AustralianSuper. November This report is not intended for distribution to or use by retail investors

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1 November 2017 This report is not intended for distribution to or use by retail investors

2 Disclaimer Copyright is owned by Chant West Pty Limited (ABN ) Our services may only be used by persons who have entered into a licence agreement with us, and their use is subject to the terms of that licence agreement. This report is not intended for distribution to or use by retail clients. The ratings contained in this report are subjective ratings produced by us. The ratings and other information contained in this report have been prepared based on information (including historical financial performance information) supplied by third parties. While we believe the information to be accurate, we do not accept responsibility for any inaccuracy in the data. Past performance is not a reliable indicator of future performance. The ratings in this report are current at the time of publication. We do not undertake to update the report. Nothing in this report is intended to constitute financial product advice. However, to the extent that any information may be considered to be general financial product advice then we warn that: (a) the advice is general advice and we have not considered any of your individual objectives, financial situation or particular needs; (b) you need to consider whether the advice is appropriate in light of your goals, objectives and current situation; and (c) you should obtain a Product Disclosure Statement from the relevant product issuer before making any decision about whether to acquire a financial product from that product issuer. If you obtained this report via Chant West s website, by viewing this report, you also acknowledge that a Financial Services Guide has been made available to you. Subject to our obligations under any implied conditions and warranties that cannot be excluded, our maximum aggregate liability for all claims under or relating to this report whether in contract, tort (including without limitation negligence), in equity, under statute or on any other basis, is limited to one hundred dollars. Ratings Methodology and General Disclosures The Attachment to this report provides an explanation of our ratings methodology, a description of our ratings and other important disclosures. Additional information about Chant West is available on our website ( AustralianSuper has retained us to rate its ability to construct multi-manager investment options for its members. We have charged AustralianSuper a fixed fee for this service. Date of Report: November 2017 Analysts: Mano Mohankumar and Tom Irwin Release Authorised by: Ian Fryer Contact Details Chant West Office: 47 Albion Street Surry Hills Sydney NSW 2010 Phone: Fax: research@chantwest.com.au Chant West November 2017

3 Contents 1 Summary 2 Manager Research 4 Capital Markets Research 7 Portfolio Management 9 Portfolio Structure 11 Performance 19 Attachment Ratings Methodology and General Disclosures Chant West November 2017

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5 Overall Rating We have awarded AustralianSuper our 5 Apples highest quality overall rating. This refers to AustralianSuper s overall ability to construct quality multi-manager investment options for its members. The Attachment provides an explanation of our ratings methodology, a description of what the different ratings signify and other important disclosures. It forms part of this report and should be read with the report. This report is dated November 2017 and, to the best of our knowledge, unless otherwise stated, the information in this report is accurate at that date. Individual Investment Option Ratings Table 1 shows our rating of each investment option considered in this report. These ratings may differ from the overall rating as they take into account the specific characteristics of each option. Table 1: AustralianSuper Options Rated Single Sector Rating Diversified Rating Australian Shares Stable International Shares Conservative Balanced Property Balanced Diversified Fixed Interest High Growth Cash Chant West November

6 Summary Business Overview AustralianSuper is a non-profit, multi-industry fund. It is the largest superannuation fund in Australia with about 2.2 million members, assets of $124 billion and $650 million in monthly net contributions. The Trustee Board of AustralianSuper comprises 11 directors: five employer representatives nominated by the Ai Group; Heather Ridout (Chair), Grahame Willis, Lucio Di Bartolomeo, Innes Willox and Gabrielle Coyne; five member representatives nominated mainly by the ACTU: Dave Oliver (Deputy Chair), Brian Daley, Paul Bastian, Daniel Walton and Julia Angrisanol; and one independent director, Jim Craig. Ian Silk, the fund s CEO, heads a team of about 580, of which, about 470 are based in Melbourne. Mark Delaney is the Deputy CEO and Chief Investment Officer. The fund s internal investment team of about 200 includes 95 investment staff and 105 operational and support staff. AustralianSuper has established an Investment Department Management Group (IMDG) to co-ordinate and report on key business activities of the investment department. The IMDG comprises Mark Delaney, Peter Curtis (Head of Investment Operations), Innes McKeand (Head of Equities), Jason Cotter (Senior Manager, Portfolio Operations) and Amanda Price (People and Culture Business Partner, Investments). Frontier Investment Consulting (Frontier) and JANA Investment Advisers (JANA) are the fund s principal investment consultants. Both provide advice on asset allocation and strategy, with Frontier working closely with the internal investment team and JANA with the Investment Committee. Frontier and JANA are both leading Australian asset consulting firms. Frontier is owned by four industry funds (AustralianSuper, Cbus, HESTA and First Super). It has over 40 investment staff all located in Melbourne. It advises on assets of about $265 billion. JANA is owned by senior staff (55%) and National Australia Bank (45%). It has about 85 investment staff including about 70 investment professionals (research and advice), located in Melbourne and Sydney. It advises on assets of about $380 billion. AustralianSuper has a well-defined investment decision-making process that involves considerable interaction between the Trustee Board, Investment Committee, internal investment team and the two principal investment consultants. This report considers the roles of each of those parties. Table 2 summarises AustralianSuper s assets under management at September Table 2: AUM at September 2017 Asset Sector $Billion % Australian equities International equities Private equity Property Infrastructure Mid-risk credit Fixed interest Cash Other Total Chant West November

7 Investment Beliefs A key feature of AustralianSuper s investment approach is its active approach to asset allocation. Each June, it sets a strategic asset allocation target for 12 months time for each investment option. This asset allocation target is based on high level judgements about economic and financial market conditions over the next year or two. The internal investment team reviews the actual position fortnightly, and makes changes periodically to reflect its views and recommendations. A more detailed review is prepared and presented to the Investment Committee at each of its meetings. The Investment Committee sets asset allocation ranges for the CIO to operate within. The strategic asset allocation targets are seen as targets to move towards during the year. Subject to quarterly reviews of the ongoing appropriateness of those high level judgements, the Investment Committee mainly uses cash flows to move towards the targets or implement asset allocation tilts. Broadly speaking, when compared with industry averages, AustralianSuper s default Balanced Option has higher strategic allocations to listed equities and unlisted assets (particularly infrastructure and property), and lower allocations to traditional fixed interest assets. In recent years, AustralianSuper has developed and grown its internal management capability initially in Australian equities, property, infrastructure, followed by cash, international equities and credit, and most recently international fixed interest. In total, AustralianSuper managed about 24% of its assets directly at September Research AustralianSuper sources fund manager research from two primary sources its internal investment team and Frontier, one of its principal investment consultants. Research is carried out by the internal team supported, where necessary, by research provided by Frontier regarding fund manager search, selection and monitoring. The Asset Class Head is responsible for assessing the initial research, initiating any further research as appropriate, discussing it with its Advisory Group and then implementing the final recommendation. AustralianSuper uses specialist consultants for property, infrastructure and private equity. Both JANA and Frontier provide asset allocation and strategy advice to the internal investment team and Investment Committee. JANA also provides the Investment Committee with research on AustralianSuper s internal management capabilities. Long-Term Performance AustralianSuper s default Balanced option, which accounts for about 75% of total assets, returned 5.6% per annum over the 10 years to June It outperformed the Chant West multi-manager median return of 5% per annum, and ranked 13 out of 51 options. However, it underperformed its return objective (CPI + 4%) of 6.4% per annum. Note that this return objective is higher than that of most peers. Strengths AustralianSuper s main strengths are: High quality investment governance framework High quality internal investment team and investment consultants Scale that allows for wide diversification Strategic commitment to, and significant experience in, investing in unlisted assets Strong and growing net cash flow Strong long-term investment performance Issues Issues that investors need to be aware of include: Relatively high exposure to a single fund manager, IFM, where AustralianSuper is both a major shareholder and a substantial client. At September 2017, IFM managed about 24% of total assets. Chant West November

8 Manager Research AustralianSuper sources its fund manager research from two parties its internal investment team and Frontier, one of its principal investment consultants. In addition, AustralianSuper uses specialist consultants for property, infrastructure and private equity. Resources and Coverage Internal Investment Team The internal investment team, headed by Mark Delaney, comprises about 200 staff including about 95 investment staff and about 105 operational and support staff. Table 3 lists the senior internal investment staff. Jason Peasley, as Head of Mid-Risk Assets, has overall responsibility for infrastructure, property and mid-risk credit. Table 3: Senior Internal Investment Staff Staff Asset Sector / Role Experience Mark Delaney Chief Investment Officer 35 / 18 Alistair Barker Head of Portfolio Construction 18 / 9 Claire Thornton Senior Manager, Asset Allocation 18 / 3 Carl Astori Head of Asset Allocation 22 / 2 Mark Tierney Economist (developed markets) 34 / 5 Stephen Joske Economist (emerging markets) 32 / 6 Richard Batley Manager, Macro Strategy 17 / 1 Innes McKeand Head of Equities 28 / 6 Shaun Manuell Senior PM Internal Aust Equities 22 / 5 Christine Montgomery Senior PM Internal Int l Equities 28 / 1 Joseph Wahba Senior IM, Equities 26 / 17 Terry Charalambous Senior IM, Private Equity 19 / 11 Clyde Haldane Equities 30 / 2 Jason Peasley Head of Mid-Risk Assets 24 / 6 Jack McGougan Head of Property 29 / 9 Nik Kemp Head of Infrastructure 19 / 5 Roger Knott Senior PM Credit 23 / 2 Joel Ickiewicz Credit 10 / 1 John Longo Property 30 / 1 Christine Phillips Property 28 / 1 Neil Harvey Property 24 / 1 Daniel Berger Property (UK-based) 16 / 9 Matthew Fidge Property 7 / 7 Nadeen Hussain Property 17 / 4 Nick Ward Real Asset Alternative Debt 14 / 6 Derek Chu Infrastructure 13 / 3 Malcolm Skene Infrastructure 15 / 1 James Walsh Infrastructure 12 / 4 John Hopper Head of Income Assets 27 / 7 Alan Bridges Senior PM Fixed Income 31 / 1 Keith Dickie Fixed interest 36 / 3 Teddi Pranoto Fixed interest 17 / 4 Mark Ferguson Currency 22 / 3 Damon Lau Currency 17 / 2 Katie Dean Fixed income strategist 15 / 3 Belinda Hill Head of Investment Capability 15 / 2 Note: Experience: years in the investment industry / years with AustralianSuper Chant West November

9 In 2013, AustralianSuper established an internal Australian equities team. The team now comprises 13 investment staff, headed by Shaun Manuell. It covers large cap stocks, small cap stocks and direct investments (ie. separate large investments in a small group of stocks). It currently manages assets of about $11.3 billion or 35% of the $31.8 billion Australian equities portfolio. AustralianSuper now also has an internal international equities team, headed by Christine Montgomery. The team comprises six staff, and began managing about $1 billion in November 2016, which is now in excess of $3 billion. At the same time, AustralianSuper also launched its internal international equities quantitative strategy for which Clyde Haldane has primary responsibility. This mandate is about $1 billion in size. AustralianSuper has also established an internal credit team, headed by Roger Knott. This team has been given two Australian loan direct mandates an investment grade mandate ($750 million) and a high yield mandate ($250 million). Most recently, in September 2017, AustralianSuper further expanded its internalisation programme with the appointment of Alan Bridges to manage a sovereign bond, investment grade global fixed income portfolio. An initial mandate of $1 billion has been approved by the Investment Committee. Frontier Most of Frontier s investment professionals have dual consulting and research roles. It has five specialist research teams Equities, Real Assets, Debt, Alternatives & Innovation, and Capital Markets. It has over 40 investment staff all located in Melbourne. Chris Trevillyan and Damian Maloney are the key relationship consultants for AustralianSuper. Chant West November

10 Process Internal Investment Team Research is carried out by the internal investment team supported, where necessary, by research provided by the external consultants. The Asset Class Heads are responsible for manager appointment decisions based on recommendations from their respective teams following the completion of investment and operational due diligence. See Portfolio Management for further details of the roles of the Investment Committee, the internal investment team and the Advisory Groups. Frontier At Frontier, new manager rating recommendations are made by the research teams to the Manager Ratings Committee (MRC). The rating sponsor conducts the research in conjunction with senior members of the asset class team and prepares a report for the MRC. The research teams themselves sign off on some ratings (e.g. new products by a currently rated manager) and these are reported to the MRC. Reviewing managers is an ongoing process covering both quantitative and qualitative factors. The activities involved in the evaluation of managers include interviews, site visits, ongoing monitoring of performance and regular formal reviews. For international managers, Frontier focuses its overseas research trips on reviewing potential new managers, together with those managers where its clients have the most exposure or where it has identified issues. Overseas research trips are undertaken up to twelve times per annum. Frontier also makes extensive use of its video conferencing facilities. In 2013, Frontier and Segal Rogerscasey a US investment advisory firm headquartered in New York formed the Global Investment Research Alliance (GIRA). A third partner, UK-based Lane, Clark & Peacock (LCP), was admitted to the partnership in early The objective of GIRA is to share research on investment managers among like-minded member firms across global regions. The establishment of GIRA supplements Frontier s international manager research effort and broadens its ability to assess and explore global investment concepts. The initial phase of assessing managers involves eliminating those managers that have obvious issues such as poor business management, excessive staff turnover, excessive conflicts of interest and haphazard decision-making processes. If a manager is not eliminated in this phase, then positive factors, which are likely to lead to superior performance over time, are considered. These include quality of staff, good work culture, appropriate incentives and a well-researched and disciplined investment style. Managers are rated on several criteria, and those ratings are fully documented in a detailed due diligence document called a Manager Assessment Profile Summary (MAPS). Fully rated managers are assigned an overall rating of Buy, Neutral Plus, Neutral or Sell. Frontier also conducts desktop due diligence to form a View, and managers can be allocated a Positive, Neutral or Negative View. All managers in client portfolios are reviewed regularly. The key purpose of a review is to evaluate whether the manager s current rating remains appropriate. In particular, Frontier assesses whether the original strengths/weaknesses that produced the rating have persisted, and whether any new strengths or issues have arisen. Chant West November

11 Capital Markets Research AustralianSuper draws its capital markets research from several sources. The Asset Allocation team, headed by Carl Astori, sets the direction of AustralianSuper s capital markets research and has access to all of the research resources of its principal investment consultants Frontier and JANA. The Asset Allocation team works closely with the Advisory Groups (described in Section 5.2) and its research is strengthened by the depth of its relationships with key global and domestic managers, while the fund s size and market position affords additional privileged insights. Each June, AustralianSuper sets a strategic asset allocation (SAA) target for its Balanced Option based on where it thinks the portfolio should be positioned over the next 12 months given the valuation of financial markets and the opportunities it sees. It also forms the basis for determining the strategic asset allocations for AustralianSuper s other pre-mixed options. This annual process is led by the Asset Allocation and Portfolio Construction teams, with input from Frontier and JANA. Analysis of the economic environment along with the outlook for each asset sector over the next one to two years is brought together with an in-depth paper prepared for the Asset Allocation Group (an Advisory group to the CIO as described in Section 5.2) which has the responsibility recommending the annual SAA. The Asset Allocation and Portfolio Construction teams papers are prepared utilising a diverse range of inputs from a number of sources including government agencies, international economic bodies, private sector economists, and many of the investment managers engaged by the fund. The views are considered and debated within the internal investment team and refined into an outlook scenario and a ranking of the relative attractiveness of the different asset sectors. The views of the Asset Allocation team and the consultants are presented to the Asset Allocation Group which assesses the outlook for markets and considers the impact on the current portfolio mix, asset class mix and SAA. Views are rigorously debated and discussed in this forum before recommendations are presented to the Investment Committee for endorsement. This process highlights points of difference and identifies areas that are subject to further research and analysis. The discussion is not aimed at determining a single consensus position. Final papers are then prepared and presented to the Investment Committee for rigorous scrutiny. As part of the setting of the SAA, the Asset Allocation Group also considers the forecast cash flow that will be available for investment during the next financial year. After reviewing the recommendations from the Asset Allocation Group, the role of the Investment Committee is to endorse the proposed SAA s for each of the pre-mixed investment options for final approval by the Board. These targets are reviewed and monitored by the Asset Allocation Group in the light of changing economic and market conditions. Chant West November

12 Table 4 summarises AustralianSuper s core investment beliefs. Table 4: Core Investment Beliefs Overview Strategic Asset Allocation Medium-Term Asset Allocation Short-Term Asset Allocation Currency Policy Active vs Passive Portfolio Construction AustralianSuper has a long-term investment focus. It believes in maintaining broadly diversified portfolios across listed and unlisted assets, asset sectors and strategies, managers and manager styles. It believes in active asset allocation and active management within asset sectors where there is persistent value added. It sets strategic asset allocation targets on an annual basis which it uses as a guide for allocating cash flows to sectors with the best expected returns. In recent years, AustralianSuper has developed and grown its internal management capability initially in Australian equities, property, infrastructure, followed by cash and more recently in international equities and credit. In total, AustralianSuper managed about 24% of its assets directly at September AustralianSuper has an active approach to strategic asset allocation. Each June, it sets strategic asset allocation targets for each investment option which are targets to move towards during the year ahead. They are based on high level judgements about economic and financial market conditions over the next year or two. The Portfolio Construction team monitors and reviews the actual allocations on a daily basis to ensure each of the option s asset class exposure is within approved delegated ranges. It is also responsible for implementing changes to asset allocation tilts as recommended by the Asset Allocation Group operating within its delegated authority from the Investment Committee and the CIO. Compared with industry averages, AustralianSuper typically has higher strategic allocations to unlisted assets (particularly infrastructure and property) and lower allocations to traditional fixed interest and listed property. See Strategic Asset Allocation above. AustralianSuper generally doesn t engage in short-term market timing between asset sectors. However, in times of market stress, it may more actively alter the asset allocation of the pre-mixed options to better manage risk and return based on recommendations from the Asset Allocation Group. AustralianSuper sets a strategic foreign currency exposure level as part of the asset allocation process and maintains this through a currency overlay. For its Balanced option, the foreign currency exposure may range between 0 and 30% of the total portfolio. The neutral position is 23%. AustralianSuper actively manages its currency exposure around this neutral position, reflecting the Asset Allocation Group s assessment on the likely direction of the currency. AustralianSuper believes in active management within each sector, but uses some passive management for risk, cost and tax management purposes. AustralianSuper does not aim to achieve style neutral portfolios. It constructs portfolios with strategic tilts that it believes will add value. Chant West November

13 Portfolio Management Resources AustralianSuper s internal investment team is responsible for both research and portfolio management (see Manager Research for details of internal investment staff). This includes making recommendations to the Investment Committee (IC) on each investment option s risk and return objectives, asset allocation, currency policy and portfolio structure. The fund has an experienced IC with particular experience in economic policy and investment in alternative assets. The IC which meets approximately eight times a year, comprises eight members Jim Craig (Independent Chair), Heather Ridout, Nixon Apple, Peter Burn, Brian Daley, Brad Crofts, Russell Maddox and Stephanie Weston. Jim Craig, Heather Ridout and Brian Daley are Trustee Directors. Nixon Apple, Brad Crofts, and Peter Burn are Alternate Trustee Directors while Russell Maddox and Stephanie Weston are independent members. Process The overall governance structure is summarised below. Portfolio mix refers to the mix of broad asset classes (high level), while asset class mix refers to the mix of asset classes (more granular). (a) The Board sets the investment objectives, SAAs and ranges for each investment option. It delegates oversight for implementing each option s investment strategy to the IC. (b) Delegated active asset allocation ranges which are recommended by the Asset Allocation Group are approved by the IC. The IC reviews the actual portfolio mix and asset class mix positions on a regular basis to ensure they are within approved ranges. (c) The CIO and Asset Class Heads are responsible for managing the portfolio mix and asset class mix for each option within approved ranges and recommending changes to these, when appropriate, to the IC. (d) The CIO oversees the due diligence process for the selection of all investments. (e) Asset Class Heads are responsible for the hiring and firing of investment managers. (f) The primary management of investment risk is embedded within the investment objectives, including risk appetite, for each option. The IC is responsible for ensuring all options are operating within their defined risk and liquidity tolerances. Several bespoke committees referred to as Advisory Groups support the CIO and Asset Class Heads in their decision making. They mainly consist of senior staff in the investment team and may include external experts. Their role is to review and debate recommendations from Asset Class Heads. Where the Group endorses a recommendation, it is then referred to the CIO or Asset Class Head for final approval. Note that the Asset Class Heads have delegated authority from the CIO making them responsible for decisions within their asset class. Three Advisory Groups support the CIO: Asset Allocation Group assesses the outlook for markets and considers the impact on the current portfolio mix, asset class mix and SAA. Portfolio Management Group reviews the performance of all investment options against their targets within the given cost, liquidity and risk constraints. It also reviews the effectiveness of portfolio mix, asset class mix and security selection decisions including the performance of underlying managers. Direct Investments Group advises the CIO on direct investment opportunities within the CIO s delegated authority and recommendations bought to the IC. Chant West November

14 Five Advisory Groups support the Asset Class Heads: Equities Mix Group manages the broad direction of strategy and portfolio construction for equities for the fund and sets the equity strategy for the Balanced Option. Fixed Interest Mix Group manages the broad direction of strategy and portfolio construction for fixed interest for the fund and sets the fixed interest strategy for the Balanced Option. Mid-Risk Mix Group manages the broad direction of strategy and portfolio construction for midrisk assets for the fund and sets the mid-risk assets strategy for the Balanced Option. Currency Mix Group manages the broad direction of strategy and portfolio construction for currency for the fund and sets the currency strategy for the Balanced Option. Operational Risk Group (Investments) represents the first line of defence for operational, counterparty and liquidity risk relating to the investment portfolio. Chant West November

15 Portfolio Structure Products Offered AustralianSuper offers seven pre-mixed diversified options (four of which have been rated in this report) and five single asset class options. In addition, it offers members the ability to invest in any shares listed in the S&P/ASX 300 Index, a range of ETFs and term deposits. Diversified Options Tables 5 to 8 show the structure of the main diversified investment options. Table 5 summarises the main strategic policies of the Balanced Option (the fund s default option) as targeted for June 2018, and compares them with retail fund and industry fund peers. Table 6 shows the risk/return objectives, targeted strategic asset allocations and key statistics of the four main diversified options. Table 7 shows the permissible ranges around the strategic asset allocation targets. Table 8 compares the actual asset allocations at September 2017 with the targets for June The 2017 Strategic Asset Allocation Review resulted in some important changes. Key changes to the Balanced option included an increase in the allocation to cash (+5%), international equities (+3%), Infrastructure (+3%) and Australian equities (+1%). This was offset by a decrease in the allocation to bonds (-5%), mid-risk credit (-4%), property (-2%) and private equity (-1%). Overall, the default Balanced option s allocation to growth assets has increased by 3.5%. Compared with industry funds, AustralianSuper has a higher allocation to international equities (+7%) and cash (+5%) and lower exposure to traditional bonds (-10%) and property (-3%). Compared with retail funds, AustralianSuper has higher allocations to unlisted assets (+19%) and international equities (+7%) and lower allocations to traditional bonds (-18%) and Australian equities (-3%). Table 5: Summary of Strategic Policies of the Balanced Option Policy Balanced Industry Funds 2 Retail Funds 2 Allocation to growth and defensive assets 72 / / / 28 Allocation to Australian and int l shares 25 / / / 27 Allocation to Australian and int l property 4.3 / / 1 3 / 4 Allocation to Australian and int l bonds 1.4 / / 6 10 / 10 Allocation to alternative assets Cash Allocation to Australian and int l assets overall 51 / / / 53 Allocation to unhedged / hedged int l shares 23 / / 9 18 / 9 Unlisted assets Notes Defensive assets include 100% of credit, bonds and cash and 50% of direct property and infrastructure Industry averages are from a survey published by Chant West in June 2017 Alternative assets includes private equity, infrastructure and credit Chant West November

16 Table 6: Diversified Options Risk / Return Objectives, SAAs and Key Statistics Asset Sector Stable Conservative Balanced Risk / Return Objectives 1 Balanced High Growth CPI Over rolling periods of 3 yrs 5 yrs 10 yrs 12 yrs Chance of a -ve annual return 3 in 20 yrs 4 in 20 yrs 5 in 20 yrs 5 in 20 yrs SAA (%) Listed Equities Australian International Private Equity Private Equity Mid Risk Assets Property Infrastructure Credit Fixed Income Bonds Cash Total Key Statistics Growth / defensive assets 2 32 / / / / 14 Active / passive growth assets 29 / 3 45 / 6 63 / 9 75 / 11 Active / passive defensive assets 68 / 0 49 / 0 28 / 0 14 / 0 Active / passive overall 97 / 3 94 / 6 91 / 9 89 / 11 Internal / external 23 / / / / 77 Aust / int l share 10 / / / / 43.5 Aust / int l property 3.7 / / / / 1.9 Alternatives Aust / int l bond 19.3 / / / Cash Aust / int l assets overall 67 / / / / 54 Listed / unlisted assets 3 76 / / / / 21.5 Currency exposure Notes Return objectives are after investment fees and tax Defensive assets include 100% of credit, bonds and cash and 50% of direct property and infrastructure Unlisted assets include private equity, property, infrastructure and credit Currency exposure represents % of the total portfolio Chant West November

17 Table 7: Diversified Options Asset Allocation Ranges and Benchmarks (%) Asset Sector Stable Conservative Balanced Balanced High Growth Range SAA Range SAA Range SAA Range SAA Listed Equities Australian International Private Equity Private Equity Mid Risk Assets Property Infrastructure Credit Fixed Income Bonds Cash Cash Currency Exposure Foreign Currency Table 8: Diversified Options Actual Asset Allocations at September 2017 (%) Asset Sector Stable Conservative Balanced Balanced High Growth Actual SAA Actual SAA Actual SAA Actual SAA Listed Equities Australian International Private Equity Private Equity Mid Risk Assets Property Infrastructure Credit Fixed Income Bonds Cash Cash Currency Exposure Foreign Currency Chant West November

18 Sector Portfolios The broad structure of the fund s asset sector portfolios is summarised below. Table 9 lists the underlying managers (for the fund s total portfolio) at June Australian Shares The $32 billion Australian equities portfolio has a core component (57%), a passive component (28%) tracking the S&P ASX 100, a small cap component (9%), and a direct investments component (6%). The internal team has the largest mandate of the five core managers 28% versus 5% to 11% for the other four managers. Additionally, the internal team is one of six small cap managers, managing about 3% of the overall portfolio. It also manages the direct investment portfolio and futures positions about 6% of the overall portfolio. In total, the internal team manages about $11 billion or 35% of the Australian equities portfolio. International Shares The $37 billion international equities portfolio has a developed markets component (79%), an emerging markets component (9%), a small passive component (3%) that is used to implement regional tilts and other investments (9%). It uses seven active developed market managers and three emerging markets managers. In addition to this, the internal team manages two mandates a core portfolio and a quant strategy. The internal core portfolio accounts for about $3.5 billion or 10% of the international equities portfolio while there is just over $1 billion or 3% invested in the internal quant strategy. At September 2017, the international equities portfolio had a 15% allocation to emerging markets on a lookthrough basis compared with 11% in the MSCI All Countries Index. Overall, the portfolio is defensively positioned in terms of regional allocations with slightly overweight to the US and underweight to Europe. Private Equity The $3 billion private equity portfolio has an approximate 11/89 split between Australian and international investments. Australian private equity investments are split between fund-of-funds (5%, predominantly IFM), buyout funds (4%) and venture capital funds (2%). International private equity investments are split mainly between a portfolio of investments advised by Hamilton Lane (71%) and IFM (9%, fund-of-funds). Generally, AustralianSuper is moving away from fund-of-funds investments and is seeking direct relationships with private equity managers. IFM, through fund-of-funds, manages about 12% of the private equity portfolio. This exposure will be reduced over time. Property The $10 billion property portfolio has an approximate 60/40 split between Australian and international property. Longer term, the strategy is to have a 50/50 split. ISPT (40%) and QIC (20%) are the portfolio s cornerstone managers. The direct international portfolio at about 40% has been the fastest growing part of the portfolio. Longer term, the strategy is to grow the direct portfolios to 55%. The total portfolio has about 54% is invested in retail property, 38% in office property and 8% in other assets. Longer term, the strategy is to have 55% in retail, 35% in office and 10% in other property. AustralianSuper uses third party managers as investment advisers for its direct property investment program. These managers are appointed under non-discretionary mandates, where the AustralianSuper internal property team retains approval over acquisitions, divestments and major asset management decisions. Within its core property portfolio, AustralianSuper has relationships with six managers across seven separate mandates. TH Real Estate has two mandates UK retail and Central London office. QIC has one US retail mandate. Principal has a US office mandate and Sentinel has a US multi-family mandate. Bentall Kennedy has a mandate for Canadian office, retail and mixed use investments. ISPT has a mandate for Australian residential. Chant West November

19 Infrastructure The $13 billion infrastructure portfolio has an approximate 70/30 split between Australian and international infrastructure. Longer term, the strategy is to have a 60/40 split. IFM is the only core manager in both the Australian and international portfolios. Overall, IFM comprises approximately 50% of the total Infrastructure portfolio. Direct investments currently accounts for about 40% of the portfolio and is expected to grow to 60% over the longer term. The portfolio has about 60% invested in transport assets (airports, ports, roads and rail), 29% in regulated utilities (electricity, gas and water), 10% in contracted assets (essential infrastructure services), and 1% in non-core assets and other. Longer term, the strategy is to increase the portfolio s exposure to regulated utilities and contracted infrastructure, whilst reducing exposure to transport and non-core assets. Bonds The bond portfolio (defensive, liquid, investment grade) comprises a core domestic manager (Henderson), one specialist Australian credit manager (IFM) and two international managers (Brandywine and Western). Western was funded in October Additionally, the internal team manages an investment grade credit mandate, a covered bond portfolio, futures and most recently was given a sovereign bond, investment grade global fixed income mandate. In total, the internal team manages about $2 billion or 26% of the bond portfolio. The benchmark is 50/50 Australian and international with a range of +/- 20%. Mid-Risk Credit The mid-risk credit portfolio (higher return seeking, potentially illiquid, sub-investment grade) comprises one high yield / loans manager (Challenger), two international credit managers (Bentham and Barings) two multi-sector credit portfolios (Marathon and Oakhill) and one high return seeking global hedge fund (Bridgewater). Additionally, the internal team manages a loans and credit portfolio (about $850 million or approximately 13% of the mid-risk credit portfolio). Chant West November

20 Table 9: Investment Managers September 2017 Asset Sector Manager Actual % Style of Sector Australian Shares Passive (28%) IFM 28 ASX 100 Core (57%) Internal 28 Core Fidelity 11 GARP Alphinity 8 GARP Airlie 5 Value Perpetual 5 Value Small Cap (9%) Internal 3 Core Yarra Capital 2 GARP Eley Griffiths 1 GARP Paradice (mid) 1 Value Celeste 1 Value IFM RAFI 1 Smart beta Other (6%) Direct Investments (internal) 3 n.a. Futures 3 Futures International Shares Core Developed Markets (79%) Baillie Gifford 14 Growth MFS 13 GARP / quality Internal 10 Core Orbis 9 Value Causeway 9 Value Independent Franchise 7 Quality Jackson Square 7 Growth Harris 7 Value Internal 3 Quant Emerging Markets (9%) LSV 4 Value GQG 3 Growth / quality Westwood 2 GARP / quality Passive (3%) SSgA 3 Regional Other (9%) n.a. Other (including futures) 9 n.a. Private Equity International (89%) Hamilton Lane 71 Funds IFM 9 Fund-of-funds Other fund-of-funds 8 Fund-of-funds Various buyout, venture 1 Funds Australian (11%) IFM 3 Fund-of-funds Various buyout 4 Funds Various venture 2 Funds / collaborations Other fund-of-funds 2 Fund-of-funds Note: Manager Allocations are based on AustralianSuper s total investment in each asset class Chant West November

21 Table 9: Investment Managers September 2017(cont) Asset Sector Manager Actual % Style of Sector Property Aust Core (59%) ISPT 38 Office, retail, industrial QIC 21 Retail, office Aust Opportunistic (1%) Various 1 n.a. Alternative (1%) Various 1 n.a. Int l Core (26%) Internal 26 Retail, office Development Property (13%) Internal (King s Cross) 13 n.a. Infrastructure Australian (71%) Internal 44 n.a. IFM 26 n.a. ICG Energy 1 n.a. International (29%) IFM 25 n.a. Various 4 n.a. Bonds Internal 26 Inv. grade credit/global/futures Brandywine 25 Global IFM 21 Diversified credit Henderson 18 Domestic Other 10 Investment grade credit Credit Bentham 36 High yield global credit Marathon 15 Multi-sector credit Oakhill 14 Multi-sector credit Internal 13 Loans & High yield credit Barings 10 European loans Challenger 5 High yield domestic credit Bridgewater 4 Global hedge fund Other 3 n.a. Cash IFM 91 n.a. Internal 9 n.a. Note: Manager Allocations are based on AustralianSuper s total investment in each asset class Chant West November

22 Manager Changes Table 10 shows the manager changes since June Table 10: Manager Changes Since June 2016 Date of Change Sector Manager Hired Manager Terminated July 2016 Mid-Risk Credit Internal - July 2016 Investment grade credit Internal - November 2016 Australian Equities - Tribeca November 2016 International Equites Internal (Core) - International Equites Internal (Quant) - December 2016 International Equites GQG First State January 2017 Australian Equities - Antares March 2017 International Equites Harris - March 2017 Australian Equites - Avoca March 2017 Bonds - Schroders July 2017 International Equites - Genesis September 2017 Bonds Internal - Western - Chant West November

23 Performance Diversified Options Broadly speaking, multi-manager investment options attempt to deliver performance that is consistently competitive over the short term (about the median for single manager funds), adding up to meaningful outperformance (second quartile or better) over the longer term, but at lower risk than single managers. As a consequence, the expected range of outcomes is much narrower than for single managers. Table 11 shows the performance of four AustralianSuper diversified options over several periods to June To illustrate absolute risk, it shows the five year standard deviation. The table compares fund performance with the median of a universe of multi-manager funds. Table 12 shows the year by year returns for the past five years. The figures in brackets in both tables represent excess returns relative to the Chant West Multi-Manager Median. Performance of AustralianSuper s diversified options has been above peers over the long-term, largely due to its relatively higher allocation to unlisted property and infrastructure. AustralianSuper s medium-term tilts have also contributed to the fund s long-term outperformance. Table 11: Diversified Options Returns to June 2017 (% pa) Option 1 Year 3 Years 5 Years 7 Years 10 Years Std Dev High Growth (86/14) 13.8 (+1.0) 9.9 (+1.2) 12.6 (+0.9) 10.4 (+0.9) 5.2 (+0.5) 5.9 Multi-Manager Median Objective Balanced (72/28) 12.4 (+1.6) 9.2 (+1.5) 11.4 (+1.0) 9.7 (+0.9) 5.6 (+0.6) 4.9 Multi-Manager Median Objective Conservative Balanced (51/49) 9.3 (+1.2) 7.7 (+1.2) 9.5 (+1.3) 8.6 (+1.3) Multi-Manager Median Objective Stable (32/68) 7.2 (+1.8) 6.5 (+1.4) 7.4 (+1.2) 7.2 (+1.1) 5.8 (+1.0) 2.2 Multi-Manager Median Objective Table 12: Diversified Options Single Year Returns to June (%) Option High Growth (86/14) 17.3 (-1.0) 16.2 (+1.3) 12.7 (+1.5) 3.7 (+0.9) 13.8 (+1.0) Multi-Manager Median Balanced (72/28) 15.6 (+0.0) 13.9 (+1.1) 10.9 (+1.1) 4.5 (+1.5) 12.4 (+1.6) Multi-Manager Median Conservative Balanced (51/49) 13.2 (+1.6) 11.2 (+1.3) 8.9 (+1.1) 4.9 (+1.8) 9.3 (+1.2) Multi-Manager Median Stable (32/68) 9.3 (+0.6) 8.3 (+0.6) 7.0 (+0.9) 5.1 (+1.5) 7.2 (+1.8) Multi-Manager Median Notes for Tables 11 and 12 Returns are net of investment fees and tax. Standard deviation is over five years Multi-Manager Median refers to the relevant Chant West Performance Survey Median Chant West November

24 Chart 1 shows the rolling 12 month returns over the 5 years to June 2017 for the default Balanced option and the Chant West Multi-Manager median. Chart 2 shows the rolling 12 month excess returns relative to the Chant West Multi-Manager median over the same period. Chart 1: AustralianSuper Balanced Rolling 12 Month Returns 20% 15% Return 10% 5% 0% -5% AustralianSuper Balanced Chant West Median Chart 2: AustralianSuper Balanced Rolling 12 Month Excess Returns 4% 3% Excess Return 2% 1% 0% AustralianSuper Balanced Chant West November

25 Sector Portfolios Table 13 shows the performance of AustralianSuper s sector portfolios over several periods to June It also shows the tracking error over three years. The figures in brackets in both tables represent excess returns relative to the Chant West Multi-Manager Median. The performance of AustralianSuper s equities portfolios has generally been in line with or behind peers over most periods shown to June AustralianSuper s infrastructure portfolio has outperformed its benchmark over one and three years but has underperformed over the long-term. While the property and private equity portfolios have underperformed their respective benchmarks over all periods shown, returns over the past seven years in absolute terms have been healthy. Table 13: Sector Portfolios Returns to June 2017 (% pa) Portfolio 1 Year 3 Years 5 Years 7 Years 10 years Tracking Error Australian Shares 12.7 (-2.3) 7.2 (-0.3) 12.6 (-0.2) 9.6 (+0.0) 4.4 (+0.0) 1.4 Benchmark Multi-Manager Median International Shares 17.3 (+0.0) 14.3 (+0.2) 18.3 (-0.3) 13.1 (+0.0) 5.8 (+0.5) 3.0 Benchmark Multi-Manager Median Private Equity n.a. Benchmark Direct Property n.a. Benchmark Infrastructure n.a. Benchmark Mid-Risk Credit Benchmark Bonds 3.4 (+1.0) Benchmark Multi-Manager Median Notes Returns are gross of investment fees and tax except for Private Equity, Direct Property, Infrastructure, and Absolute Return where the returns are gross of tax and net of underlying investment manager fees Returns for the Australian Shares option include the benefits of franking credits received from participation in share buybacks Median refers to the Multi-Manager Median from the relevant Chant West Performance Survey Benchmark for Australian Shares is the S&P/ASX 300 Accumulation Index Benchmark for International Shares is the MSCI World Ex-Aust Index A$ Benchmark for Private Equity is 50% S&P/ASX 300 Accumulation Index, 50% MSCI AC World ex Aust Hedged A$ plus 5% Benchmark for Direct Property is 60% Mercer/IPD Unlisted Property Index, 20% IPD UK Quarterly Property Fund and 20% Open End Diversified Core Equity Benchmark for Infrastructure is 30% Bloomberg AusBond Composite Index, 70% Citigroup World Govt. Bond Ex-Aust Index Hedged A$ plus 4% Benchmark for Mid-Risk Credit is the 60% Credit Suisse Leveraged Loan Index A$ Hedged / 20% Credit Suisse Western European Leveraged Loan Index A$ Hedged / 15% BofA Merrill Lynch US High Yield Index A$ Hedged / 5% BofA Merrill Lynch Euro High Yield Index A$ Hedged Benchmark for Bonds is 50% Bloomberg AusBond Composite Index All Maturities / 50% Barclays Capital Global Aggregate Hedged Chant West November

26 Charts 3 and 4 show the rolling 12 month excess returns within the five years to June 2017 for Australian and international equities, respectively. Chart 3: AustralianSuper Australian Shares Rolling 12 Month Excess Returns 4% 3% 2% Excess Return 1% 0% ` -1% -2% -3% AustralianSuper Chant West Median Chart 4: AustralianSuper International Shares Rolling 12 Month Excess Returns 15.0% 10.0% Excess Return 5.0% 0.0% -5.0% -10.0% -15.0% AustralianSuper Chant West Median Chant West November

27 Attachment Ratings Methodology Attachment Ratings Methodology and General Disclosures

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29 Ratings Methodology Attachment 1. Overview Our multi-manager ratings, which represent the views of Chant West formulated on the basis of the ratings methodology described below, include an overall rating for the product issuer and separate ratings for each of its products (investment options) covered in our report. Our overall rating refers to the issuer s ability to construct multi-manager products that represent industry best practice and have a high likelihood of achieving their stated risk/return objectives. The ratings of individual products take their specific characteristics into account and may differ from the overall rating. By industry best practice, we mean portfolios that focus on generating superior long-term investment outcomes for investors as opposed to those that are overly focused on short-term business risks. Those portfolios typically reflect the issuer s best ideas. In rating multi-manager products, we are not rating the underlying investment managers. We are primarily rating the ability of the issuer to construct well-diversified portfolios and to select and combine managers to best achieve a stated set of risk/return objectives. Our ratings range from 5 Apples, our highest rating, to 1 Apple, our lowest rating. The full range and their descriptions are set out in the table below. Description of Ratings Product Rating Highest quality / highest likelihood of achieving objectives High quality / reasonable likelihood of achieving objectives Sound quality / moderate likelihood of achieving objectives Low quality / low likelihood of achieving objectives Lowest quality / very low likelihood of achieving objectives A Chant West overall rating takes into account four main criteria: portfolio management (35%) capital markets and manager research (30%), investment governance (20%) and past performance (15%). We determine a score for each of these criteria and then weight them to provide an overall rating. For each of the main criteria, we have a further sub-set of criteria. The criteria and weightings we use have been developed over a period of 21 years and reflect our considerable experience in evaluating multi-manager products. A key aspect of our ratings is that we focus on the issuer s investment governance regime, the quality of the internal investment team, the quality of the primary investment consultant, and the structure of the investment portfolios. Investment beliefs and processes, and the quality and integrity of the people involved, are more important to us than past performance. Our ratings are based on information that is either publicly available or is provided directly to us by the issuers themselves. Issuers review our report for the accuracy of the information, but we do not have the information audited or independently verified. All overall multi-manager ratings, and therefore the spread of multi-manager ratings we have given, are published on our website ( Chant West November 2017