Offshore markets getting half of Australia’s $3.4 trillion superannuation pile
It may come as something of a surprise for most everyday workers to discover that for every dollar they put into their superannuation accounts, 50 cents will be invested overseas.
There are a lot of very good reasons why that is so but given that superannuation deposits are heavily tax advantaged by the Federal Government, it could eventually cause some political blowback, given that investing in Australian industry is an important by-product of the motivation for superannuation in the first place.
That is probably a debate for another day, possibly in the context of the purpose for superannuation legislation but first, let’s look at some of the many good reasons that so much of the funds are being invested offshore.
Australia is a very small part of the investing world
Probably the first and most important is that the Australian share market and other investment opportunities across property and infrastructure are a very small part of the investing world.
Looking at just the listed sector, that represents somewhere between 1.5% and 1.9% of the global total – depending on the way it is calculated and currency movements.
That makes having a “home market bias” a particularly dangerous thing for Australians compared to somewhere like the US, where their market is around 42% of all listed shares an is a more reasonable world investment proxy.
Getting investment access to various megatrends
A second and related reason for super funds looking offshore is the variety of different opportunities that are available. For example, there are massive companies that exist in areas such as technology, robotics, nuclear energy, climate change and cybersecurity that are simply not available locally.
A third important reason is concentration risk – a slightly more sophisticated version of the old adage that you shouldn’t put all of your eggs in the same basket.
A fourth important reason is the relative size of the superannuation funds that must be invested versus the size of the market opportunity available.
The latest APRA estimate put the superannuation pie at a stellar and growing $3.4 trillion and to provide some comparison, the entirety of the ASX listed market is around $2.3 trillion.
Granted, there are many unlisted investment opportunities in the Australian market and a massive property sector but you can imagine the difficulties super funds would have investing a greater proportion of their funds without building an unwanted price premium into local shares.
Super funds are getting much bigger
The fifth and final reason for the move towards offshore markets is the contraction in the number of super funds available, with the larger super funds much more likely to have a larger asset allocation to offshore markets.
A recent NAB (ASX: NAB) super insights report showed that offshore investment allocations rose to 47.8% in 2022, up from just 46.8% in the previous year – a trend that means we are most likely very close to passing the 50% international mark or may even have done so already.
That report surveyed 41 funds which made up 85% of the sector’s assets under management and found that large funds were clearly leading the trend towards international assets.
If anything, this trend is accelerating as the big funds get even bigger as merger activity continues to gather pace.
Unlisted assets growing fast
The NAB report also showed that the big funds are increasingly favouring unlisted asset classes, with private credit and unlisted international infrastructure the most favoured asset class, followed by unlisted property.
That marks a big contrast to the previous report in 2021, which featured listed equities more prominently.
Interestingly, despite the extent of the foreign investments, currency hedging had not grown – possibly because for large capital pools with very long investment timeframes, the cost of hedging over the long term can tend to be higher than the foreign exchange risk they are meant to be guarding against.