Australia pension fund Hostplus upbeat on credit, shuns govt bonds

SYDNEY: Australian pension fund Hostplus is keen to invest in credit, property and infrastructure, but sees no value in sovereign bonds, its chief executive said on Friday.

David Elia, CEO of Hostplus which manages A$22 billion ($16 billion) of assets, said the balanced fund's credit exposure rose to 6 percent from none in 2009, but it holds no sovereign bonds.

Elia is particularly keen to lend directly to middle-market companies in the United States and Europe in the face of tighter bank lending standards after the global financial crisis.

Hostplus is also keen to invest in unlisted infrastructure and real estate assets, which combined account for around a quarter of the portfolio, due to the fund's strong tolerance of illiquid assets.

The chief executive, however, has little patience for fees charged by some external fund managers, having recently ended a 12-year-old partnership with a US hedge fund because of weak returns.

"Private equity managers have had it too good for way too long, particularly funds of funds," Elia said, adding Hostplus was now directly investing in potential companies on a co-investment basis with zero fee being charged.

Hedge funds and private equity managers are known for their '2 and 20' fee model - an annual management fee of 2 percent of assets plus a 20 percent cut of any profits.

But those days have gone for most funds which, like others across the financial industry, have seen returns hit by the impact of low interest rates.

Hostplus targets base fees below 1 percent plus a performance fee above a hurdle rate.

It allocated a new funding pool of A$700 million this year to five private equity managers to share .

Around half of Hostplus's funds are invested in equities, 14 percent in direct property, 13 percent in infrastructure, 7 percent in private equity and the balance in cash, credit and alternative products.

Australia's A$2.1 trillion pool of tax-advantaged retirement savings, know locally as "superannuation" or "super" funds is among the world's largest after the US, UK, Japan and Canada.

Super funds' holdings greatly exceed Australia's A$1.6 trillion gross domestic product and are set to reach nearly A$10 trillion by 2035, according to Deloitte.