Maintaining domestic allocations ‘not practical’ for super funds

As super fund assets continue to grow in size and scale, investment executives have increasingly been faced with the challenge of finding opportunities to put members’ money to work.

Earlier this year, Deloitte’s Dynamics of the Australian Superannuation System report flagged the persistent capacity problem of Australia’s $3.5 trillion super industry.

Namely, super funds’ total investment in Australian shares, including allocations within managed funds and pooled superannuation trusts, equals about 36 per cent of the total market capitalisation of the Australian Stock Exchange (ASX), Deloitte found. 

“If we assume that superannuation funds seek to retain the same percentage allocation to Australian shares, we have estimated that the proportion of the ASX market capitalisation represented by superannuation funds would steadily increase, potentially to more than 50 per cent eventually,” the report said.

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This issue of limited domestic investment vehicles has driven funds to look outwards for opportunities to deploy capital, with NAB’s Super Insights Report finding that allocations to offshore investments by funds rose to 47.8 per cent in 2023, up from 46.8 per cent in 2021, and 41 per cent in 2019.

Australian Retirement Trust’s head of investment strategy Andrew Fisher said it is “not going to be practical” for mega funds to continue to maintain the current level of domestic allocations.

Speaking at the Morningstar Investment Conference in Sydney this week, he said: “I’d be lying if I said $280 billion of assets to invest is not a challenging task at times. 

“It is a lot of money and we’re forecast to go to $500 billion by the end of the decade, those are the internal numbers we’re dealing with.

“Realistically, it’s not going to be practical for us to continue to maintain the level of domestic allocations, particularly listed market equity allocations that we have.”

Last year, JP Morgan’s Future of Superannuation report, which collated data from six superannuation fund leaders in Australia and the UK, found Australia’s largest funds have turned their sights to offshore investments to fuel growth. 

Unlisted assets such as infrastructure, private equity, and real estate are poised to play an ongoing key role in portfolios and future investment strategies, it said, and, increasingly, funds have been moving offshore to capture these opportunities.

According to Fisher, with Australia being one of the first countries to privatise infrastructure, locating opportunities in the domestic market is made more challenging.

“The market is finding new and innovative ways to create infrastructure – digital infrastructure is quite popular now – but realistically, there’s some underdeveloped markets offshore where we’re likely to see better opportunities,” he said.

However, he added, ART holds a “real strong preference” for domestic investment where possible.

“Our members are Australians, their liabilities are linked to Australian inflation, and the best protection against that is investments in the domestic economy,” Fisher said.

“We certainly will be strongly committed to investing domestically, but there is an inevitability with scale that we’re going to have to increasingly move offshore, and also an inevitability with being one of the first mover countries in the infrastructure space, [as] there’s only so much infrastructure that can be sold.”

The fund, which is Australia’s second-largest super fund, recently announced it has opened its first overseas office in London as it seeks to further capitalise on international investment opportunities.

At the time, a spokesperson confirmed that a team of three existing ART employees moved to the UK in mid-March, with the focus being on a “select few” working with external managers and taking advantage of being closer to new investment opportunities.

The option of smart partnering

UniSuper has pursued a somewhat different approach, choosing to partner with “high quality managers” operating globally, rather than launching an office overseas. 

Joining Fisher on the panel, Sandra Lee, the $130 billion fund’s head of private markets said there is “complexity in going overseas” whether it’s to set up shop or to purchase an asset. 

She cited currency hedging as one element adding to the complexity, as well as finding a common language with a different team of co-investors. 

“They’re generally the large offshore pension funds, so you go in there and you need to understand cross-jurisdiction, tax, legal requirements. It starts making your business model more complex,” Lee said. 

Last year UniSuper acquired a 5 per cent indirect stake in mobile towers business Vantage Towers, marking its first direct unlisted infrastructure investment in Europe.

The major shareholder and anchor tenant was Vodafone, which entered into an agreement in 2022 with a consortium led by Global Infrastructure Partners (GIP) and KKR. UniSuper then joined that consortium through its relationship with KKR.

These are the sorts of relationships the fund is willing to pursue, Lee said. 

“When you say we’ve invested in mobile towers in Europe, Europe consists of multiple markets and they all behave differently, so it’s [about] having the right talent and right resources,” she said.

“UniSuper is not looking to create offices in all those markets, but our approach is very much to have strategic partnerships with high-quality managers that exist and function in those markets. We retain the investment decision making and we work in partnership with those high-quality fund managers and they do a lot of the detailed due diligence.

“Us trying to set up offices across the globe and attracting the right talent, sitting here today feels rather challenging.”

However, these challenges haven’t prevented Australia’s biggest fund from making its mark overseas. 

In March this year, AustralianSuper doubled down on the UK as an “attractive location” to deploy capital, announcing it would commit a fresh £8 billion by the end of the decade. 

At the time, AustralianSuper said it expects to hold an investment portfolio of over £18 billion in the country by 2030 with large-scale, long-term opportunities across sectors like transport and logistics, digital infrastructure, mixed-use estate, and the energy transition. 

The fund, which opened a London office in 2016 and has since grown to more than 100 staff members, presently has some £8 billion currently invested in the UK.