Despite the challenging landscape of high inflation and ongoing geopolitical tensions, the head of investment strategy at the $260 billion fund suggested the fog may finally be lifting, presenting an opportune moment, “for the first time in a very long time”, to allocate capital towards growth assets.
Unveiling its performance for the financial year 2023–24 on Monday, Australian Retirement Trust (ART) announced its balanced option delivered a return just shy of double digits at 9.9 per cent.
Meanwhile, its High Growth option, now the default offering for members under the age of 50, delivered its second consecutive year of double-digit returns at 11.3 per cent.
The High Growth option comprises nearly 85 per cent of growth assets, encompassing Australian and international shares, as well as some unlisted assets and alternatives such as private equity.
Speaking to Super Review, ART’s head of investment strategy Andrew Fisher said that equity returns, particularly from global markets, were the “biggest single” driver of growth over the past year.
“It’s been a market in which we wouldn’t necessarily expect equities to perform quite so strongly, particularly given some of the inflationary pressures that are still coming through markets,” Fisher said, adding that strong returns from equities were met with outperformance from some parts of the unlisted market, as well infrastructure.
Areas that didn’t meet expectations included real estate, which experienced a “marginal negative return” for the year and was the lowest-performing asset class.
“It was a really good outcome in a market where a lot of other real estate portfolios were doing a lot worse than that. In absolute sense, real estate has been one of the more challenging places to invest in over the past year,” Fisher said
Looking forward, Fisher said the outlook looks “pretty constructive for economic growth”, which translates into an environment conducive to growth assets.
“I think one of the best parts of the environment we face right now, and looking forward, is the fact that, for the first time in a very long time, we’re sitting here looking forward in an environment where equities feel relatively appropriately valued, risk premiums look reasonably well rewarded in equities, interest rates are about right, bond yields are fairly attractive and on top of all that, you have inflation moderating at a global level,” Fisher said.
“Inflation moderating tends to be a pretty conducive investing environment, so while it feels hard to invest and it feels risky, most things that we look at would actually suggest this is a pretty good, conducive time in the market cycle to be investing in growth assets.
“That gives us some comfort,” he said, adding that the current time is a “conducive time in the market cycle” to invest in growth assets.
Looking at specific growth assets, he observed US equities still look “reasonably good”, emphasising that the US has successfully navigated through the inflationary environment at a macro level.
At home, he said Australia remains a little behind in its fight against inflation and ART maintains its base view of a higher-for-longer scenario. As such, Fisher doesn’t expect the domestic market to drive returns over the coming 12 months.
“We don’t think the RBA is in a position to want to raise rates from here, we think it’s more likely that the RBA just maintains the current setting for longer than the market might anticipate,” he said.
“That’s likely to be a little bit of a drag on a relative basis, on growth here versus growth offshore.
“But all things considered, we think the outlook for growth [assets] is reasonably constructive.”
Identifying opportunities
Reflecting on where the fund is seeking opportunities, Fisher cautioned against following obvious trends and emphasised the importance of specificity in the search for investment opportunities.
Namely, digital infrastructure, he said, has proven to be a “hot area” to be invested in, however, its rapid price growth raises questions about its sustainability.
“One of the challenges is when things are really attractive and exciting, then demand outstrips supply, so it’s not just growth, it’s growth at what price. And so, if it’s a growing sector, what price are you paying for it?” Fisher said.
“Sometimes, good investing is going to find a thing that no one else likes, and pre-empting where the future will take it.”
But price consciousness doesn’t mean ART is averse to big thematic trends, Fisher said, rather it prefers more lateral plays over expensive opportunities.
“The thing you learn over time is just because there’s a big thematic trend playing out in markets doesn’t mean you can’t still make money from that trend,” he said.
Regarding artificial intelligence, Fisher said that while Nvidia may be an obvious choice, the ancillary services supporting its growth are less apparent.
“If you look at artificial intelligence, for example, the first phase is buying Nvidia, that has been done to death. But then there’s data centres that support Nvidia, which have been a really lucrative sector here, and there’s the ancillary services to support data centres, like some of the best investments people have made are air conditioning companies that service data centres,” Fisher said.
Despite its overall underperformance over the past year, Fisher highlighted potential opportunities in real estate within three to five years, particularly in sector-specific investments like student housing in Norway, retirement living in the UK, and self-storage in the US, rather than broad-stroke investments.
“I think, given the challenges that the real estate asset class has faced over the past few years, the mean reverting bias in me would like to think that’s probably an area of opportunity over the coming three to five years,” Fisher said.
“I know the team is really thinking ‘this should be one of the opportunities that you don’t see very often in that space’ and applying a lot of time and energy and making really good decisions now is going to bear fruit for three to five years forward, I expect, from the real estate sector.”
