Superannuation funds are changing quite dramatically as they try to grow and outperform.
Part of that is the need to keep up with changing investment markets and part of it is the need to gather scale, with consolidation the name of the game among super funds at the moment.
Those with strong and consistent results and a solid investment method have the best chance of being predators rather than prey as the number of super funds continues to drop in the coming years.
So, what are some of the new trends?
To answer that question, we will look at the latest scoreboard of the best performing balanced funds and check out what they are up to.
According to fund researcher SuperRatings, the median “balanced” fund which holds growth assets of between 60% and 76%, has risen about 18% in the year to the end of April.
Balanced funds average impressive 8.4% over five years
Over the longer term of five years, the average for growth funds was 8.4% but there were some funds that outperformed this.
The top performing fund was giant industry fund AustralianSuper, which recorded 9.93% a year, followed by another industry fund Hostplus (9.76%), UniSuper Accumulation (9.5%), Aware Super (9.43%) and BT Panorama Full Menu – BT Wholesale Multi-Manager Balanced Fund (9.42%).
All of these funds have strong investment methods supporting their good performances and are adjusting to the unusual financial picture that we confront at the moment of ultra-low interest rates.
AustralianSuper looks to private equity to boost returns
Looking more closely at AustralianSuper, one of their responses to that low interest rate environment is likely to be copied by many other funds as well.
One of the consequences of low interest rates is that Government Bonds – which are normally a mainstay of the fixed interest component of a balanced super fund – are less appealing.
That is because if interest rates rise over time – which seems like the only possibility from here – then bond holders suffer a capital loss because the yield on their bond portfolio is lower than newer bonds.
In response, AustralianSuper is dramatically increasing its exposure to private equity as a way to find higher returns.
The $213 billion fund has plans to double its private equity holdings over the next five years, according to external private equity chief Terry Charalambous.
That would take it from the current 4% to around 6% to 8% of assets.
It is not alone in this move with Australian superannuation funds boosting their holdings in private capital by $2.1 billion or 9% in the six months to June 30.
The growth in private equity holdings by super funds is a big change because they have traditionally not been big players in the area.
Funds could pour many billions of dollars into private equity
AustralianSuper’s plans to expand its private equity holdings both in Australia and offshore would see its holdings go from $8.5 billion to around $17 billion – a reflection of its status as the biggest public offer fund in the country.
Other areas that AustralianSuper and other funds are looking towards include infrastructure, property and even loans to companies.
Traditionally private equity performs well, with the Australian Private Equity and Venture Capital Index returning 10.35% a year over the past five years, above the 8.5% return on Australian shares and the 4.7% return on Australian Bonds.
However, it also probably has a higher volatility than bonds, although many offshore pension funds have much larger allocations to private equity than Australian funds.
Private equity should suit super funds well though, given that they can be patient investors and ride out periods of volatility.