TelstraSuper investment chief Graeme Miller said exposure to industrial property delivered bumper returns for the superannuation fund as the boom in online shopping drove up values.
The unlisted property sector makes up about 11 per cent of the super fund's balanced investment option, of which more than 25 per cent is in industrial property.
Shifting more assets into industrial property paid off as the asset class delivered total returns of close to 20 per cent for the 12 months to 30 June.
Several years ago, TelstraSuper moved the portfolio away from traditional retail investments and invested in industrial properties, logistics facilities, and distribution centres - things that power e-commerce.
Historically, the industrial property sector generated much higher yields than office and retail property.
These have since equalised, triggering a rise in industrial property prices.
Thanks to industrial property the fund delivered an above-average return for the year to June 2022, according to Rainmaker data.
It's true that TelstraSuper's short-term performance was marred by market conditions that hit all funds but its MySuper products have ranked in the top five in the market for three, five and ten years.
Notably, it's not just that Miller made the right call on industrial real estate. TelstraSuper had less retail exposure than other super funds.
Moreover, the retail portfolio is heavily skewed to what he describes as 'daily needs' shopping centres which proved to be very resilient to the pandemic.
Bunnings stores are his favourite example. "We've got a large exposure to about 35 Bunnings stores," he points out.
"They have got long leases and have very few significant competitors."
But property wasn't the only good news.
Coming out of Covid, it made sense to increase equity exposure at the expense of fixed-income securities.
Miller held that position until early 2022 when he sold down shares and increased his exposure to government bonds.
Says Miller: "It was just one of those times where all of the big asset allocation decisions we made really helped."
As for strategy, Miller hasn't seen much to justify changing tack, although TelstraSuper's equity exposure is still well below what it was last November.
Miller concedes that the current cycle will turn as equity markets are cheap.
"While we are cautiously positioned right now, my gut feeling is that our next asset allocation move will be to increase rather than reduce risk," he explains.
However, he thinks inflation will be persistent and that central banks will continue to be aggressive.
"The combination of inflation and higher interest rates is going to have a meaningful impact on company profitability," he cautions.
Soaring interest rates have pushed him to increase exposure to the fixed-interest asset class.
"We believe there is value in government bonds and so we've been progressively increasing towards our long-term targets. We're not quite there yet, but we're very close."
TelstraSuper manages a quarter of its assets internally, and Miller plans to hike that to about one-third over the next few years.
Miller says the case for internal management is very compelling, although he is conscious of managing concentration risk and ensuring sufficient diversity in the portfolio.
The investment chief has an opportunities asset class to take advantage of changes in economic conditions. "We know that every market dislocation in history has thrown up great opportunities, and the current market dislocation is no different."
A recent example of this was taking advantage of the opportunity to buy shares in listed real estate investment trusts (REITs).
"As interest rates have risen, the price of REITs appears to have fallen well below the value of the underlying properties they own. The Opportunities asset class has allowed us to capitalise on this dislocation. We love nothing more than paying less than 100 cents in the dollar for high-quality assets."
Another example is funding Vertical Aerospace, the developer of an electronic flying commuter vehicle, through one of our partners in New York.
"We saw the opportunity and had the deal done within a very short time frame - something many funds can't achieve. We have purposely set up our processes to be able to move quickly whilst not sacrificing good governance and due diligence."
Buoyed by the retirement income covenant, pension funds are gearing up to meet a growing need for retirement products.
Miller notes that up until now, most have focused on the accumulation phase of superannuation.
"I'd say the majority of funds are well behind us on that journey," he states.
"It's not surprising that many funds historically have tended to focus more on accumulation rather than decumulation since that is where the bulk of need has been."
Over the next decade, as those funds mature, as members age and as account balances grow, there will be an increased focus on retirement.
"It will just take some time for them to get there," he adds.
Getting people into a retirement product that is right for them is a tough ask, given how varied membership bases are.
Designing a suitable range of products for each segment or cohort is essential if super funds are to provide their members with a secure and dignified retirement.
But it's difficult for funds to build such meaningful cohorts without access to more information about their members' situation than they can currently have.
In terms of data, the TesltraSuper has an advantage.
The fund has long provided members with financial advice and retirement products to help members reach their post-working life goals.
This reflects the maturity of the fund members, who mostly have high account balances.
So members willingly share the information with the advisers to help the fund design an optimal retirement strategy.
Miller says this is entirely achievable with a membership base of around 85,000 members.
He argues that it is much harder for a fund that has millions of members and few, if any, internal financial planning professionals.
Also, TelstrSuper has a high engagement rate allowing it to personalise the member experience based on the knowledge of members.
When TelstraSuper members visit the website and their online account, what they see will be very different to what other members will see. For example, their age, product or employment status may determine which links they see on the homepage.
Links will take them directly to help with retirement, transitioning to retirement and financial planning. Further, personalised dashboards help the member understand their super and how it is tracking.
Opening the doors
TelstraSuper has a full public offer license, although it has only recently begun to promote itself as an open fund to other corporates.
"About 18 months ago, we decided that we would be open to TelstraSuper members' friends as well as family. It's a kind of referral system."
"It's only in the last six months that we've said anyone can join, but we're taking a highly targeted approach."
Miller's aim is to provide our members with a better retirement than they ever imagined. That's more important to him than growing assets to any specific target.