Last year, HESTA conducted a review of its investment strategy and objectives. We speak with Jeff Brunton on the impact of the review on the portfolio and the fund’s continued efforts in internalisation
When Jeff Brunton joined HESTA in July of 2021 as Head of Portfolio Management he quickly found himself immersed in the midst of investment transformation increasing the internalisation of investment decision making within a total portfolio approach.
The $72 billion industry fund places significant emphasis on responsible investment (RI) and its role as an active owner of capital.
“We’ve uplifted our already strong responsible investment team, which plays a critical role in helping us embed responsible investment into every investment decision we make. And as we internalise, we really want to make sure that we internalise in a way that is supporting our key RI focus areas,” Brunton says in an interview with [i3] Insights.
“We represent over 1 million Australians and about 80 per cent of them are women, many working in the care economy. So, we have mapped out important areas of focus to the relevant United Nations Sustainable Development Goals, with a particular focus for us as an investment team on gender, affordable housing, climate transition and biodiversity.”
As economic turmoil unfolded during and after COVID, the fund’s investment team became more concerned about the possibility of negative economic and market environments.
“We’ve increased the use of scenario frameworks to guide our medium-term investment strategy,” he says.
“We’ve witnessed a really large increase in inflation in many parts of the world, including Australia, and the large increase in interest rates from very accommodating levels to now somewhere around neutral to tight, in our opinion.
As the 2022/23 year has progressed, the possibility that these higher interest rates may lead to economic recessions in many countries, including the risk of one in Australia, has increased. So we've been focusing on building portfolio resilience in a variety of ways
“And as the 2022/23 year has progressed, the possibility that these higher interest rates may lead to economic recessions in many countries, including the risk of one in Australia, has increased.
“So we’ve been focusing on building portfolio resilience in a variety of ways and across the total portfolio and adding to the liquidity position of the fund,” he says.
Brunton believes the portfolio is in a good position to manage potential economic downturns that might come to the fore in the coming months. The investment team is particularly concerned about the situation in the United States and Europe, although Brunton doesn’t rule out a recession in Australia either.
“We’ve got a downside scenario with a recession probability of more than 50 per cent in the US. And in Australia, we’re less clear because of the immigration trends and the health of the household sector.
“But it’s very difficult to [predict], because growth still looks pretty strong everywhere. And so interest rates are not in a tight position yet,” he says.
Internalising Fixed Income at HESTA
During the past year, HESTA has continued its efforts to internalise parts of its asset management process.
The fund is already running an Australian equity capability in-house and it is close to seeding its first internal fixed income strategy.
“Over the last 12 months, we’ve built a [fixed income] team. We’ve hired a team of people and they’ve built an investment process. That process is going through important stakeholder review processes and will begin to be seeded over the coming months,” he says.
In May 2021, HESTA hired Stephen Howard as its General Manager of Defensive Assets and he has expanded the fixed income team to around half a dozen people.
As we grow the internal investment capability, we will expect to use our partners in different ways and look to them to help us enhance our total portfolio approach. I want to emphasise that our investment partners, our external managers, will remain hugely important for HESTA across all asset classes
The continued internalisation of investment functions will change the way HESTA will work with external fund managers, but Brunton was quick to point out that external managers will always play an important role in the fund’s investment approach.
“As we grow the internal investment capability, we will expect to use our partners in different ways and look to them to help us enhance our total portfolio approach. I want to emphasise that our investment partners, our external managers, will remain hugely important for HESTA across all asset classes,” he says.
“There is a great opportunity for innovative asset managers to explore new ways of collaborating with funds like HESTA as the industry continues to grow.
“An important part of this conversation is how our partners help us achieve total portfolio outcomes.
“HESTA won’t do everything [internally], far from it. We want to partner with leading external investment managers that are going to help us deliver great results for our members,” he said.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.