The planned transition of $44 billion worth of additional Tier 1 (AT1) bank hybrids to Tier 2 capital by 2032 will see the last bank hybrid disappear by March 2032, bringing to an end an era that income-oriented Australian Securities Exchange (ASX) investors will remember mostly fondly. In this guest article, Simon Dawkins, Partner and Head of Capital Markets at Escala Partners, lifts the lid on a better alternative for sophisticated investors.
An audience of advisers, researchers, and asset allocators gathered in Sydney last week for an intimate discussion with Haran Karunakaran, dissecting the unique opportunities and challenges facing fixed income investing today. Against a backdrop of economic uncertainty, where inflationary pressures, central bank policies and liquidity concerns intersect, Karunakaran, fixed income investment director at Capital Group, painted a nuanced picture of an asset class that is experiencing a renaissance — albeit one with caveats.
The ART of deploying alternative investments
Speaking on behalf of ART at The Inside Network’s Alternatives Symposium, Andrew Fisher, Head of Investment Strategy, outlined the rationale and execution behind the fund’s approach to alternatives.
Fisher underscored that the core appeal of unlisted assets lies in their ability to deliver diversification, reduced volatility, and access to unique investment opportunities. “Alternative assets are an alternative to something,” he explained. “They need to justify their place in the portfolio by offering characteristics that public markets cannot.” For ART, the allocation to alternatives is not about chasing short-term performance but about constructing a long-term, resilient portfolio that can weather market stress events while delivering sustainable returns.
One of the key learnings for ART in building its alternatives program has been the importance of bringing investment decision-making in-house. Historically, much of ART’s infrastructure investment was outsourced, but post-GFC underperformance prompted a rethink. Today, every infrastructure transaction is underwritten internally, reflecting a more hands-on approach. “We recognised that nobody cares about our portfolio as much as we do,” Fisher noted. “By internalising key decisions, we gain better oversight, better risk management, and ultimately better outcomes for our members.”
ART’s private equity experience reinforces this mindset. While private equity has delivered strong returns in certain periods, it has also proven highly episodic. Fisher acknowledged that “private equity isn’t something you can time,” pointing to 2021 as a year of extraordinary returns, followed by a period of significant capital chasing the market, driving down future performance. The lesson here, he argues, is that investors must commit to private equity as a long-term allocation and be prepared for cycles of under- and outperformance.
Liquidity management is a central consideration for institutional investors allocating to alternatives. ART caps its allocation to unlisted assets at around 35%, a level Fisher describes as “where we’re comfortable that after a stress event, our stakeholders won’t be concerned about our ability to invest the way we need to.” During the COVID-19 pandemic, ART faced 8% net outflows, the highest of any superannuation fund in Australia, yet was able to maintain its investment strategy without liquidating alternatives. “It’s not just about having liquidity to pay the bills—it’s about ensuring we can keep investing, even in times of stress,” he explained.
A major focus for ART is ensuring that alternative assets align with the broader portfolio’s growth and defensive characteristics. Fisher argued that simply categorising assets as ‘growth’ or ‘defensive’ is insufficient; rather, a more nuanced approach is required. “We want an alternative asset portfolio that, in aggregate, reflects the same growth-defensive mix as the overall fund,” he said. This allows ART to rebalance listed assets dynamically without being constrained by illiquid holdings.
Due diligence and manager oversight are also key areas where ART applies rigorous scrutiny. Fisher acknowledges the tendency for managers to chase risk to generate returns, which requires constant monitoring. “We don’t take for granted that our private market teams will always give us what we want,” he says. ART employs extensive quantitative analysis to assess how much growth risk is embedded in its private markets allocations, adjusting for valuation lags and leverage. “It’s not enough to just assume alternatives are uncorrelated—we need to test and verify that,” he explained.
Diversification within alternatives is another core principle. ART limits single asset exposures to ensure no individual investment can significantly impact the fund in a downside scenario. “If you’re engaging in this space, ensure you have an adequate level of diversification,” Fisher advised. “For every high-profile success story, there are deals that don’t go as planned. A well-diversified portfolio ensures that one bad outcome doesn’t define performance.”
Founded through the merger of QSuper and Sunsuper, Australian Retirement Trust is one of Australia’s largest superannuation funds, managing over $240 billion in assets on behalf of more than two million members. With a focus on long-term value creation, ART has built a reputation for its strategic approach to investment management, leveraging its scale to access high-quality opportunities across public and private markets. The fund’s commitment to innovation and risk management ensures that its members benefit from a diversified, resilient portfolio that can navigate shifting economic conditions.
The opportunity set in alternatives continues to evolve, and Fisher sees real estate as an area of emerging potential. While office property has been heavily discounted due to work-from-home trends, he believes this trend has “clearly gone too far” and that selective opportunities exist for long-term investors. Similarly, he highlighted affordable housing as a global issue that presents investment potential. “It’s not social housing—it’s about meeting the real demand for housing supply,” he said. Infrastructure remains a core focus, though Fisher is cautious about whether the USA will follow through on long-overdue infrastructure investment plans.
The role of benchmarking in alternatives is another area of debate. Fisher argued that private equity, for example, must generate a sufficient premium over public markets to justify its place in the portfolio. “If private equity can’t beat listed equities over ten years, then it shouldn’t exist,” he stated bluntly. ART applies both public market equivalents and private market peer benchmarks to assess performance, ensuring that every active decision adds value.
Reflecting on lessons learned, Fisher emphasised the importance of clear priorities. In asset allocation, opportunities can be lost if execution is slow. “We wanted to deploy capital into private credit when spreads were wide, but by the time the best managers were identified, the opportunity had diminished,” he says. The need to balance total portfolio considerations with individual asset class perspectives is another key takeaway. “Sometimes, asset class teams are hesitant to deploy capital because new deals don’t look as good as their existing portfolio, but from a whole portfolio perspective, we still need that exposure,” he explained.
For Fisher, the overarching lesson is that institutional investors must take ownership of their strategies rather than relying solely on external managers. “You can’t outsource operational risk,” he concluded. “Asset managers care about their fees and their businesses, but they don’t care about our members like we do. It’s our job to ensure the best outcomes, and that means being engaged, disciplined, and accountable.”
