Australian superannuation funds stand out as top performers globally, according to new research from NAB and the Association of Superannuation Funds of Australia.
A significant reason is their big exposure to the share market.
However, that exposure is backed by rising levels of unlisted assets, which helped protect fund members during the COVID market slump.
With around 43 per cent of investments by the top 14 local super funds held in listed equities, Australia sits behind only Belgium in equities exposure.
Not only do Australian funds have a big share exposure, they have big exposures to a few companies.
The top four local holdings of the major super funds (BHP, CSL, Commonwealth Bank and NAB) account for 10 per cent of their total share holdings while the top 20 account for 25 per cent of their total share portfolios.
That is not surprising, says David Knox, director of superannuation group Mercer.
“The top 20 companies dominate the market and the market is dominated by the big banks and miners,” Dr Knox says.
“So the Australian market is biased to a few high-value stocks.”
The research found there has been a dramatic shift away from the Australian equity market. In 2021, top super funds had 53 per cent of their equity holdings in Australian shares and 47 per cent in offshore markets.
That has now reversed, with 46 per cent of equity holdings in the Australian market and 54 per cent in offshore markets.
Foreign holdings’ diversification
The foreign share holdings are dominated by the tech sector, which is very limited in Australia, so those foreign holdings provide great diversification for funds.
The move offshore is also driven by the fact that the super fund asset base is expanding very quickly.
“With superannuation assets growing quickly as a percentage of GDP, funds need to invest more outside Australia to keep their investment allocations balanced,” Dr Knox said.
The holdings in foreign stocks are much more diversified than their local holdings.
“The top 20 [international] holdings accounting for less than 10 per cent of the total and the top four stocks accounting for only 4.5 per cent of global holdings,” the report found.
While Australian funds may seem very heavily weighted towards investments in the relatively small local markets, the strategy has produced good returns for Australian super fund members.
Over the 10 years from 2011 to 2020, “Australian funds produced average annual real [after inflation] returns of 5.6 per cent – superior to almost all of the 38-country sample”, the report found.
Leaving out Australia, the remaining countries in the survey averaged real returns of only 3.4 per cent.
That has meant that Australians have built retirement wealth at a much faster rate than many of their OECD peers.
However, the super funds have increasingly balanced their equity investments with exposures to alternative asset classes that help protect members from market volatility.
Over the 16 years to 2022, the median balanced super fund with between 61 and 80 per cent in growth assets saw significant declines in relative exposures to Australian shares, listed property and fixed interest.
Instead, funds increasingly held unlisted infrastructure, hedge funds, private equity and international shares.
“Funds have become less reliant on traditional listed allocations and have increased exposure to alternative investments and international shares,” Chant West lead researcher Mano Mohankumar said.
Those moves have helped funds survive market shocks like COVID and the bear market experienced in 2022. Back in the Global Financial Crisis funds lost a disastrous 21.5 per cent in value in 2008.
But returns stayed positive in 2020 despite the COVID collapse, and lost only 4.6 per cent during the 2022 slump.
That is because the lower relative exposure to shares and a greater exposure to unlisted assets smoothed out returns.
Downward revaluations
That doesn’t mean that unlisted assets weren’t revalued during those two slumps. “Most funds did out-of-cycle downward revaluations of unlisted assets during COVID,” Mr Mohankumar said.
However, the markets in those products did not dramatically fall because they were still delivering income and profits which held up their valuations relative to shares.
Researchers said funds’ recent ability to hold up in difficult conditions was likely to continue.
“From our analysis of the data released to June 30, we’ve found large superannuation funds are well prepared for further market volatility, with high levels of liquidity in the investment options we’ve examined over the period,” NAB Global Markets executive Jamie Bonic said.
““The research indicates funds remain well-diversified across a range of investment strategies which should help reduce investment risk and produce more stable returns in the longer term for members,” Mr Bonic said.
One reason Australian super funds had high exposures to share markets was the structure of the retirement system, Dr Knox said.
“In Europe many funds are defined benefit and are paying out to retirees so employers have to invest in bonds to ensure they have the liquidity to pay out their commitments to members.”
Australian super funds are overwhelmingly defined contribution with members withdrawing money according to their needs and what they can afford.
That enables funds to invest more in shares because members carry the risk of falling markets, not employers or the fund.
The New Daily is owned by Industry Super Holdings
