After a profitable 2017, Australia’s superannuation pension funds are facing mounting challenges, courtesy of a shifting macroeconomic environment and an industry-wide investigation into their governance issues, particularly around illicit fee charges.

The combination leaves a potential cloud hanging over their investment returns and governance, as the funds ponder their activity until the end of the year.  

All told, Australian asset owners had a strong 2017 for investment returns, rising their combined assets under management (AUM) by 11.1% last year to $1.78 trillion. That accounted for about 4.5% of total AUM in the latest AI300, our annual list of the top 300 asset owners in Asia-Pacific.

All-told, 34 of the 47 asset owners from Australia are superannuation funds, accounting for about 42.1% of the country’s AUM. And the superannuation funds enjoyed a combined 25.8% asset growth, well ahead of the 2.4% growth among all other Australian asset owners.

But it’s not all been good news for Australian supers. On August 6, a Royal Commission focused on misconduct in the banking, superannuation and financial services industry initiated its superannuation-focused fifth round of public hearings . The two-week round of public hearings will examine several concerns about the industry, including the fact that some supers have charged their incorrect fees of their retirement contributors, or even claimed fees for services they don’t conduct.

A few superannuation fund trustees, including AMPCBA, and IOOF, have already acknowledged such practices to the commission. Michael Hodge, a senior counsel assisting the commission, also called out ANZWestpac, and StatePlus during the first day’s hearing for fees-related misconduct.

It’s unclear what the final outcome of the investigation will be on the superannuation industry. The Royal Commission is conducting public hearings until August 17.

The latest round of discussion comes two months after the Australian government’s Productivity Commission released its draft report on superannuation efficiency and competitiveness, on May 29. The analysis also had some sobering news for some super funds, noting correlations between high fees and lower net returns, fund underperformance, and insufficient use of data to develop and price products.

EQUITY ENHANCEMENT

Some industry players profess not to be unduly worried about the impact of the Royal Commission’s investigation.

Construction and Building Unions Superannuation (Cbus), which ranked 182nd in the AI300, is focused on its investment activities, said chief investment officer Kristian Fok.

“Our focus predominantly is on trying to put together the best portfolio and returns for our members, so I think we’re well positioned in that regard,” he told AsianInvestor. “Beyond that, I think trying to extrapolate where things will go is probably a bit early.”

Cbus’s AUM growth of 47.6% to $27.8 billion was the second-highest among all Australian asset owners, and tops among all superannuation funds, which helped it leap 32 places in the AI300.

Many Australian supers are continuing to grow because their members continue to contribute each month. This was the case with Cbus, which largely gains cash inflows from workers in the construction industry, who tend to be younger than the contributors to many other supers.

Combined with this, Fok noted that equities and real assets helped explain its AUM rise. “The best performing asset classes in our portfolio have been Australian and international shares and property,” he said.

Its default option fund showed returns of 11.9%, and about 25% of this fund was allocated to Australian shares, with another 23% invested into international shares. About 11% of the default option fund was allocated to property, and that asset class had returns of 24.3% last year, according to Cbus’s annual report.

Strong performing equity and property investments also helped Mercer Super Trust to report 17.7% AUM growth to $14.2 billion last year.

“Strong returns came from listed equities, which have been in double digits in [2017 and 2018], with small cap especially strong in 2018, and unlisted holdings in property and infrastructure,” Kyle Willment, Mercer’s chief investment officer for the Pacific region, told AsianInvestor.

Mercer’s global equity returns were 16.8% and 15.4% for the financial years ending June 2017 and June 2018, respectively, while global small-cap returns were 15.3% and 21.5% over the same time periods.

AustralianSuper, the country's largest superannuation fund, also benefited from strong stock performance. The 91st-ranked pension fund grew its AUM by 23.8% to $74.6 billion, rising eight places from the previous year, partly on the back of its investments into Australian and international shares. These returned returned 12.7% and 15.7%, respectively, according to its annual report.

The super’s balanced fund accounts for more than 90% of members, and it invested 58.4% of its portfolio into Australian and international shares, netting it a return of 12.44%.

OUTLOOK CONCERNS

While last year was one for the super funds to enjoy, this year’s shifting environment is forcing the funds to change their tactics.

A combination of tightening monetary policy and rising interest rates has led AustralianSuper to decrease its exposure to real estate and infrastructure, which might be impacted by rising yields, said Alistair Barker, head of portfolio construction.

“In the short term, we’re shifting the portfolio back towards equities and taking a bit more risk in equities, rather than in property or credit, where there's not a great deal of upside at this point in the cycle relative to the upside that equities have offered,” Barker told AsianInvestor.

Cbus’s Fok is also concerned about growth prospects in 2018, though he still expects strong cash inflows to continue.

“At this point in time, we would be expecting returns for investment options with significant exposure to growth assets to be lower than [fiscal year] 2017/2018,” he said.

The Melbourne-based superannuation fund is also reviewing its longer term asset allocation weights between Australian and international shares to better diversify its portfolio.

“We are considering the merits of progressively reducing our exposure to Australian equities and increasing our exposure to global equities over the medium term,” said Fok.

Mercer, on the other hand, remains generally optimistic. Willment said business growth has come from a range of areas, which gives the fund confidence that it can sustain investment returns in the coming years.

In fact, the superannuation fund is reallocating towards alpha-generating sectors over those offering predominantly beta exposures.

“This includes increasing allocations across unlisted assets, both equity and debt, and absolute return target sectors, such as unlisted property and infrastructure, private debt, and absolute return bonds,” said Willment.