When AustralianSuper agreed to acquire the assets of the smaller Westscheme fund earlier this year, Mark Delaney wasn’t worried.

AustralianSuper’s long-serving chief investment officer had carefully reviewed the A$3.4 billion (US$3.6 billion) portfolio, which had come under particular pressure during the global financial crisis as its largely unlisted portfolio of assets created a liquidity-squeeze for investors.

In fact, AustralianSuper had inside knowledge about Westscheme’s directly-owned unlisted assets. “Quite a few of the big ones, we already owned,” Delaney says of the penchant for industry funds to co-invest.

Westscheme merged with the fund on June 30, boosting AustralianSuper’s assets to more than A$43 billion. The smaller fund held the bulk of its portfolio in unlisted assets but was forced to radically overhaul its strategy in its final year to avert dangerous liquidity pressures.

But the line between a successful and unsuccessful portfolio can be a fine one. Unlisted assets have formed a core component of the diversification strategy which has underpinned AustralianSuper’s strong long-term investment returns.

The fund has about 27.6% of its balanced portfolio in unlisted assets (post-merger) although the addition of Westscheme’s assets didn’t materially change its initial exposure. Of those assets, infrastructure comprises 12.7%, property 10.4% and private equity 4.5%.

“Unlisted assets, which are a key component of the portfolio because of their diversification characteristics, have performed pretty well so far,” Delaney says. “And those businesses are less volatile than the broader equity markets so that’s quite satisfactory.”

Delaney says the assets are consistently delivering returns of between 8% and 10% after a downturn in 2009, when valuations caught up to spiralling equity markets across the industry. However, AustralianSuper didn’t invest in the highly-geared unlisted assets which were brought undone by the GFC.

“The ones that are less highly-geared and more stable businesses do a lot better. So which type of fund you have is really important and one really clear lesson out of the GFC is you don’t go chasing extra returns by taking on more risky unlisteds.”

Westscheme is not the only fund to merge with AustralianSuper, which was itself formed in 2007 from the merger of the Australian Retirement Fund and the Superannuation Trust of Australia.

Since then it has more than doubled in size, attracting several smaller funds to join its fold. The A$80 million Aviation Industry Superannuation Trust also rolled into AustralianSuper last year as the local industry continues to consolidate amid rising government pressure to keep costs down.

Delaney says AustralianSuper’s rapid growth has not resulted in changes to its investment strategy but rather prompted it to increase the strength of its internal investment team. “You have a lot greater organisational capabilities and a lot less dependence on external advisors - that’s the key difference.”

AustralianSuper has retained both consultants since its inception: JANA Investment Advisers, which advises on international assets, global equities, fixed interest and cash, and Frontier Investment Consulting ,which advises on Australian equities, property and infrastructure.

The internal team has grown considerably. In March, AustralianSuper created a new head of infrastructure role, filled by former infrastructure adviser Jason Peasley, and in August, it appointed its first head of equities, Innes McKeand. He is currently reviewing the fund’s equity strategy including its active versus passive and in-house versus external manager decisions.

Industry Funds Management, which AustralianSuper part owns, is its preferred index manager and the fund has been a long term supporter of passive strategies. It increased the level of indexing across its local equity portfolio about 18 months ago - over half of its Australian equities portfolio is now indexed.

“We think the strategy to have more indexed has been a good strategy over the past couple of years because active managers have struggled to add value,” Delaney says.

At the same time, it shifted its international equities portfolio to active management. “We thought coming out of the GFC there would be a lot more opportunities for active managers to add value in global equities, particularly as they had performed so poorly during the GFC. And our active managers have done pretty well over that18-month period.”

Delaney says the past few months have been particularly volatile and the fund has been building up its cash reserves in lieu of equities. The shift has added almost A$1 billion in cash, representing 2-3% of its balanced portfolio. Its cash holdings were A$3.12 billion at June 30.

“Most people would say that the equity pricing is attractive now and has been for the last month or two, so what we’re really wanting is greater confidence around the risk factors around Europe, around the US and even around China. As an investor you can’t wait until everything is settled until you decide to go. You have to make a balanced judgment that things have improved sufficiently to put your money back in the markets.”

Such active management of the fund’s equity exposure, alongside diversification via unlisted assets, has helped the fund navigate the GFC, Delaney says.

The fund stopped buying equities in mid-2007, prompting equities to decline from over 60% of its balanced portfolio to below 50%. It only began buying equities again in early-2009, after the worst of the GFC had passed.

Its other major long-term call has been to maintain an overweight position in emerging markets over the past several years, which now comprises about 40% of its total global equities exposure.

“Developed markets clearly have significant issues and while the market pricing reflects a fair chunk of those issues, it’s hard to see them resolved in a substantive sense in the near term,” Delaney says. “That might be managed but they won’t be resolved. In emerging markets they’ve got some near term issues… but are likely to benefit from just stronger economic performance over the medium term.”

Delaney stresses long-term performance remains key for investors although the fund also performed well last year. Its balanced portfolio, which holds two-thirds of the fund’s total assets, returned 3.15% over the five years ended June 30, 2011, compared with the median fund’s 2.49%, according to research house SuperRatings.

“It’s been a very adverse environment and these plans have still generated positive returns over a five-year view.”