Investing between the cracks
Australian Financial Review
15 February 2006

Sunsuper has formed a special alliance with Carnegie Wylie, writes Adam Courtenay.

At a time when most institutional investors are congratulating themselves for making easy money in a booming Australian sharemarket, it's refreshing to hear of one investing where most fear to tread.

Queensland-based Sunsuper is in the throes of increasing its exposure to alternative investments to a hefty 15 per cent, a proportion well above that of its peers, which tend to view areas such as private equity and global capital arbitrage as risk-laden and unmanageable.

Not so Sunsuper chief executive Don Luke, who firmly attributes the fund's generation of "alpha" - the returns above normal benchmarks - to its more esoteric forays.

Luke mentions areas such as macro hedge funds, currency management overlays and a diverse array of global infrastructure and private-equity plays as the main drivers of added value to the fund.

It was this inclination towards the "alternative asset space" that prompted Sunsuper to align itself so closely to boutique financial services firm Carnegie, Wylie & Co, which has a reputation, he says, "for investing between the cracks".

In December the $8.2 billion industry fund announced it would take a 5 per cent stake in the Melbourne firm and commit at least $200 million to two of its opportunity funds. Luke seems to have upped the ante since and is now talking about a $300 million total outlay.

Luke says the Carnegie Wylie philosophy of seeking out assets ripe for arbitrage was a perfect fit. He was also impressed by Carnegie's commitment to invest 10 per cent of its own money into the funds.

Taking the 5 per cent stake was more symbolic of the alignment than a practical investment, but would also help Sunsuper to maintain due diligence on the firm.

"Most Australian houses dealing in alternatives tend to be either infrastructure-oriented or private equity," says Luke.

"Carnegie Wylie are different. Their deals seemed to fall somewhere in between these areas. They cannot be boxed into any one category."

In the two months since the partnership began, the Carnegie funds have made a number of small but diverse forays. These include a $3.8 million investment in US company Guidant Corp - a takeover opportunity - a $2.5 million "distressed debt play" on an unnamed listed Australian company and a small investment in the Hunter Valley-based Bluetongue Brewery, to help the business expand.

All the same, Luke says he's not betting the bank on Carnegie or on alternatives as a whole. Nor has he forgotten that listed markets still form the basis of wealth generation for its members.

Sunsuper is relatively light on Australian equities at about 32 per cent of its assets, compared with an industry average closer to 40 per cent.

"The strong run in Australian equities has been one big driver of performance for most funds, but you do need to diversify in this kind of environment," he says. "That's why we're even more delighted to have done well even though we were underweight in that sector."

In calendar 2005, Sunsuper's balanced fund achieved a 15.1 per cent return and over three years 13.2 per cent, according to Intech figures. This places it in the top 30 per cent of funds in both periods.

Over five years it fares better - it is in the top 15 per cent of balanced super funds, returning 8.3 per cent compared with the Intech median of 7.1 per cent.

"It means we have to look even closer at the deals we do to ensure that the returns will outweigh the costs."

Like most super fund bosses, Luke would welcome the removal of the super contributions tax, which is now being discussed within government circles, but he doesn't believe the system as a whole needs to be overhauled.

"Generally, I think the super regime is very good, even though the tax situation in Australia is not very generous compared to other countries.

"There's no doubt it would be a huge boost to people's super if they removed the tax and I'm all for it. The government would also be relieving itself of a very real underfunding liability."

Sunsuper has been a big beneficiary of the new super fund choice regime, both in terms of asset and membership growth.

Two years ago, it had about $3.5 billion in assets. It's now nudging $8.5 billion.

Industry researcher Rainmaker recently reported that Sunsuper enjoyed the biggest increase in member numbers - about 35,000 - of any fund in the six months from the introduction of super choice on July 1, but Luke says this figure is unreliable.

However, he confirms that the number of new employers joining its ranks has grown strongly - a 9 per cent increase in the period to about 60,000.

Much of this rise can be attributed to the Australian Prudential Regulation Authority's tough licensing rules, which have prompted many small to medium-sized funds to merge with their larger brethren. But he is unapologetic about the death knell of so many smaller funds.

"A few years ago, people used to think they could put together a fund, make a few investments and run it part time. But we've moved well beyond that," he says.

"People say the compliance now expected is too hard - but I think APRA had to tighten up. This is a very serious business and we have to be superb at what we do and we need lots of qualified professional people to look after people's money.

''You can't do it OK - you have to be brilliant at it. This is people's financial futures. The tightening of regulations and the tougher licensing is a good thing and should have been done years ago."