Oct 9, 2023 · 1h 5m · capital-allocators
Sonya Sawtell-Rickson – Total Portfolio Approach at Australian Superannuation HESTA (EP.342)
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Ted Seides interviews Sonya Sawtell-Rickson, Chief Investment Officer of Australian superannuation fund HESTA, exploring how the fund implements the Total Portfolio Approach, navigates systemic universal owner risks like climate change, and structures resilient governance to manage 75 billion Australian dollars.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 22.1% of the talking time here. How this is scored →
Ted as informed peer 4.8 Guest teaching 2.2 Guest disagreement 0.0 Ted pushing back 0.1
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 23:20 Direct pushback on simplistic divestment strategies
Sonya strongly rejects the conventional idea that reducing portfolio emissions through blunt divestment equals real-world sustainability success.
Hardest push from Ted ▶ 20:00 Host drilling down on dynamic trading execution frequencyTed presses Sonya on whether dynamic asset allocation models actually lead to frequent operational portfolio changes versus passive positioning.
Biggest teaching moment ▶ 58:40 Deep dive into APRA's superannuation performance testSonya delivers a comprehensive breakdown of the Australian regulatory framework, explaining the severe operational consequences of failing APRA's 50 bps benchmark test.
Ted holds their own ▶ 22:10 Host dissecting factor risks in complex private marketsTed demonstrates advanced allocator expertise by questioning the specific statistical factor mapping of alternative assets and directional macro hedge funds.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Guest Overview: Sonya Sawtell-Rickson and HESTA | 4 | 0 | 0 | 0 | Ted opens with an introductory monologue highlighting HESTA's size and Sonya's pioneer role in Total Portfolio Approach (TPA), followed by a personal LinkedIn anecdote. | |
| Sonya's Journey from Medicine to Investment Management | 3 | 2 | 0 | 0 | Ted prompts Sonya on her background and entry into superannuation. Sonya recounts transitioning from biomedical science to economics and the early days of Australian super. | |
| Modernization of Portfolio Structures in Australian Super | 5 | 3 | 0 | 0 | Ted asks about structural shifts in superannuation portfolios over decades. Sonya breaks down the shift from standard balanced 70/30 defined benefits to complex accumulation options and TPA. | |
| Defining Portfolio Objectives, Real Returns, and Climate Targets | 5 | 2 | 0 | 0 | Ted pushes on how broad real return objectives translate to concrete benchmarks and operational incentives. Sonya details their CPI plus 3% hurdle alongside net-zero and climate targets. | |
| Asset Allocation Breakdown and Dynamic Tilting | 6 | 1 | 0 | 1 | Ted questions the mechanics and frequency of dynamic asset allocation around their 58% equity allocation. Sonya explains that risk and fair value models run daily to capture price volatility. | |
| Factor-Based Risk Modeling for Real Assets and Alternatives | 6 | 3 | 0 | 0 | Ted probes factor-based risk modeling for illiquid and alternative assets like infrastructure and hedge funds. Sonya details factor deconstruction and dynamic beta hedging. | |
| Designing Team Architecture and the Co-CIO Operating Model | 4 | 2 | 0 | 0 | Ted asks about team culture and the operational setup required to solve systemic problems. Sonya articulates her Co-CIO model bridging top-down portfolio design with bottom-up asset selection. | |
| Internal Team Dynamics, Physical Seating, and Grounded Debate | 4 | 1 | 0 | 0 | Ted inquires about the practical rhythms and physical seating arrangements that encourage cross-team debate. Sonya explains rotating desk pods and monthly cross-functional risk forums. | |
| Investment Governance and Non-Committee Risk Delegation | 5 | 2 | 0 | 0 | Ted asks about decision governance and board-level risk delegation. Sonya highlights that HESTA avoids decision-making by committee, instead delegating explicit risk mandates to individual decision makers. | |
| Horizon One Internalization and Manager Partnerships | 5 | 2 | 0 | 0 | Ted asks about the balance between building in-house capabilities and selecting external managers during Horizon One insourcing. Sonya explains how internal expertise makes them better partners to external managers. | |
| Horizon Two: Unlisted Assets and Strategic Partnerships | 4 | 2 | 0 | 0 | Ted asks about the next horizon of insourcing. Sonya describes Horizon Two focused on strategic partnerships, managed-direct structures, and co-investing in unlisted real assets. | |
| Tactical Opportunities in Private Credit and Real Estate | 6 | 2 | 0 | 0 | Ted inquires about current tactical market tilts. Sonya identifies mispricings in US private credit and commercial real estate balance sheet recapitalizations. | |
| Manager Selection Framework and Inflation Hedging Instruments | 5 | 2 | 0 | 0 | Ted explores manager diligence and direct inflation hedging instruments. Sonya details their RFP process alongside inflation swaps and inflation-linked bonds (ILBs). | |
| Managing COVID-19 Liquidity Shocks and Early Super Access | 5 | 4 | 0 | 0 | Ted asks how HESTA manages extreme liquidity crunches. Sonya explains navigating COVID-19 when the Australian government permitted early super withdrawals alongside heavy currency hedging margin calls. | |
| Navigating Late-Cycle Risks, Biodiversity Loss, and Geopolitics | 4 | 3 | 0 | 0 | Ted asks Sonya about her biggest market concerns. Sonya itemizes late-cycle macroeconomic signals, inverted yield curves, and systemic biodiversity destruction. | |
| Translating Systemic Threats into Portfolio Adjustments via Squads | 5 | 3 | 0 | 0 | Ted asks how high-level systemic risks are translated into actionable portfolio adjustments and diversity initiatives. Sonya explains multi-disciplinary squads and gender equity surveys for asset managers. | |
| Competitive Dynamics and the APRA Superannuation Performance Test | 6 | 4 | 0 | 0 | Ted asks about competitive dynamics in the Australian super landscape. Sonya educates on the regulator APRA's annual performance test where failing the benchmark by 50 bps triggers harsh regulatory penalties. | |
| Systemic Impact Initiatives: TNFD, AMR, and Affordable Housing | 4 | 2 | 0 | 0 | Ted wraps up by asking about future operational goals and standard closing reflection questions. Sonya outlines initiatives in affordable housing, antimicrobial resistance (AMR), and AI. |
Statements from this episode (36)
Australian pension funds emerged from 1980s wage sacrifices to counter inflation
“Remember Australian pension funds really started to sort of come into existence in the eighties as part of the Creation and the sacrifice of salaries in a high inflation environment to really try and achieve dignity in retirement.”
Sawtell-Rickson: Early Pension Funds Offered Defined Benefits Only to White-Collar Workers
“Back then, the fund that I worked for, they offered a defined benefit only for white collar workers, blue collar workers, Had much different insurance, much lower contributions and very different terms.”
Sawtell-Rickson: HESTA has over 1M members, 80% female in healthcare
“We have over a million Australians as members. The membership is 80% female, and they come from the health and community services sectors.”
Sawtell-Rickson: Markets are complex adaptive systems with medium-term predictability
“My personal view on markets is very much That they tend towards being complex adaptive systems. I think we can talk about them as complex environments, but there is a level of predictability, and we do think markets are somewhat predictable over the medium ter…”
Sawtell-Rickson: Top investors use a total portfolio approach over siloed benchmarks
“The way I believe the best investors sort of attack markets is with a total portfolio approach. So very much embedding in the entire team, a deep understanding of those investment objectives, a deep understanding of what matters most for our members. So moving…”
HESTA hit initial carbon reduction goal early, raised 2030 target to 50%
“We set ourselves an interim target in 2020, a third reduction in our carbon emissions by 2030, and pleasingly two years in, we've achieved that objective, so we've increased it to 50% now.”
HESTA's MySuper default option targets CPI plus 3% real return
“We offer a number of products, but almost three quarters of our funds are in our MySuper default balanced growth option, and the real return objective for that fund is CPI plus three percent.”
HESTA allocates 58% to equities, 16% to real assets, 24% to debt
“It's a balanced growth fund, so it does hold a reasonable amount of growth assets, a significant amount of equities, around 58%, including private equity. We've got around 16% in real assets, so infrastructure and property to give that inflation hedging charac…”
HESTA Limits Dynamic Equity Tilts to Plus or Minus 10%
“They're not big tilt. So we're not going plus or -30% equities. And that's because we have the product by definition is in a risk cohort. And so we are limited by the ranges that we publish to our members. But within those ranges, and they're broadly plus -10%…”
Sawtell-Rickson: HESTA does not hold many hedge funds
“We don't have a lot of hedge funds in the portfolio.”
HESTA reports SDG alignment and participates in Harvard impact pilot
“We are using those taxonomies and we are reporting publicly on our investment aligned with the SDGs step one. We're also part of a pilot program with the Harvard called the impact weighted accounts, which is really trying to start to translate externalities, b…”
Divesting high-carbon assets is not ESG success for universal owners
“We know that we don't just want carbon emissions to reduce in our portfolio. That would be easy. I could just sell everything with high carbon and be done tomorrow. But that is absolutely not success for us. Success is reducing carbon emissions in the real eco…”
Sawtell-Rickson: Investment Debates Should Focus on Core Beliefs Over Valuations
“So rather than talking about whether equities are cheap or expensive, we're talking about, well, what are our beliefs around how equities behave? What really is driving our views on earnings growth into the future or multiples into the future? How do we see ri…”
HESTA bought cheap inflation hedges in 2019 when priced at 1%
“So we were buying inflation Back in 2019, when it was pricing at one percent, we were loving inflation. So, well, let's buy some of that.”
HESTA rejects committee decision-making in favor of individual risk delegation
“We actually delegate decisions to key decision makers. There are a lot of decision makers in our business. I don't get to make every decision, for example. We're very fortunate that we've got a lot of delegation from our investment committees. They set clear p…”
Sawtell-Rickson: HESTA internalized Australian equities, fixed interest, and cash
“So that led us to internalize Australian equities. And we've attracted a great team into our Australian equities who have been on the ground and running portfolios now for over a year. We've also moved into Australian fixed interest and cash.”
Sawtell-Rickson: Internal investment capabilities make allocators better manager partners
“And I think, again, what's been interesting is that by having that sophistication in house, it actually makes us better partners. It's been fascinating to watch how the relationships with our active managers globally and even domestically have really improved.…”
Sawtell-Rickson: HESTA expects to transition to fewer, deeper partners
“So we think we'll probably have Fewer, deeper partners into the future, and then how do we create capability so that we have more discretion in our building?”
Sawtell-Rickson: Universal owners bear the cost of corporate externalities in portfolio performance
“We are a large global investor. We are exposed to the global economy and these risks and externalities that individual companies create have an impact on the system. We pay the cost, whether we pay it directly or we pay it indirectly. We pay that cost in our p…”
Sawtell-Rickson: Private credit investors are overpaid for risk amid bank retreat
“And probably, to be honest, we think we're being overpaid for the risk we're taking in the current environment of scarcity as banks are pulling back.”
Sawtell-Rickson: Inflation-linked bonds are a cheap portfolio hedge
“It seems to us like a cheap hedge to be adding to the portfolio, especially even ILBs now. Inflation linked bonds with real yields really rising over the past while, locking in and protecting some of that real yield for our members is attractive.”
Sawtell-Rickson: HESTA prefers private markets for credit dislocation opportunities
“And at the moment we're preferring private markets. We think the dislocation is better and, you know, more targeted in private markets, but that's not always the case.”
Sawtell-Rickson: Real Assets Preserve Value via Replacement Costs and Indexed Income
“Obviously constrained by the cost of replacement, and as the cost of replacement rises, inflation rises, they can hold value in a way that other things may not, as well as often having inflation linked income streams.”
Sawtell-Rickson: Crisis agility requires manual intervention in quantitative market models
“So you've got to have the preparation to be able to make decisions in the moment. You have to have found that alignment and belief on how you believe markets will work. And then you need a culture that you can come together with agility and make decisions quic…”
Market downturns trigger collateral calls for Australian funds via currency drops
“In Australia, when markets tend to go south very quickly, the Australian dollar also tends to go south very quickly, which means where we hedge some of our international exposure, we can end up with lots of collateral calls on our currency hedges.”
HESTA entered the COVID-19 pandemic with an overweight 9% cash allocation
“We were fortunate we actually went into that period through our dynamic asset allocation process, underweight risk assets, and overweight cash. So we were running about nine percent cash going into COVID.”
HESTA's COVID-19 liquidity demand and collateral outflow forecast was within 5%
“Following our process, we quickly formed a view on what we thought that collateral that would go out of our fund, so the external liquidity demands would be, and it turned out we were within five percent of our estimate, which was a fantastic outcome.”
HESTA currently targets an approximately 30% allocation to illiquid assets
“We currently target around 30% in illiquid assets.”
HESTA stress-tests liquidity to keep illiquid assets below a 40% cap
“But assuming that those couldn't be traded, we do different scenarios and try and make sure that we're not breaching 40%.”
Sawtell-Rickson: Traditional recession indicators are triggering across markets
“We're seeing a lot of indicators that are traditional recession indicators triggering. Obviously we've got an inverted yield curve. We've got leading indicators starting to slow. We're seeing employment starting to turn. High inflation, rising interest rates. …”
Sawtell-Rickson: Equity markets have not priced in consumer bifurcation and debt risks
“That is something we're watching closely, and we just don't think equity markets have really priced that risk at the moment.”
Sawtell-Rickson: HESTA's internal investment team is over 40% female
“Within the investment management team, we're running over 40% female, which is very high. Relative to the financial services industry and benchmark.”
Sawtell-Rickson: APRA Bans Super Funds From New Members After Consecutive Failures
“If you underperform that benchmark by more than 50 basis points, then you fail, and you have to write to your members and tell them that you failed this test. And if you fail for two years in a row, you can't accept new members.”
Sawtell-Rickson: HESTA Partners with Asset Owners on Antimicrobial Resistance
“We're working with some other global asset owners on an initiative around antimicrobial resistance, which is the resistance we're all building to antibiotics as they're used through the food supply chain and overuse in the medical industry. Again, we see that …”