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Australia's super funds have made plenty of changes in response to industry headwinds and operational challenges.
- Australia's superannuation among emerging global powerhouses in managing retirement funds
- Post-covid challenges have led to recalibration in strategies
- Could there be valid lessons for investors?
How Australia’s Superannuation Giants are Reshaping Investment Strategies for a Disrupted Decade
By Erick Nyamagwa
Superannuation giants are government-regulated entities that help manage Australians’ mandatory retirement contributions. Commonly known as super funds, these corporations invest on behalf of members in various asset classes.
These classes include venture capital enterprises, infrastructure assets, and private equity. The revenue generated is then shared among members so that when they retire, they will have more super savings for better living standards.
According to Deutsche Bank, Australia’s Superannuation sector is among the emerging global powerhouses in managing retirement funds. Currently, it ranks fourth globally, and it is projected to become the second largest in the world by 2031.
Despite the sector’s bullish performance in recent years, it is also facing its fair share of challenges in the current uncertain post-covid economic landscape.
Research in this article explores how super funds are reshaping their investment strategies to address the new economic realities.
Key Takeaways
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Super funds have shifted their investment strategy by making allocations to foreign assets.
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AI and technology are reshaping investment strategies. Most super funds are now embracing AI to streamline workflows and manage portfolios.
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Unlisted assets have become powerful. As super funds diversify their investments, they are tapping into unlisted assets for long-term stability.
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The use of derivatives in risk management is becoming crucial. Since super funds are investing in foreign markets, they now use derivatives to mitigate exchange risks.
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Mergers are a new trend. Most funds have resorted to mergers to reduce costs and boost investment power.
Currently, the Australian Superannuation sector’s has assets worth circa $4.4trn under management. This value represents 150% of Australia’s GDP.
The rapid growth of the funds has made the sector one of the largest and fastest-growing in the world, due to the following strategies:
Investing in Foreign Markets
To generate more investment returns for Australian citizens, super funds are now investing aggressively in foreign markets.
One of the main markets that dominates most super funds’ portfolios is the U.S.
Why the U.S. though?
In a recent CNBC interview, Paul Schroder, AustralianSuper’s chief executive, said that “it is a win-win situation because we can invest alongside great American companies”.
Schroder added America is an incredible environment to invest in, and the worst thing anyone can do is to bet against it.
This is because America understands markets and always welcomes investors.
Currently, 30% of Australian super funds’ portfolio is made up of foreign assets.
The funds are increasing their allocations to these foreign assets rapidly to accumulate higher investment returns for Australian citizens.
Apart from the U.S., other foreign markets for the funds are the U.K. and Europe.
Embracing AI to Enhance Operations
One of the technologies that has disrupted the superannuation sector is AI. AI has become a game-changer because super funds can now utilise it to:
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Provide a personalised experience to members
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Improve operational efficiency
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Make investment decisions
For example, John Livanas, State Super’s CEO, recently said that they are now using AI (machine learning) to interpret huge market data. The insights obtained help the investment team to make wise investment decisions.
In the interview, Livanas also noted that AI chatbots have helped streamline their customer service sector. Customers can now chat with chatbots, which deliver instant and accurate answers to even complex queries.
The adoption of AI has transcended to other superannuation funds, and this has completely reshaped the management landscape of funds. Currently, 90% of asset managers are actively using AI to generate ideas, allocate assets, and construct portfolios.
Asset managers who have yet to embrace AI expertise are encouraged to do so because it now enhances efficiency and makes management of assets easier. Failure to adopt will make these managers lag and get overridden by competitors.
Investing in Unlisted Assets
Another strategy that super funds are embracing is investing in unlisted assets. Unlisted assets are investments that are not traded on public stock markets. According to studies by AustralianSuper, unlisted assets are less volatile in the market, as compared to listed assets.
Therefore, these assets guarantee strong cash flows because they are rarely affected by market sentiment. In AustralianSuper’s podcast, Justine O’Connell, the head of Portfolio Construction, says these assets are less known. Thus, they are not flooded and guarantee safety in the long term.
Some examples of unlisted assets include:
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Local toll roads
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Foreign toll roads
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Local airports
Justine encourages investors to explore and invest in unlisted assets for long-term stability, especially during times of economic uncertainty.
Leveraging Derivatives
Derivatives are agreements that allow parties to sell or buy a financial asset at a predetermined price on a future date. Due to the exposure of funds to non-AUD investments, it is crucial to protect generated revenue against exchange risks.
The use of derivatives by Australian superannuation funds comes in handy because offshore returns are remitted in foreign currencies, whose value fluctuates depending on the FX rate.
To safely manage offshore returns, superfunds leverage derivatives to maximise profits. The common derivatives used by the funds include:
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FX forwards
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Cross-currency swaps
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FX options
When funds create derivative positions, they invest confidently in a portfolio that is protected against future exchange fluctuations. Therefore, they rest assured that their profits are protected in advance.
Derivatives are managed by financial firms. These firms contain established systems and procedures that safely execute the whole process.
Negotiating Mergers to Improve Outcomes
The aftermath of covid-19 affected many sectors in the world, superannuation not being an exception. Most super funds started experiencing the following:
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Declining membership subscriptions
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Low returns
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Reduced portfolios.
To create scale and improve efficiency, APRA recommended all underperforming funds negotiate mergers to provide reasonable returns to members in 2021.
To navigate the changing landscape, most funds have witnessed rapid mergers since 2021. Currently, there are only 89 super funds in the country, an -80% decline in the past 20 years.
The rest have merged to form powerful funds that offer improved services to members.
Implications to Investors
Firstly, Australia’s superannuation sector is not the only one experiencing these rapid transformations globally. According to J.P. Morgan, leading global pension funds like Sweden’s AP1 are also experiencing the same.
Secondly, investors should understand that it is better to take calculated risks for bigger and better returns. The rapid growth of superannuation funds is attributed to the aggressiveness of asset managers, both locally and domestically.
Thirdly, investors should take note of the power of mergers and consolidations. Mergers allow companies to make better investment choices, operate efficiently, and provide attractive investment returns to members.
Finally, investors should embrace diversity in their portfolios for them to reap huge gains. A diverse portfolio protects investors from losses because it acts as a buffer during economic downturns.
Conclusion
Retirement is a fundamental aspect of every individual on earth. Australians consider the sector crucial due to the country’s ageing population.
The superannuation funds continue to play a fundamental role in delivering solid investment returns to members, and their role is expanding rapidly.
The transformations being experienced in the industry demonstrate a bright future not only for the retiring generation, but also for the future one as well.
Investors can learn from the strategies that super funds are using to navigate the current challenging economic landscape for better and wiser investment decisions.
However, it is important to do your own research before banking on any (change in) strategy.
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