Alternative assets provide attractive benefits for building diverse portfolios.

Alternative strategies include allocations to a range of strategies with a focus on yield and capital preservation and opportunistic capital appreciation. These strategies are primarily focused on private debt and implemented through a combination of unlisted and publicly traded assets.

Our ability to maintain higher exposures to alternative asset classes in general, and unlisted assets in particular, is underpinned by strong, reliable net cashflows into the fund, averaging over 760 million per month in net inflows over the last 12 months¹. These cashflows come from a relatively young membership making compulsory superannuation contributions and, on average, many years away from drawing down on their retirement savings.

Maintaining substantial allocations to alternative assets allows us to build diversified portfolios that aim to deliver strong long-term real returns, while being less exposed (although certainly not immune) to the short-term volatility of global share markets.

Real estate

Australian Retirement Trust’s (ART) real estate portfolio invests in a range of institutional-quality assets, both within Australia and globally. Institutional-quality investments typically include office buildings, retail shopping centres and industrial warehouses but can also include residential, hotels, retirement villages, healthcare, education, leisure, self-storage, data centres and land.

Exposure to real estate is direct and via institutional funds. Investments can also include property operating platforms that both own and operate property assets. We also invest in real estate-backed debt securities in the US, UK and Europe.

Under normal market conditions, the real estate portfolio seeks to provide returns between that of listed shares and fixed income that are also positively correlated to inflation. Returns from the real estate portfolio are expected to be largely from rental income rather than capital gains. We invest in developments only when the risk-adjusted returns are favourable, given our preference has been to invest into established properties with a reliable rental income stream. In 2016, we invested alongside Mirvac and AMP in the South Eveleigh office development in south Sydney. With the Commonwealth Bank as the long-term anchor tenant, the development risk was reduced.

Infrastructure

Infrastructure refers to the fundamental assets of a society that are required to provide essential services to its population. As with our real estate investments, the aim of infrastructure investments in our investment portfolios is to provide returns between those of listed shares and fixed income while being positively correlated to inflation.

Infrastructure investments are typically characterised by several key features: long duration, large initial capital outlays, monopolistic qualities, stable income, GDP - or inflation-linked earnings, and returns dominated by income, once an asset has matured.

Institutional-quality infrastructure typically includes airports, ports, roads, railways, registries, utilities and digital infrastructure assets, in addition to assets operating in the renewable energy sector and through public–private partnerships with government agencies.

Private equity

Our private equity portfolio focuses on unlisted equity investments across the globe. We expect to extract an illiquidity return premium relative to listed share markets. The premium is the extra return we expect to earn for investing in an illiquid asset, or one that is not readily converted to cash. Investing via various forms of private ownership enables us to take advantage of time and control, and to access relatively inefficient markets, generally in small and midcap companies.

Private equity provides access to the largest pool of companies in the world and enhances the diversification of the portfolio. For example, private companies account for over 85% of US firms with 500 or more employees.

ART’s private equity portfolio is primarily invested with 20 to 30 carefully chosen managers across the key sub-sectors of the asset class as defined below: buyout, venture capital, growth equity, special situations and distressed debt.

Alternative strategies

The alternative strategies asset class has the flexibility to invest opportunistically in public and private markets, asset classes and capital structures with a focus on private debt and alternative credit.

Private debt and alternative credit encompasses a diverse range of strategies and investment opportunities that offer varying degrees of defensive and growth characteristics, which we have acknowledged through the setup of two sub-portfolios: private fixed income and private alternative credit. Each of these two sub-portfolios invests in a range of credit strategies that include private corporate direct lending, asset-backed credit, mezzanine lending, distressed debt, and special situations credit.

ART’s alternative strategies portfolio is primarily invested with 15 to 20 carefully chosen managers. While we do invest in managers’ funds, we increasingly seek to co-invest alongside our preferred managers.

This allows us to lower costs and gain greater transparency and control over our investments.

By holding a substantial allocation to alternative assets, we aim to deliver strong long-term returns for our members. We seek to capture the illiquidity premium attached to unlisted assets while reducing the short-term volatility our members face by investing in share markets. Our four unlisted asset classes have delivered on those objectives: our alternative strategies portfolio has delivered solid net returns above cash, while acting as an important diversifier during difficult share market conditions.