Are our super funds too big for Australia?
Are Australian superannuation firms getting too big to invest the funds they want to in Australia?
It is an interesting question which brings out two very different sides of the equation.
One is that the Australian Securities Exchange (ASX) is actually shrinking at the moment for the first time since 2005.
There are a host of reasons for Australia’s shrinking share market – a dearth of quality company floats in recent years, more takeovers and perhaps less need for some companies to chase a public listing if they can raise enough capital without one.
The incredible shrinking ASX
Some of the companies that have disappeared from the ASX since the start of last year include Sydney Airport, AusNet, Crown Resorts, CIMIC, OZ Minerals, Tassal, Virtus Health, Nitro Software and Senex Energy.
That represents around $65 billion of shares that have now effectively become cash and must find a new home and there is more to come, with other companies in the process of going private, including Origin Energy.
The other side of the equation is that super funds are already anecdotally being forced to restrict their buying of ASX shares for a number of reasons and are instead buying unlisted assets or even taking over companies themselves – the Sydney Airport takeover being one recent example.
With $3.5 trillion in retirement savings in the super system and the ASX shrinking by around $43 billion to about $2.3 trillion, the gross imbalance is already fairly obvious.
Why Super funds can’t buy all of the shares
Of course, there would never be any chance that all of the shares on the ASX being bought by super funds and there is a whole wide world of opportunities out there, both listed and unlisted.
Super funds have always invested overseas and they will need to keep up that international outlook given the restricted number of Australian listed companies and the many sectors that are under-represented here.
With 10.5% of the Australian payroll effectively flowing into super, rising steadily up to 12% from 2025, the quantum of assets within super is only going one way, even as some people retire on private pensions and start to slowly run down their accounts.
It is hard to see the ASX being able to keep pace with that sort of growth, even with the best will in the world.
There are other considerations as well.
Super funds already own 38% of the market
Australian super funds already own 38% of the shares on the ASX worth $874 billion, up from 35% a decade ago, according to Rainmaker research.
That is still expected to grow to about 41% by 2030, although there are important reasons why super funds need to be careful about getting too many shares in particular companies.
Growing super funds need to limit their home bias and get access to investment sectors such as technology which are not well represented on the Australian share market.
If a super fund were to buy too many shares in a single company, it would become a little stranded because of the extent of the market impact if it were to buy or sell more shares.
The same sort of limitations even apply when buying or selling Government bonds, given the size of the sums super funds are investing.
Of course, one of the popular answers has been to buy unlisted assets both locally and overseas such as property and infrastructure and to use this to help maintain portfolio allocations and achieve target weightings.
Buying offshore can also help funds to get exposure to new economy companies that are scarcer on the Australian market such as climate change solutions or nuclear energy and also access the faster growth that might be on offer in emerging markets.
Australian super funds are already bigger than the Australian share market and they are likely to keep growing faster than it for a long time, so it is also up to Australian ingenuity to come up with ideas for new companies that are capable of helping to grow the Australian market and effectively harness the large amounts of local capital that is always searching for a promising new home.