Investment insights

Want to know the stories behind the numbers? We had Chris Grogan, Head of Defensive Assets and Deputy CIO at Qantas Super, talk us through the latest market activity and what’s on the horizon:

The banking world was put on notice in March 2023 as a number of small- to mid-sized regional banks in the United States collapsed. One of the biggest names to fall was Silicon Valley Bank, a bank largely serving the tech and startup sector in the US.

As Chris explained, one of the key issues behind the fall was what’s called an asset-liability mismatch: the bank had invested in a significant amount of longer-dated mortgages and government bonds that, if valued today, would be worth significantly less.

“If you’re holding a long-dated fixed interest asset in an environment where interest rates have gone up, your asset has lost value,” Chris explained. “If you have to sell it, it doesn’t matter what you’re marking that asset at on your balance sheet, because you can only sell it for what the market is currently willing to pay.”

Why did Silicon Valley Bank have to sell?

Tech companies, the bank’s largest customer base, were flush with cash when the pandemic hit and interest rates were low, making large deposits with the bank. However, when rates started going up, these same companies then started taking more cash out of the bank for various reasons, which meant the bank saw its deposit rates fall.

In turn, this then meant the bank had to sell some of the fixed-interest assets on its books in order to meet withdrawal demands, with some of them having to be sold at a loss.

Along with Silicon Valley Bank, Signature Bank, First Republic Bank, and Silvergate Bank also collapsed.

So, what impact has this had on your Qantas Super? According to Chris, the effects are perhaps not what you’d think – our portfolio had no exposure to these banks.

Rather, these failures have created opportunities for our investment team in US commercial real estate debt.

This is because small, regional banks tend to be the biggest lenders to the commercial real estate sector, which means there’s a significant amount of real estate debt that has to be refinanced over the next few years, creating attractive opportunities for our Investment team.

Despite the banking failures, the market has remained relatively steady. As Chris explained, this could be thanks to the fact that the US regulator stepped in quickly to stem the fallout, while the fact that some US regional banks were in trouble in the first place could also lead markets to think that we may be nearing the end of the rate hiking cycle.

In turn, markets tend to bounce at times when they think interest rates could be coming down, Chris said.

“The market reaction can sometimes be counterintuitive.”

In Australia, the Reserve Bank of Australia (RBA) Board increased the cash rate at its May 2023 meeting. Following the pause in April 2023, the increase came as a surprise to most market participants, however RBA Governor Philip Lowe said the Board was focused on its priority of returning inflation to target.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” he said.

In the meantime, while interest rates remain high, our Investment team has added to our interest rate exposure in markets including the UK, US, Europe, and Japan, in addition to Australia through the use of an overlay – this particular strategy ensures that, as the rate environment stabilises, the portfolio is appropriately positioned from both a risk management and return perspective.

Two years into our plan to achieve net zero carbon emissions across our investment portfolio by 2050, Qantas Super’s Investment team has been busy exploring various opportunities in this space.

Among the themes the team is exploring is that of ‘electrifying the world’ – that is, the idea that as we decarbonise, we will need to move to electric methods of powering everything from cars to our homes.

With this come a variety of opportunities, from clean energy storage to ‘green minerals’. Also known as critical minerals, green minerals are key inputs into clean energy technologies such as batteries and Electric Vehicles (EV). With global battery demand growth set to double roughly every 3 years, demand for key minerals such as graphite and lithium which are used in EV batteries, is also set to grow.

Also on the radar is sustainable agriculture. For example, the team is exploring opportunities with managers that can enhance and build sustainable farming systems through the revitalisation of underperforming farmland.

In addition to investment opportunities across environmental themes, the team is also looking at social and governance issues under the broad ESG – environmental, social, and governance – umbrella.

Looking at the social lens, the team is working with a dedicated impact investment manager that seeks to invest in businesses and other assets that can deliver an attractive return while also explicitly and positively impacting the society and environment. One of these businesses looks to deliver high quality, purpose-built specialist disability accommodation to provide Australians with disabilities with more choice and control over where and how they live.

Meanwhile, the team is also looking at the ways it can engage with investment managers and portfolio companies to ensure governance issues – from processes to the diversity of the board and team – are adequately considered.