Investments

The Local Government Super investment team's main aim is to achieve the investment objectives of each strategy available to members.

In order to assist the team, Local Government Super's Trustee employs the services of an external Asset Consultant to provide advice on the investment strategies to be adopted, fund manager selection and how managers' performance should be monitored.

The assets under management are spread across a range of sectors (for example, Australian shares, direct property and fixed interest) within strict guidelines. They diversify the assets across the sectors in predetermined proportions (called asset allocation) to meet the relevant long term objectives and each sector has a specified list of authorised investments which can be used.

Overlaying this, Local Government Super actively invests these assets based on a sustainable and socially responsible investment policy. This policy specifically takes into consideration environmental, social and corporate governance (ESG) issues.

The team also has strict guidelines regarding how a fund manager is chosen and this includes investigation into their relevant expertise, whether they have adequate resources and a good track record. Further, they work to diversify fund manager style and risk by using a complementary blend of professional fund managers.

Finally, an Investment Committee monitors all the managers and receives reports comparing their performance against pre-determined benchmarks. From time to time managers may be replaced if there are issues regarding their ability to perform to expectations or if there are changes to a strategy.

Direct property

Local Government Property Fund (LGPF) is an unlisted property fund managed and controlled by Local Government Super (LGS). Originally established in 2003, LGPF has 11 assets in the portfolio throughout NSW including 6 office buildings, 4 retail centres and 1 industrial estate.

LGPF adds value to their properties by providing a long-term innovative investment platform and active asset management. As tenant retention and sustainability are key elements in the investment philosophy, we focus on meeting our customers' needs for a more productive and greener work environment.

As a leader in environmental, social and corporate governance (ESG) issues, LGPF has engaged in a range of sustainability initiatives culminating in being awarded the Green Globe Award for Commercial Property Sustainability in 2009. Further information can be found by visiting the sustainability pages.

Asset allocations

Find information on Asset Allocations for each investment strategy.

Financial commentary

The 2009/10 financial year was a year of two halves. After a fantastic first six months where the Australian share market was up over 25%, the next six months saw it retreat back 10% to finish the year with a positive return just over 13%. Coming off the back of one of the worst financial years in history, at first glance a 13% return would appear to be reassuring, but there are underlying problems that need to be resolved if markets are going to advance from here.
Read the full commentary.

Fund managers

Find out information about the fund managers Local Government Super uses to manage its investments. The descriptions, broken up by asset class, provide a brief account of the fund manager's investment style and areas of expertise.

Investment story

What's involved in the Absolute Return sector?

One area of the Local Government Super investment portfolio that needs explanation is the Absolute Return sector. Apart from 'Cash', each Local Government Super investment option has a significant allocation to the Absolute Return sector.

Our objective for this sector is to get reliable positive monthly returns by seeking investments that produce a small premium over the cash rate without a lot of risk.

We use a range of different investments in this sector, but currently the largest investments are in high quality, short-term credit mandates. 'High quality' means our fund managers can only buy securities from 'investment grade' borrowers, ie there are credit rating restrictions on what we can invest in. 'Short term' (or short duration) means we are not greatly exposed to interest rate risk. If interest rates rise further our rate of return will increase as we have floating rate investments.

The largest pool of funds we have in this sector is managed by Macquarie Funds Group.

Within this pool of funds, the biggest amount is currently invested in Residential Mortgage Backed Securities (RMBS). These are investments that give Local Government Super a part ownership in a large group of housing loans. These investments allow the original lenders (or originators) to on-sell housing loans so that they can make some new loans*.

Macquarie also has a large allocation of investment to floating rate securities issued by the big four Australian banks and some overseas banks. They also invest in securities from other financial companies and some highly rated industrial and real estate companies.

Another example of an investment in this sector is Local Government Super's approach to lending funds to the banks. The banks often complain about their cost of funding so we are taking advantage of this situation by lending to the banks via our managers. Macquarie Funds Group has been earning a return that is higher than the deposit rates offered by the banks. Further, we are also lending indirectly to home owners through RMBS, which means that LGS benefits every time mortgage rates are increased.

* Note that Australian RMBS are far safer than the US Sub Prime Mortgage Securities.