He manages $120 billion, what keeps him awake?

Hello, and welcome to The Australian's Money Puzzle podcast. I'm James Kirby, the editor at The Australian. Welcome aboard everybody. Have you ever wondered what it's like to manage or run a lot of money, say one hundred and ten billion dollars for instance, with maybe two million people or so, depending on you. I wonder how you might sleep at night, Not just that, but the responsibility of managing that money

Well, Thanks Joon, Thanks for the opportunity.

Great to have you. Great to have you on the show. You might think I have lots of fund managers and super fund managers on the show. I don't. I don't, Sam, but occasionally I do when they're particularly interesting and host plus is particularly interesting, you might just it would be nice to introduce you to the listeners, many of whom would be in funds, some in your fund, some in running their own funds, and much younger listeners on the

This is year sixteen, that's right?

And how much did the fund have the day you walked in the door?

It was seven point six billion.

Dollars and today it's one hundred and ten.

Actually it's one hundred and twenty.

But who's quippling one hundred and twenty, give or take ten billion. I want to talk to and I want to put it to the audience, because the first thing, if they don't know you and what you do, what is it? What is it like? Is it something that you. I know, I'm sure you have protocols and models and routines, but there must be times where it is more demanding than others managing that amount of money for that many people.

So we have close on to two million members at host plus, average age thirty seven.

So not retiring, I'm sue.

And the reason and why I begin there is because we really need to establish as investors, whether it's a super fund investor or whether it's the listeners that are listening to this podcast at the moment, you do need to establish what type of investor you are in order to make appropriate comparisons. I think let me leave it with that teaser.

At the moment, and I'll come back to that.

But it matters, and I wanted to spend a bit of time today, if you indulge me, to basically argue that what really matters for long term superannuation investments?

So what is the objective here? The objective is to provide.

A retirement balance, so maximize returns over a working lifetime which is likely to be closer to fifty years. Maximize that return while at the same time controlling for risk. And even though those words are thrown around, if you are truly a long term investor. The models to which you speak.

Are far less useful than some.

Other investment tools and investment beliefs, and so while it's a responsibility to do that, we can't lose sight that these are compounding returns over a lifetime, vastly different to single year returns.

It's interesting you said the average age in the funders thirty seven, which the point you're making there, of course, is that's pretty young as funds go. As Super fund school, the average age on our service early service we did a year or two ago on the show, was that the average listener was thirty five. So very similar, so very similar cohort in terms of who's listening, and your cohort, which happens to be that nearly two million people and they're super is in your control.

Now.

I know you make this point, and of course it's a crucial point about long term investing, but I'm old enough to know that the emphasis or the information flow,

So again, let's look at that.

A twenty year return is a series of twenty one year returns.

Right.

All we're saying is you can't get access to your money for retirement, if that's the objective. You can't get access to it. All our splitting equal until you retire. And so look at how long that runway is for you. Is it thirty years because you're currently thirty five, or is it five years because you're currently sixty? Even the latter Super was designed at a time time when people retired at sixty five and conveniently died at sixty eight.

Yep, so the emphasis is changing and on you too, right, tell us about that. How your funds like you? The whole thing was to amass money for people in retirement and the pressure is changing now, isn't it as the whole system grows as Australian age to provide deeper into retirement. Does that mean any change in the investment approach when the people between sixty and ninety compared to thirty and sixty.

That's a great question.

So let's break it up using the terms the accumulation phase followed by the accumulation phase. The question is we know when accumulation happens normally between during your working life, when you're contributing to super, your employer is contributing to super, or you are, and you get to a certain stage that you would call retirement, and then you will decumulate

Sure? And is that accumulation? Is that opponent? Is that getting bigger and more important?

It's getting bigger and more important because of aging demographics. This is a global problem, not just an Australian problem because of the aging demographics. But there's a lot of good people turning their good smart people turning their minds towards how do you solve for longevity from a a need to have income during that period of time. So a lot of good work is being done there. There are increasing products available that protect you from market volatility,

Of running out of money well before.

Their health runs out or well before their lifespan mons out.

Is there anything people listening to this show can do about that? Now? At their agent we take it at the average ages thirty five?

Sure, So again let's separate superinnuation wealth creation in superannuation and wealth creation outside of superannuation. If you can, you should do both. Right, wealth creation inside superannuation, there's a superannuation guarantee. There's a certain amount it gets contributed on your and invested on your behalf, and that's the bit that compounds until you get to a retirement agent, or at least under the current legislation. Right in outside of superannuation,

You qualify you reach retirement age.

But non super money you can get access to it at any stage you wish. So if you can do both, why wouldn't you do? And implicitly we do. We purchase a home, perhaps purchase other assets and investment property or art or whatever it is it that you believe will appreciating value, and that's wealth accumulation outside of super emulation. So I think the two are vastly different. Why because the time horizons are different.

If people were replicating outside Super sam is. I often wonder if we often cover and people often correspond and say, oh, I've been looking at a future fund, or I've been looking at Australian Super host plus or whatever, and I

Okay, so perhaps by way of example, last financial year, slightly more than thirteen billion dollars flowed into host Plus. It's gross, so there are out benefits, deaths, transfers, et cetera. Close to somewhere between seven and eight billion of that thirty is net. In other words, it needs to find an investment home. So we bat, if you like, with seven billion dollars, we can take advantage of every opportunity that we believe.

We want to that is desirable.

Right personally, I don't have that capital, and therefore I would behave differently. I can't replicate as an individual as Sam Secilia. I can't replicate what Sam Secilia the CIO can do inside of host plus.

Are there certain assets you just can't get at as the as an individual?

Interestingly increasingly no, you can get access to unlisted assets airports, toll roads, shopping centers, logistics, et cetera. You can buy slices of those. You can buy slices of them that are listed on an exchange, but that behaves vastly differently to the unlist The underlying unlisted asset that's illiquid, and so it's your ability to tolerate illiquidity that's the problem.

For the listener. Can I just try and work this out with you? And I think it would be very good example, and it's really good that you've brought it up. Airports listed and unlisted this is and listeners, if you're not familiar with the bigger debate out there, the big funds have explored, including the Future Fund, have explored unlisted assets. Right, I'm always talking about this. They're not listed on the share mark. This is an essential point. They are behind

But behavior you're referring to the valuation of those airports not Yeah? So yeah, So the answer to that is yes. So the real question is what is the underlying root cause of the different behavior.

So let's just do an example. Take Melbourne Airport, Perth Airport.

These are unlisted vehicles, unlisted assets rather and if you think about the operation of an airport, you get paid when the aeroplane lands, you get paid when the aeroplane takes off.

That doesn't happen.

During COVID because there were no departures and arrivals. So if you are a long term investor, you have to believe that one day that airport is going to go back to functioning. Because it's illiquid, you can't sell it, which perversely is a good thing because if you could sell it, no buyer would buy it off you at its current valuation. They'll say, well, if you want to sell it now, I need a sixty percent discount to

Over the world.

So public markets or public markets are a very small.

Part of the overall economy.

Nearly ninety percent of the world's assets are unlisted. Shopping centers, buildings, logistics, warehouse facilities, can accommodation I can just keep medical officers. Your house is unlisted. All the residential properties are unlisted globally. I imagine how many of that do compared to what four hundred stops on the asx two thousand stocks on the US stock market. It's like a handful of assets

It's cleaner that way.

No, Well, I'm glad to hear it. So just finally on that so as listeners would, and as you've articulated that idea, that advantage and the distinction of the big FONT is that it can go into unlisted assets, and you, as a private investor or as an SMS if you can, but it's very difficult to really get in there. And ironically, the main window of late is perversely on listed markets, which by definition are onlisted assets on listed markets it's a bit of an oxymoron. I just want to ask

The short answer is no.

The rationale behind is that if you cut out all the unlisted assets, what's left is equities, listed equities, passion bombs, three asset classes compared to ten or so if you venture into unlisted markets, unlisted infrastructure, unlisted real estate, credit, private equity and venture capital or unlisted asset classes and so you want to be as diversified as possible, because that's your one ticket to mitigating market risk.

But as diversified as possible.

Okay, very good. We'll take a short break, folks. We'll be back in a moment. I want to talk to Sam about more topical issues. But that was a very good introduction to his view of the world, which is always worth hearing because not just as I said that he runs a large amount of money, but he is the top fund managemer in the nation over a ten year period. Okay, back in a moment. Hello, Welcome back

There's a lot of short term noise and if you lose sleep over that short term noise, you.

Might life hard for yourself at superanuation fund investor.

So if you have a good long term investment strategy defined, and you have solid investment beliefs and you are able to stick to both of those long term investment strategy investment beliefs, then sleeping at nights pretty easy.

So let's have a look at some what am I talking about.

Let's talk about inflation, interest rates going up. Yes, very painful for individuals myself included, but not very painful for a twenty year investment horizon investor in a superfund lose no sleep over inflation or interest rates personally, lose a lot of sleep about individuals. There's a lot of pain out there, but the superfund still Ask yourself this, why is it that every year there's a forecast of doom and gloom, and every year somebody comes out and says

I'm not worried about inflation or interest rate for the super fund.

Right the assets are often inflation linked if their infrastructure. There's parts of the portfolio that wins, and there are parts of the portfolio that loses, no matter what's happening.

On the plant. So what do I lose sleepover?

There's probably one scenario that worries me a lot, and that's it's a potential byproduct of all of the things that I've mentioned, inflation, interest rates, a war, climate change. When take climate change, for example, if climate change spooks enough people and they start to move because their current land is insufficient to grow food. If that were to happen, where do they move to someone else's land? There's no

Can I just quickly on that issue, on the broader issue of EESG environmental, social and governance issues, which were front and center and so dominant for a few years and now there seems to be a backlash against it. There is a backlash against it, probably because it definitions and standards. That's the main reason, I think. But where do you come from on that? What is your stance on that as a manager of a fund.

So again, let's separate personal views from the being the check investment officer of the super right, our primary purpose is to generate a financial return for our members while mitigating risk. So what kind of risks have an ESG flavor?

Right?

So you would remember many years ago when Nike was using child labor to manufacture shoes and there was a consumer backlack, a backlash, a boycott that results in the share price of Nike falling. That is a threat to the to the investments we have. So we need to make sure that companies are behaving in a sustainable.

Way to protect their share price. These are not ideological positions. That can be, but that would be a personal view.

But as a superannuation CIO, I'm more concerned about the share price and make sure you're not behaving in a way that would adversely impact that share price.

And part of that is you actually legally bound on that, aren't you Some with the sole purpose set on superannuation.

Yes, we need to make sure that what we do acts in the everything with what we do acts in the best financial interests of our members.

But there are derivatives.

Right, So the derivative there is obvious is stopping that example, I'm going to have to labor it a little bit more, but asking Nike to change their behavior because it threatenier downstream, It will threaten the share price and therefore our member's best financial interest. So the next access to the member's best financial interest taste should be clear. If you need to sit there and scratch your head and wonder why, then you're not doing it for the right reasons.

I'm going to get Sam to stay with us and go through some of our listeners questions, which should be very interesting. We'll be back in a moment. Hello, Welcome back to The Australian's Money Puzzle podcast. I'm James Kirkby,

Cool So, the investment team at host plus and the host Plus's advisors, that Financial Investment Advisors JAA, and the board get briefings about a whole set of things that are not directly today impacting the decision to put a dollar in a market or an asset, pending demographic changes, declining demographics in China, but accelerating demographics in India. So the natural question that comes out of that is should we add more to China, take away from China, should we start investing in India?

Should we put more in India? Is now the time to do that?

Or we're waiting for other environmental factors to come into place. I think all of those things are important considerations for any investor, whether it's inside super or outside of Superowl.

Okay, yeah, and do you the specific question was do you think the decline of developed populations what's the impact they will have on global markets? Is there a theoretical big picture answer that would come to mind.

We saw the countries that come to mind, Japan and China with deteriorating demographics, put stresses and stragons on those as economies. In order to function, they need more people of working age. Equally, the social security issue, that is, how do you take care of a much older population that again is living longer. It becomes a political problem, and those political problems ultimately impact the companies that are operating in those countries and ultimately has the possibility of

Us, that's their problem. Very unwise as an investor to understand it.

Even if you can't directly make an assessment of it today, you begin to understand it.

Okay, all right, question from Donna. This is not the sort of question that you'd get now on at your high level investment committees. But it's the sort of question I guess, and I'm really interested to see you would answer it. Donna says, I'm new to the stock market. I want to know if some shares can defy the stock market and retain or increase in value even when the majority of stocks have declined. Now, that's a question that you would probably ask when you're new to share

So it depends on which markets we're talking about.

In some markets, especially emerging markets, the bottom up approach is that we favored by most of the investment managers.

We would't use they're on the ground.

You need to go kick tires in India to purchase an emerging company. In developed markets, you can have a top down view because there are certain events happening in the economy, certain parts of the cycle, which would be more favorable.

To some companies and not others.

For example, in times of low interest rates, all companies do well.

Small companies do well.

But when interest rates start to hop to rise, small companies have difficulty servicing that debt and they would be expected to suffer more So that kind of high level analysis makes a lot of sense. Having said that, if you are an individual and you are new to the stock.

Market and you are thinking of buying companies.

That define the market overall, the answer is they actually exist. Unfortunately, it's not the same company every time. And what you then need to do is know when to time marks to go in and out. And unfortunately, market timing is a loser's game. You need to be there when lightning strikes if you learn the game of going in and

And see what happens after twenty years.

But if your time horizon is only one year, then you are setting.

Yourself up for disappointment. There is no quick path to getting rich.

All right, I've got a final question. I'm going to take the one I think here from David, we often hear there is enough evidence out there to say that ETFs are index funds exchange treated funds, as that acronym suggests, regularly outperformed fund managers. However, we then hear, if you're looking at small caps, it will be better to go with the fund manager because they can get in there

Yes?

Okay? And then this whole theory that active managers can't beat passive managers. So someone might say, I wonder if the big super funds simply ran index funds where they do as well. And I'm sure the invest the ETF sellers and the index funds sellers out there would talk like that, what do you say to that core suggestion that passive investing wins in the end and beats all active managers over long periods of time.

So in listed markets you could mount that argument, But there are there is no passive strategy for airports and toll roads and seaports and buildings in infrastructure, in private equity, in venture capital, in credit, so you miss out on a substantial portion of the market. Right, You could buy an ETF that is that has exposure to the listed versions of all of those, but that behaves very differently

Why how do we know this?

Well, because if you look at these small company index there are years where most of the managers outperform that index.

How can that be right?

And the answer is because the index has everything in it, and those managers have some skill at picking out smaller companies that are behaving in a particular way that's consistent with their own investment beliefs, and believe that the share price will go up faster than would otherwise.

Be the case. So the's horses for courses.

There are times for passive strategies and areas that you would do passive management index funds, etc. And there are areas where you just can't do that, and therefore you have no choice to either do active management or miss out altogether.

Okay, very interesting and as David says, there is all sorts of rubbish health there, which is what the active manager is supposed to dodge. But as some are saying, it's really only applicable. Even the debate is only applicable to listed securities and as he mentioned at the start of the Shield, the vast bulk of business activity commerce in the world is not listed on the share market. Really interesting to talk to you today, Sam, great to

Thank you Jones.

That was Sam Cecilia folks. He is the chief investment officer at host Plus. Do send some correspondence in love to hear from you. The money puzzle at the Australian dot com dot au is the email do mention us to someone you know mentioned the show. We would love to spread the word. Maybe mention us to one person and we will be talking to you soon.