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SMSFundamentals: Super-Sized – Observations From A Private Investor

SMSFundamentals | Nov 24 2021

SMSFundamentals is an ongoing feature series dedicated to providing SMSF trustees with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

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Super-Sized – Observations From A Private Investor

By Danielle Ecuyer

As a retail investor it is far too easy to become bogged down in the short-term stock price movements and the profile grabbing headlines in the financial media. Often, it is worthwhile for us to cast an eye over what is taking place in the big end of town and observe whether there are some large-scale trends.

This week I had the opportunity to observe the AFR Super and Wealth Summit.

Although I manage my SMSF and have done so for years, there were some notable trends and take away points for investors like you and me.

The wealth and superannuation industries, like many other industries are in a state of transition and restructuring. The flow on impacts of the Hayne Royal Commission continue to rumble through the industry.

Jeremy Cooper, Chairman, Retirement Income for Challenger highlighted that there are currently 15 alliances and mergers underway in the industry.

David Byrant, President Pacific Region and CEO of Mercer Australia observed that the structure and the shape of the industry will continue to change, with 140 funds currently available and in five years the number may well be reduced to 40 funds.

Byrant emphasized three broad categories from large funds that have eliminated the disadvantage of scale; purpose driven funds such as ‘industry, faith or service’ and lastly ‘challenger’ funds that offer an alternative be it an ESG slant or one more specific to a unique retail manager.

The fact is the Australian superannuation industry is large, very large and undergoing considerable change.

The Hon Jane Hume, Minister for Superannuation, Financial Services, and the Digital Economy reminded the summit that with $3.3trillion under management and 16 million members the industry now represents 150% of Australia’s GDP.

The median super is $125,000 and expected to grow to $460,000 in forty years.

The largesse of the savings and the position of the industry in the government’s portfolio creates often disputed and awkward conversations politically as a possible place to access higher taxable income or in the case of the pandemic allow for 3million Australians to access $38 billion in savings.

The lack of housing affordability in Australia also raises the prickly question of should first home buyers be allowed to access their superannuation savings for a housing deposit?

It is unlikely the regulatory question marks will disappear as the size of the industry is forecast to grow to around 280% of GDP in 2061 according to Jeremey Cooper. That would equate to $34trn of superannuation savings and double the size of the Australian ASX today.

Size has its problems too. The Norwegian Sovereign Wealth Fund is unable to invest in the Norwegian economy for fear of overheating the economy or basically the fund is too large for the investible asset base.

Australian superfunds at the summit also cited the increasing need to invest overseas, in part because the opportunities in sectors such as renewable energy and decarbonisation were greater with a lower risk profile.

Debby Blakey, CEO of Hesta cited that every $1 invested in Australia is matched by $3 overseas in the decarbonisation space. Both Ms Blakey and Deloitte Access Economics Partner Chris Richardson concurred with the need for policy certainty over a 10-, 20- and 30-year time frame to drive positive and risk adjusted investment outcomes for members in the investing opportunities to tackle global issues like climate change.

The appetite for more private assets and infrastructure assets is also on the agenda.

One of the greatest changes for the superannuation industry is the transition from the ‘accumulation’ phase of the asset base to the ‘de-accumulation’ or retirement phase for members.

Sally Loane, CEO of the Financial Services Council and Paddy McCrudden, Head of Retirement Solutions and Data Science at Magellan Asset Management both raised the conundrum for product and service providers of meeting three objectives for retirees –

  1. Providing a stable and reliable income in retirement
  2. Avoid excessive risk taking to achieve the income streams
  3. Access to capital

The golden egg of retirement products is still evolving and given the three objectives in what will predominantly be a lower growth environment according to Chris Richardson remains challenging.

The industry leaders emphasized throughout the summit the need for increased investment in the digitalisation and tech upgrades to the industry.

Deanne Stewart, CEO of Aware Super didn’t pull any punches when she quoted the industry as being like a “dinosaur”, trapped in a world of paperwork and the urgent need to embrace “technology, data and digital”.

The retail segment of wealth market has been well covered post pandemic. The Gen Zs and the millennials have embraced the low-cost trading platforms and the crypto currency markets. My hunch is that they are here to stay and will continue to impact on how the industry shapes itself, but a market shake out might give some of them a nasty fright.

The hot topics, crypto and decentralised finance were embraced in varying degrees. Minister Hume stated the government would not seek to legislate against the market, but suggested investors should approach the asset class with “caution not fear”.

Joe Longo, Chair of the Australian Securities and Investment Commission (ASIC) made some great points, highlighting ASIC does not strive to eliminate risk, but maintain enforcement of regulations in combination with reducing red tape to provide for more affordable advice in a post covid world.

In his words crypto is “phenomenal and impossible to ignore” but substantial policy questions around DAOs or ‘decentralised autonomous organisations’ are in play.

How do you regulate an organisation that has no directors, normal company structure or annual accounts? In the simplest terms a DAO is an organisation working off a blockchain structure or in the words of Mr Longo the organisation engages by the “rule of code” replacing the “rule of law” in a virtual community.

Some 3% of SMSFs (not me) have money invested in crypto. For what it is worth Mr Longo said consumers should approach with great caution and “don’t put all your eggs in one basket”.

Looking at some of the other highlights; advice for Australians remains too expensive and the levels of engagement too low but improving. A handy reminder to all investors that we are all in a better financial position when we are more informed about where our savings (super) are invested.

The size of the industry will push funds to invest more offshore and into private markets.

For private investors, there is a risk that the global hunt for yield from global retirement funds and private equity has the potential to crowd out investors like you and me.

Think the removal of Sydney Airport from the ASX and this week KKR announced a US$37.5bn bid for Telecom Italia as another example.

My hunch is allocating some cash to listed infrastructure assets might prove savvy as the super funds will be on the lookout to grab the right asset at the right price.

But with so much change in sectors such as energy, I would always risk adjust my investment decision based on possible disruption from regulatory or global trends such as decarbonisation. In other words, if the yield on the asset/investment seems too good to be true (high in a low interest rate world) then proceed with caution.

If the 1990’s and the naughties were the decades for government privatisation of assets and infrastructure then the 2020’s marks the start of the re-privatisation of such assets as global savings target investable, stable and risk adjusted returns.

The summit also reinforced my opinion that the growth in the Cloud, Data and Digitalisation of one of Australia’s largest industries has a long runway. Investors could do worse than us maintaining an exposure to these secular trends as well.

Danielle Ecuyer has been involved in share investing in Australia and Internationally for over three decades, both professionally and personally and is the successful author of Shareplicity A simple approach to investing and Shareplicity 2 A guide to investing in US stock markets.

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