Infovest21 Investor Focus

Australian Superannuation funds increasingly look to invest globally
Over the next few years, Australian pension savings are projected to grow to A$6 trillion (US$6.5 trillion), many times GDP, says Alex Dunnin of Rainmaker, a financial services information company. “It is going to make Australia a net exporter of capital. The trustees of the superannuation fund are trying to work out where they are going to invest the money because there is a view that investing in the Australian market is not big enough to absorb all the money. 30% of institutional money is invested offshore.”

James Twiss, managing director of the Americas at First State Investments, says, “We used to see a lot more home country bias in a number of our markets including Australia, but now there is growing interest in international global products.”

The Australian investor has always had a high equity bias. About 60% of the money they invest goes into equities – 35-40% goes into Australian equities and the rest into international equity.

Hedge funds are a small but growing market in Australian superannuation funds. Estimates are that comprise $35 billion of the $1.4 trillion market.
Some of the superannuation plans which are very interested in hedge funds might have 20-30% allocated but there are not many like that, says Dunnin. Non-for-profit funds are most comfortable with hedge funds’ lock-up periods and have a long term focus.

Dunnin says, “Australian superannuation plans are more wary of hedge funds. They didn’t deliver non correlated returns during the global financial crisis.”
Downward pressure on fees

There continues to be downward pressure on fees. Twiss takes the view that the jury is still out on the fees hedge funds, as a sector, can charge. “Certainly there are good hedge funds out there who continue to do well. But the sector on the whole faces tremendous headwinds when it is trying to compare performance net of fees to a traditional manager.”

The reason why Australians are conscious about fees is that joining a superannuation fund in Australia is compulsory. The government should be doing all they can to make sure fees are as low as can be, within reason.
There is a growing perception among superannuation funds that the manager should be charging flat fees. They say: “We will give you $700,000 to run a $10 million mandate. If the amount gets bigger, we’ll give you an additional fee.”

Dunnin says the big concern is not the investment management fees, but the financial planning fees. There is huge pressure on those. Government reforms are focused on that.

Reduced role for consultants
Funds in Australia used to be dominated by the investment consultants such as Towers Watson, observes Dunnin. These are very influential. “Increasingly, as superannuation funds get bigger, the superannuation funds realize they need to develop internal expertise. They will bring in consultants as needed but will want their own people who can understand what the funds are offering them. Five years ago, they would probably play off two to three asset consultants to get their best investment ideas and advice.”

Dunnin says consultants, by definition, are conservative. “They don’t lead, they follow. Superannuation funds had to almost show the consultants how they should be looking at that sector.”