Industry funds and unlisted assets deemed ‘dynamic duo’

Industry super funds continue to demonstrate a strong investment appetite for unlisted assets, particularly as the largest of such funds seek new avenues to deploy capital outside of their material investments in Australia’s listed market, according to Morningstar research.

In a recent report on Australia’s superannuation landscape, industry funds and unlisted assets were described as a “dynamic duo”, highlighting that direct property and infrastructure allocations have long been fundamental components of these funds.

In contrast, retail funds demonstrate a higher inclination towards listed equities, while both fund types maintain broadly similar allocations to fixed income and cash.

The report revealed that industry funds allocate over 20 per cent to unlisted asset classes, compared to approximately 7.5 per cent for retail funds. Within the unlisted asset class, unlisted infrastructure constitutes the majority of industry fund investments (10 per cent), followed by unlisted property and unlisted equity (5 per cent each), and private debt at about 1 per cent.

“The reason for this difference comes down to membership profiles; industry funds have historically had a stable membership base providing a steady, predictable stream of cash inflows,” Morningstar said.

Namely, the “big eight”, all of which belong in the industry fund category, dominate net flows, having received nearly 93 per cent of total superannuation net flows in the 2022–23 financial year. The largest fund, AustralianSuper, had net fund flows approaching $20 billion in just one year – essentially, the fund is absorbing the equivalent of an entire medium-sized fund in net flows annually, all of which must be invested.

This steady stream of cash enables allocations to less liquid assets without compromising liquidity risk for members reaching retirement or otherwise exiting the fund, Morningstar explained.

The report revealed that for allocations by fund size, high positive net flows and impending capacity constraints in certain listed classes have created a favourable environment for large funds to increase their investments in unlisted assets. As a result, these funds are exploring cost-effective opportunities through co-investment and expanding their private asset investment teams.

Hostplus topped the “big eight” funds with a 26 per cent allocation to unlisted assets, while Cbus and AustralianSuper led in unlisted infrastructure exposure at 12 per cent each, followed by ART at 10 per cent.

Hostplus again topped its “big eight” peers with an exposure of 10 per cent to private equity.

Moreover, Morningstar revealed that among the “big eight” industry funds, there has been a steady moderate increase in average allocations to illiquid assets over the past five years, rising from 21 to 23 per cent of total assets.

While not all unlisted assets are illiquid, a close connection exists between the two, and the current range of illiquid allocations among these funds – spanning from 16 per cent to 31 per cent – indicates varying perspectives on exposure to illiquid assets, even among large funds, the research house said.