, the world class assets in MTAA Super’s alternatives portfolio will respond positively.

Ten and 20 years tell the truth and completeness of performance. The source of outstanding performance over that time will be the cause of recovery of that by MTAA SF and its like peers.

The thing is, in a better metaphor than wheels and with better factual content and without the self-interest, Francis is the sort that would charge a fee to tell a house owner to sell the house because its assessed value had fallen; even though a roof overhead was still unavoidably necessary, such that a loss would occur, buying back into housing would probably be impossible because of the crystallised loss and the increase in price of another home.

The truth still is the long term is the only true measure of investment performance. One point, taken in a Polaroid instant snap of these things, in the extraordinary circumstances of once in eighty years, does not the longer term story tell.

Michael Delaney is principal executive officer & fund secretary of MTAA Superannuation Fund Pty Ltd.