John Pearce Thinks Nothing Can Be Ruled Out

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“What the Global Financial Crisis (GFC) has done is make everyone aware that nothing can be ruled out. We have got a heavier focus on liquidity management and currency management. We do currency overlay ourselves. We have a hedging policy in place and it varies depending on the nature of the underlying security or asset. For example, we will hedge global fixed interest 100%, whereas with global equities, we have a more dynamic hedge. We see the rapid rise in the Australian dollar without a commensurate rise in the terms of trade or structural adjustments required by Australian industry as a huge risk. What we’ve done basically is target a fairly tight cap on illiquid assets. We grade our liquidity and, for those assets that we consider generally illiquid—for example, we couldn’t divest them within 12 months without taking a material discount—we like to limit the portfolio to about 10%. It’s something that I’ve been personally heavily involved with because I do believe that the markets are not priced for risk for illiquidity. The premium that should be achieved is not being achieved. Setting a certain target or an allocation to a certain asset class and then saying ‘Let’s look to fill it up’ is fraught with danger. If a terrific asset is available at a reasonable price—that’s when we will look at it. The Wonthaggi desalinisation plant [UniSuper is an investor in AquaSure, a consortium building a AU$3.5 billion project in the state of Victoria], we thought was very attractively priced, because at the time we were still in the throes of the GFC, and we felt that the uncertainty was leading to a nice premium that we were happy to take. The Government’s commitments around infrastructure development will be very marginal. The first aspect is that everyone thinks of superannuation as this very long-term pot of capital that we all have to invest, but the reality is that the vast bulk of super money in Australia is subject to weekly or monthly switching or redemptions. Once you’ve got that inbuilt into the system – as the Government effectively did with choice of funds and mobility—your capital isn’t as sticky as everyone thinks it is. The second thing is: If you look at the history of infrastructure investment in Australia, it’s not that good. The big winners are the early adopters—when we had the privatization of the toll roads, you had a situation there where nobody ever really knew how to price it. You have to get back to a situation where the market has to get onto an even keel. To an extent that there is a lot of tail risk on projects, the Government has to pick up some of the risk. I can’t see any way out of it with the current public-private partnership structure. The Government has to say, ‘We want you guys to take the risk of construction but, if you get it up and ready, we’ll pay you an income stream’.”