AI300: Experts divided on future growth of Aussie supers

Buoyed by returns from listed and unlisted assets, Australian pension funds recovered from 2015 decline, though industry experts split on how they can sustain this momentum.
AI300: Experts divided on future growth of Aussie supers

Australia's pension fund grew their assets under management (AUM) in 2016 after a precipitous decline in 2015, but two of the leading players in terms of asset growth were split over whether they could maintain their asset growth momentum going forward.

AsianInvestor's AI300 data revealed that one year after falling by nearly 19%—a drop of $149 billion in total asset value—Australian pension funds, known as superannuation funds, grew their AUM by 2.3%, an increase of $15 billion in 2016.

Of the 34 superannuation funds in the AI300, 20 increased their AUM in 2016, These included Hostplus and AustralianSuper.

Hostplus, founded by the Australian Hotels Association and trade union United Voice in 1988, increased its AUM by 11% last year, from $9.7 billion to just over $10 billion. The AI300 only takes into account current assets, which includes cash, equity, and other liquid assets. Hostplus net assets grew by 24% in the 12 months to June 2017, according to company data.

“Much of our fund’s outperformance has stemmed from our strategic asset allocation to unlisted assets and (to) active management,” chief investment officer Sam Sicilia told AsianInvestor.

Around 40% of their portfolio is invested in unlisted assets, including direct property and infrastructure, he said, noting that these investments have outperformed bonds by 7% this year, as at the end of June.

Residential property prices in Australia’s eight capital cities have appreciated by 10% year-on-year, as of June 2017, led by a nearly 14% growth in Sydney and Melbourne, according to the Australian Bureau of Statistics.

Hostplus’s allocation is more heavily skewed towards property and infrastructure than most, according to data from industry regulator Australian Prudential Regulation Authority (APRA). An August report showed superannuation funds as a whole had around 13% of their assets in property and infrastructure as of June 2017.

Sicilia also credited their active management strategy with outperforming the equities market.

“For the last financial year, active management delivered strong dividends for our developed market equities, which outperformed the developed markets index by 9%.”

He added that, as at the end of June, it had achieved a 25% return on year-to-date active management in developed markets. Three-quarters of Hostplus’s international equities are allocated to developed markets, with the remainder in emerging market equities.

The MSCI World Index, which measures returns across 23 developed markets, showed 16% returns year to date, as at the end of September.

MySuper balanced leads

Hostplus’s default employer-contributed MySuper Balanced fund, which accounts for around 90% of total AUM, Sicilia said, returned 13.2% in the last financial year, making it the number one performing fund in Australian superannuation research firm SuperRatings’s rankings.

As of August 31, it remains the top performing fund in Australia, with a return of 10.9% in the 12 months prior, according to SuperRatings data.

Cash and bonds underperformed, Sicilia noted, but it didn’t come as a surprise. “This is why we positioned our strategic asset allocation accordingly with no AUM in cash and only 2% in bonds.”

In comparison, superannuation funds as a whole, excluding self managed super funds, allocated 12% of total AUM to cash and 21% to fixed income as of June 2017, according to the APRA August report.

VC portfolio tech-focused

Looking forward, Hostplus has invested A$515 million ($ 404 million) in its venture capital (VC) portfolio, with a focus on biomed, fintech, clean energy, autonomous cars, and cybersecurity, Sicilia said.

“This sector is an important diversifier in our Balanced Portfolio, giving us exposure to exciting new businesses, rather than passively waiting for them to disrupt other more established companies.”

The superannuation organisation has committed $50 million to Australian alternative investment manager Artesian Capital Management’s China VC fund, he said, citing China’s rapidly growing market for both producing and consuming technology. Hostplus and Artesian announced the investment on September 20 in a joint press release.

It is also considering greater investment in Australian agriculture in order to diversify its portfolio. “Agricultural assets have the potential to provide bond-like income streams from farm businesses' annual earnings and long-term capital appreciation from rising land values.”

A May report by Australian agribusiness bank Rural Bank and Rural Finance said national median farmland prices increased by 9.3% in 2016, after growing by 5.3% in 2015, and 6.8% in 2014.

Hostplus currently outsources all of its portfolio management, according to Sicilia, partnering with active managers with the flexibility and confidence to outperform the market. This includes Macquarie Investment Management, BlackRock Asset Management, Paradice Investment Management, and Neuberger Berman, according to the Hostplus website.

Despite the strong investment returns in both listed and unlisted assets, as well as a steady net cash inflow from its members, Sicilia is doubtful about reproducing the results due to changing global market conditions.

“It will be difficult to achieve similar return outcomes with central banks (which are) well into their tightening cycles,” he said.

The US Federal Reserve announced last month that it would begin unwinding its $4.5 trillion balance sheet by $10 billion each month starting in October, with a gradual rise to $50 billion per month by next year.

Future hopes 

AustralianSuper head of investment operations Peter Curtis, on the other hand, is more optimistic than Sicilia about maintaining AUM growth momentum this year, despite geopolitical and economic risks.

“We are confident the fund will continue to grow,” Curtis told AsianInvestor, “due to the strong inflows which we receive from the defined contribution nature of the Australian superannuation system.”

“At the moment, these risks are not large enough to impact the improving economic outlook,” he added, referring to increased protectionism, the potential fragmentation of the European Union, and instability in the Korean peninsula.

AustralianSuper’s Balanced fund had the second highest returns in the last financial year after Hostplus, according to SuperRatings, with 12.4% returns as of the end of June. The latest data from August has it in 5th position in the SuperRatings rankings, with 9.7% year-on-year returns.

“It was a good year for investors,” Curtis said. The superannuation organisation increased its AUM by 3% last year, according to AI300 data, from $58.5 billion to $60.2 billion.

AustralianSuper saw returns of 19.3% on its international shares and 13.8% in Australian equities, Curtis said, noting that there were strong returns in almost every type of investment, excluding cash and bonds, where returns were between 0% and 3%.

The Australian Securities Exchange’s ASX 200, a market index measuring the top 200 ASX-listed companies, saw a one year return of 6.2% as of October 13.

AustralianSuper, in contrast to Hostplus, is working on bringing more of its portfolio management in-house. “Around 23% of the portfolio is managed in-house at the moment, and this percentage is expected to grow,” AustralianSuper head of investment operations Peter Curtis told AsianInvestor.

He cites greater agility in implementing investment outlook, the ability to buy assets available to funds with scale, more control over their members’ investments, and lowering costs as their reasons for further internalisation of investment management.

“Most of the industry is fixated with a percentage of asset charge, meaning a lot of the scale benefits have accrued to agents, and not to our members,” Curtis said.

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