Aussie super funds becoming global giants

One of the most underappreciated things about the Australian financial landscape is the size and the growth profile of our biggest super funds.

Compared to the old days when investment/insurance companies such as AMP and National Mutual were the giants of managing funds, today’s big industry super funds are much bigger and even more dominant.

Just looking at the two biggest super funds – AustralianSuper and Australian Retirement Trust – together they manage an astonishing $655 billion in assets.

To give that number some scale, the size of the Australian economy is a little above $1.7 trillion and the Australian share market has a market capitalisation of around $1.6 trillion.

In other words, retirement savings in just two funds are equivalent to around 40% of our entire economy or our entire share market.

Already massive but still growing fast

It is not just the size of these funds that is so astonishing, it is the way they are still growing fast, with effectively a double-digit percentage of the country’s payroll rolling in all the time plus the earnings from the investments.

These two funds alone are dragging in more than half of all new retirement savings as the biggest funds grow bigger and the smaller ones continue to consolidate and close.

The sheer size of the big two – plus the $700 billion being invested by the next largest industry funds UniSuper, Hostplus, Cbus, Rest and HESTA – creates both massive opportunities for Australia and some intriguing problems as well.

Scale can cut costs

Size and scale tend to be helpful in reducing administration costs for super fund members and also provide access to long term, unlisted investments that would be difficult to participate in otherwise.

Scale has also allowed the biggest funds to internalise investment management, saving significant costs.

Obviously, the super industry as a whole has long since outgrown the Australian share and bond markets as sole destinations for investment – an issue that will become more obvious as the biggest funds eventually approach the trillion-dollar mark.

Already the big super funds need to tread carefully when making new Australian investments, with the size of their buying capable of boosting and sustaining share prices that seem to defy financial gravity.

The somewhat perplexing recent growth in the share price of our biggest bank, Commonwealth Bank (ASX: CBA) amidst a forest of sell recommendations from analysts is perhaps an obvious symptom of this issue, which might become more common as time goes on.

Avoiding investment crowding an issue

This is not just a problem locally – in a global sense these funds have significant scale with AustralianSuper now ranked number 16 in the world, which is why they are setting up significant offshore offices to manage new and existing investments.

One of the ways the super funds have found to get around the problems of crowded public markets is to go private with private equity and private credit being big targets.

This is part of a global trend toward private markets as well but can be particularly suited to super funds that can hold assets for a long time and don’t need to pay the premium that is often required to have assets that are instantly tradable in public markets.

It also presents a problem, of course, with valuation becoming a difficult task that could become more difficult should public markets continue to shrink in relation to unlisted ones.

Public markets are also a useful destination for many private companies that grow significantly, although the size of the IPO market tends to fluctuate a lot.

From 3% beginnings to number 4 in the world

Largely though, the growth in the big super funds is a function of the growth in Australia’s superannuation system, which has become the fourth largest in the world – something that the industry funds that were started to house a negotiated compulsory 3% super contribution during the Hawke/Keating years could barely have imagined.

As that percentage of wages grew over time and the earnings of the super nest eggs began to snowball as well, the growth of the largest industry super funds has been nothing short of extraordinary.

Switching to retirement mode will be difficult

The one issue that will be interesting for the entire super sector to navigate will be the switch over time from accumulation to retirement.

This will require not just innovation in developing retirement products but also a fundamental change in how the funds invest over time.

Depending on the demographics of the individual funds, there will come a time when a much larger percentage of their members will be gradually drawing down their nest eggs in retirement rather than accumulating more as workers.

Navigating that change over time will also require some financial gymnastics, given the size of the funds and the balance between long term, private investments and the much more liquid share and bond markets.