Australian asset owners are increasing their overseas assets and expanding the breadth of these investments, according to a survey released on January 22 by J.P. Morgan Asset Management (JP Morgan AM).

Among the survey’s strongest signals were continued interest in infrastructure and emerging markets, the latter mostly related to equity, according to Rachel Farrell, chief executive of JP Morgan AM Australia. She also said that it was noteworthy that the asset owners' overall overseas alternatives are rising.

Rachel Farrell

The size of the asset pools is growing for Australian investors, and it is becoming more difficult to plough all of that capital into domestic markets. The view is also that [investors] are getting more sophisticated and are looking at overseas opportunities,” Farrell told AsianInvestor.

Australian investors’ historical preference for real assets remains as strong as ever. Asked about their asset allocation plans for the next 18 months, 58% of investors said they would be adding more to infrastructure, with a further 42% saying they would be upping their real estate allocations.

Private credit continues to be of interest, with 38% of investors intending to add more to their exposure in the next 18 months. Australian investors are also relatively positive on hedge funds. They are either holding steady (40%) or adding (30%) to hedge funds, with only 9% intending to reduce their allocations in the next 18 months.

Sixty-one percent of respondents plan to increase their allocation to private equity, 30.5% plan no change, while the remainder plan to reduce it.

In-person polling for this survey was conducted at briefings on-site for JP Morgan AM’s 2020 Long-Term Capital Market Assumptions (LTCMAs). Approximately 135 respondents who attended briefings in Melbourne and Sydney were polled on their asset allocation plans and investment strategy.

Respondents included investment professionals from superannuation funds, pensions, investment consultants, family offices, insurers, sovereign wealth funds and financial advisory services. The survey was conducted in December last year.

GOING ABROAD

When it comes to their regional allocations, Australian investors are diversifying beyond their home market, with 30% intending to decrease their exposure to Australia in the next 18 months.

The need to diversify overseas has been highlighted, and rightfully so. For instance, by 2033, superannuation funds alone are projected to control more than half of ASX-listed Australian equities, according to calculations from Australian data provider Rainmaker.

When it comes to public market asset allocation, investors say that they will maintain their exposure to equities and trim their bond holdings. Nearly half (46%) don’t plan to change their equities allocations, while almost one-third (32%) intend to add more, which suggests a relatively upbeat view from Australian investors on risk assets continuing to perform.

Faster growing emerging markets such as China and India are attracting capital, with respectively 35% and 39% of investors planning to add to their holdings in these markets. Underscoring this trend, 47% of investors are set to add to their exposure to broader global emerging markets.

Farrell points out that emerging markets investments will mainly be made into equity. When it comes to real assets, core investments in developed countries will be the preferred allocation strategy.

“Superannuation funds, in particular, are looking for stability of returns and yield in core real estate and infrastructure,” Farrell said. “They want global diversification in open-ended funds in prime, deep developed markets. The largest might supplement that with more targeted strategies.”

Farrell elaborates that superannuation funds typically target 3% or just above 3% over domestic inflation as a target annual return. The target return for Australian superannuation funds, defined in terms of returns over 10 years above CPI (Consumer Price Index), is 4% annually for growth options and 3% annually for balanced option, according to Alex Dunnin, executive director for research and compliance at Rainmaker Group.

ILLIQUID ISSUES

The Australian investors are shifting out of fixed income. More than a third (36%) of investors plan to decrease their holdings. Interest in multi-asset strategies is relatively mixed, with almost half (48%) of investors intending to hold their allocations stable.

As institutional capital keeps flowing into alternatives investment around the world, the issue of illiquidity is becoming increasingly more prevalent.

On January 20, Mark Machin, chief executive of the Canada Pension Plan Investment Board, highlighted why it was important for asset owners to manage the liquidity risk in alternatives portfolio.

“You have to be very careful to make sure that you truly understand the liquidity positions, that you truly understand if that thing turns out to not be liquid you can still cope, and if you can still pay the university, the pensioners,” Machin told Bloomberg.

Australian investors have, in general, found a balanced base for alternatives exposure, with an average of 35% of total AUM invested in the asset type, Farrell pointed out.

Kerry Craig

As portfolios are typically balanced for the longer term, Australian investors can take on some illiquidity risk in order to achieve the targeted returns, according to Farrell. A more global, well-diversified portfolio using the annual illiquidity budget to maintain returns are all very effective way to achieve those goals, she adds.

“Australian investors are taking on some accounting volatility, as private assets are not marked to market regularly. But they are moving away from large trophy assets, big-ticket items. They are thinking more about mid-market, and there the competition is less intense. We still see plenty of growth opportunity,” Kerry Craig, global market strategist at JP Morgan AM, told AsianInvestor.

“Australian investors also tend to be quite big users of open-ended funds, which are somewhat more liquid than closed-end vehicles. Not all of the alternatives investments are highly illiquid; there is diversification within that category too,” Farrell said.

Craig pointed to the OECD’s report on the need for new infrastructure investments, and how investments cannot keep up with demand for new development projects. The same trend goes for modern and more real estate assets with urbanisation as a driver.