Statewide Super's Size is an Advantage
Con Michalakis says Statewide Super, the AUD$9.7 billion superannuation fund where he’s been CIO for the past dozen years, may be smaller than some of Australia’s giant supers, but it’s faring well: “We’re the Spartans versus the Persians.”
Michalakis, the son of Greek immigrants to Australia, says there are more than 50 major Australian super funds, with “the largest, AustralianSuper, weighing in at AUD$150-odd billion, whereas we’re at AUD$10 billion, so if you think about us, we’re the small- to medium-size.” But he adds, “We want to use our size as an advantage rather than a disadvantage. In everything Statewide Super does, from how it engages with members to how we invest, we think of our size. We want to be structured, so we’re using our natural strength.
That not only means it stays close to its members – under the unique Australian retirement income savings system, workers have to contribute to a super fund, but they can pick which one – it also permits Statewide Super to be more nimble in making investments. It’s big enough to get in on deals, Michalakis says, but small enough to be able to move in and out of markets without leaving any footprints.
Statewide Super’s principal marketplace runs down the middle of the country from the Northern Territory to the State of South Australia. Statewide Super started life three decades ago as a state-based fund serving small businesses in South Australia, and about eight years ago, it merged with another fund in South Australia called Local Super, which focused on local government employees in South Australia and the North Territory.
The default option for Statewide Super’s 136,000 members is a multi-asset class, multi-sector option, called Statewide by Super, “which is sort of like a 75/25 balanced growth fund, if you will: We call it growth. And that’s invested in Aussie shares, international shares, cash, bonds, unlisted property and infrastructure, some venture capital, private equity, private global credit. So, it’s pretty well-diversified,” Michalakis says.
To fund that benefit, Michalakis has developed an asset allocation in which 50% of the portfolio is in shares, with slightly more than half of that outside Australia. The rest of the allocation includes 10% property, 10% infrastructure, just under 9% cash, 6% bonds, and the rest in the various alternative options, including “private markets, absolute returns, all of that stuff,” he says.
Statewide Super’s asset allocation “has been on a journey,” he adds. “The biggest thing that’s changed in institutional allocations – and it doesn’t matter whether you’re in Statewide Super in Adelaide or anything around the world – is you’re seeing much more use of alternative investments: Alternative could be infrastructure; it could be property; it could be private – mostly private credit; it could be some venture capital; it could be some absolute return strategies.”
The reason is pretty obvious, he says: “I mean, 12, 13 years ago, cash was at 5% or 6%, 10-year Aussie government bonds were between 5% and 7%, inflation was 3%, and that was just beautiful: You could basically run a cash/bond/equity portfolio. Today, cash is 0%, bonds are 0%, equities – They’ve had a good run but seem a little overpriced.”
Meanwhile, “the financial world has become a much more complicated place. Not everybody wants to be in a bond or an equity. You have private markets, you have different structures, different capital structures, different ways to access investments, and as the world becomes complex, markets have developed in that area,” he says “Plus cash and bonds being 0% has naturally created a market for those things.”
While Michalakis is convinced the asset allocation is right for the long haul, he says, “I should have had more growth equity in the last five years. I wish we had bought more of the overpriced stuff than we did.”
Statewide Super’s money is managed externally, but it is guided by the interaction of the external managers with Statewide Super’s internal team and investment committee, plus JANA, an asset consultant. “So, we really rely on the triangle of the three to come up with best ideas, and then to allocate capital, whether it’s top-down by what’s happening with what’s happening with the asset classes or the bottom-up looking for best ideas. That creative tension is an allocator’s job to then make sure you get set,” he explains.
As far as investment style, Michalakis says he’s “definitely active, and if not active, quantitative and systematic, and there’s a slight value bias. I blame that on working a couple of years at Pzena. His previous job was at Pzena Investment Management, a New York asset manager, which is a deep value shop.” While “I probably have more value genes than growth genes,” he says, “let’s be honest, you want to be diversified because growth has smacked it out of the park. I want to be more value-oriented, but listen, that’s as popular as a sneeze in an airline.”
Still, Michalakis likes to be a bit of a contrarian, buying value despite its long term lagging of growth, and, conversely, he’s not adding to the private equity portfolio while everyone else is piling in. He’s also not adding infrastructure investments.
Maybe that’s because “we have two direct infrastructure investments, an airport and a port that’s local here in South Australia that we have managed internally.” Statewide Super put some $500 million into Adelaide Airport and Flinders Port, not just because they were the home team, but because they’re close enough to keep a close watch on them. He says this also demonstrated that if they have a good idea they’re not afraid to “pump a decent amount” into it.
Statewide Super is known for consistency. Neither the asset allocation, nor the roster of managers changes very frequently. Perhaps the lack of tinkering may explain why Statewide Super has frequently been in the top quartile of super’s performance.
That helps in his regular duties of talking to members, a task that has been stepped up this spring. He says he understands the members’ need for communications, and welcomes opportunities to share ideas with them. This spring, Statewide Super went from quarterly to weekly investment committee meetings, and daily stress testing. That went on for about two months, as did weekly video calls and webinars on the Statewide Super website.
Michalakis, who grew up in Adelaide, learned about financial matters early on from his sister, who is 11 years older and a financial planner. When he entered university, “I was doing a math degree, and I was going to be a math teacher.” But in his last year, “a great professor was working on a thing called option pricing, and he told me to work on this.” Michalakis thought this stuff was pretty interesting, and besides, he says, “I’ll be honest with you: In the math class, I was bottom-quartile in a really smart class, so finance was an easier bet.”
After university, he went on to earn a master’s degree at the University of London, and then held several jobs including roles at Alliance Capital Management, in Sydney and London, the head of institutional business for Merrill Lynch Investment Management in Sydney and the first Australian practice leader for investment consultant Watson Wyatt. He also worked in New York for Pzena Investment Management.
He recalls, “When I was at Alliance, an acquaintance had gone to work at Pzena Investment Management, and he arranged for me to interview. “They flew me over for an interview, and a minute later, I’m working in New York, and I’m so happy I did that. In Australia, we’re all Anglophiles – we look to the UK to study, because cricket and all of that – but I spent two and a half years in the U.S. New York is a fantastic city and America is a great country. If you haven’t lived there, you don’t realize how big and diverse it is. It’s just a brilliant country.”
So why is he not still there? “Oh,” he says, “home is where the heart is, mate.” Aging parents, fond memories, and a good job offer at QIC brought him back to his hometown a dozen years ago. The timing could have been better, he recalls: “When I first joined Statewide Super, it was during the GFC (global financial crisis). I’d just moved from New York and my first week here, Fannie and Freddie were national news, and Lehman went under, and it was like, ‘Oh, man, what’s going on.’”
But Michalakis soldiered on: “You’ve got to manage clients; there’s a board to manage, an investment committee. This is work, but gosh, it’s so interesting. This is fun.”
While he’s happily back where he grew up, he’s got a soft spot for his ancestral homeland. His parents were among the many Greek immigrants to Australia (Melbourne is the city with the third-largest Greek population, trailing only Athens and Thessalonica).
In addition to his work, Michalakis has an abiding interest in music. In fact, these days he’s learning to play bass guitar. He plays covers of groups like the Ramones and Black Sabbath. “If I look back on my life,” he says, “there’s two regrets: I wish I’d learned more languages, and I wish I’d played more music. I’m learning the second one, but it’s hard learning to play. There’s four strings and all that. It’s hard work, mate, but it’s good.” Indeed, his mantra is, “Everybody should learn how to play rock and roll.”
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