Investment Review

Investment Review

The investment activities at the Helen Macpherson Smith Trust are guided by the organisation’s strategic aims of Building, Enabling, and Leading.



Within this context “Building” means strengthening HMSTrust’s investment capabilities.

During FY2016 unlisted infrastructure was included as a new asset class in the strategic asset allocation.  The stable cash flow and steady growth of assets such as airports, pipelines, toll roads, and electricity distribution networks are ideal for a long-term investor like HMSTrust.  Furthermore, analysis from our external investment adviser, Frontier Advisors, showed that by adding this asset class we materially lowered the volatility of our overall portfolio while having little impact on its long-term expected return.  We subsequently made a $10m commitment to Utilities Trust of Australia (UTA) which has a well-diversified portfolio of unlisted infrastructure assets, predominantly in Australia.  Half this commitment was drawn in January when a consortium, including UTA, was successful in buying Transgrid from the NSW government.  In its first six months, our investment in UTA has delivered a pleasing return of 9.8%.

HMSTrust is one of few trusts which manages its investments internally.  The advantages of this are greater control over the investment process and lower costs.  This year the cost of the investment operation was 0.30% of average assets under management, including fees paid to external managers for international shares and unlisted infrastructure.


The purpose of the investment operation is to “enable” HMSTrust to fulfil its granting mission.  This is reflected in two investment objectives.  The first is to generate an operating surplus of at least $4.1m ($4.0m in 2014, indexed for inflation).  This year the operating surplus generated was $0.4m above the target despite falling interest rates and a substantial 78% cut in BHP Billiton’s final dividend.

The second investment objective is for the total return of the Capital Account (corpus) to match or exceed the return on the strategic asset allocation over rolling five year periods.  The latter measure is the return that would have been achieved if each asset class was held at its strategic weighting and the return of each asset class equalled its specific benchmark index return.  This objective has not yet been in place for five years, but in FY2016 the total return (meaning both capital growth and income) of the Capital Account was -1.2% compared with 1.1% for the strategic asset allocation.  The main reasons for the under-performance were underweight exposures to bonds and property which performed strongly on the back of unprecedented central bank monetary policy.  Towards the end of the year it was estimated that around a third of developed market government bonds were trading at negative yields.  Our Australian shares portfolio also under-performed its benchmark by 1.4%, mainly because of a high exposure to banks.  The bank sector under-performed because of demands by the regulator (APRA) to hold more capital as protection against financial shocks.  This has the effect of lowering their return on equity and pressuring dividend payments.  We chose to hold our bank positions because they underpin the income generation of the portfolio which is one of our primary objectives.

The strategic asset allocation and actual asset allocation at June 2016 is shown in the table below.  The main changes over the year were the introduction of unlisted infrastructure, a reduction in the exposure to Australian and international shares, and an increase in cash.

Asset Class Strategic weight Min. Max. 30 June 2016 weight
Australian shares 65% 40% 80% 60%
International shares 15% 0% 30% 17%
Australian property 5% 0% 20% 3%
Growth Assets 87.5% 82.3%
Unlisted infrastructure 5% 0% 20% 5%
Hybrids 0% 0% 5% 4%
Australian bonds 5% 0% 25% 0%
International bonds 0% 0% 10% 0%
Cash 5% 0% 50% 11%
Defensive Assets 12.5% 17.7%
Note:  Unlisted infrastructure is classified 50% growth and 50% defensive

The investment objective for the Income Account is to generate an interest rate greater than the 90 day bank bill swap rate.  In FY2016 this was again achieved comfortably with the portfolio earning an average rate of 3.86% compared with 2.18% for the benchmark.


HMSTrust has a strategic objective to provide leadership in philanthropy.   During the year the Investment Committee spent considerable time discussing the topical issue of impact investment.  Impact investing is a broad term, but in essence it means making investments with the explicit objective of generating both a financial return and a measurable social or environmental impact.  In practice this covers a spectrum ranging from “ethical investment” to direct investment in social enterprises and it spans the full range of asset classes.

The Investment Committee has recommended (and the Trustees subsequently approved after year end) changes to the Investment Policy Statement that allow participation in impact investment within strict guidelines. As a will-based trust in perpetuity, the Investment Committee rightly places a high priority on preserving the value of the corpus in real terms, and this objective underpins our approach to impact investing.

HMSTrust’s policy includes principles-based screening of our internally managed investments to ensure we do not invest in companies whose activities are regarded as contrary to HMSTrust’s mission and values and its granting strategy.  We also have the ability to make direct impact investments which have strong capital preservation characteristics and social or environmental impacts aligned with our granting strategy.  In total, such investments will be limited to no more than 2% of the corpus.

Social impact investing is a much-discussed topic in philanthropic circles but the range of investment opportunities that meet our criteria has been limited to date.  As with all investments, our approach will be patient and disciplined and it may well be some time before we make our first direct impact investment.

Peter Wetherall
Investment Executive