Systemic risk in the superannuation system likely doesn’t stem from funds themselves, but from their service provider relationships. Regulators need to be thinking harder about where and how it arises – something they’re not necessarily well set up to do.
Big asset owners and managers are embracing the private markets as one avenue for growth, but the complexity that brings to portfolios means they also need to get a better view of what might be decades of siloed information.
Big super gets real on real assets
While J.P. Morgan’s 2022 Future of Superannuation report homed in on the challenges of scale and benchmark-aware investing, this year’s iteration focuses on the management of real and private assets with some of the biggest Australian funds fretting liquidity and valuation practices and weighing the benefits of in-house investing.
“Unlisted assets have been a significant driver of their long-term outperformance,” the report says.
“While funds also see opportunities in listed vehicles – and remain mindful of illiquidity and valuation issues – their appetite for private market assets continues to grow.”
“Some funds say they are ramping up their internal investment capabilities to make bigger deals, including offshore. It is a strategy closely tied to their increase in size, with several funds now managing more than AUD$100 billion in assets each.”
Regionally, Australian funds have been first movers in private markets investing and are setting up overseas offices to grow their allocations even more. AustralianSuper expects to lift staff numbers in its New York office, opened in 2021, to around 100 people over the next three years and focus mainly on mid-market private equity.
But the fund’s head of international investments Damian Moloney says it isn’t “rushing to deploy capital today” as it waits for the market to digest higher interest rates. Meanwhile, Aware Super is planning to set up its first offshore office in London by the end of 2023, with deputy CIO Damien Webb saying that investing in private assets demands a boots on the ground approach.
“In private markets you really do need to have a physical presence there to set up proper origination, business development, sourcing, and then due diligence and asset management activities,” Webb said, adding that while the fund will continue to work with fund managers it will also make more direct and co-investments. “We’ve completed quite a few of those types of investments here in Australia. We would love to take that ability overseas.”
But with greater private allocations has come greater regulatory and political scrutiny of valuation practices and liquidity management. While many funds are significantly cashflow positive as a result of the superannuation guarantee and a younger member base, others – including Aware Super – service a slightly older demographic, creating a different liquidity outcome to be managed. Cbus is a major investor in unlisted property – which forms one of its sector-specific investment options – but has also taken a shine to REITs.
“We’ve been very conscious of having quite a large allocation to listed REITs in there, so that covers the liquidity question,” said Cbus CEO Kristian Fok. “It also helps manage the risk of a member trying to time their investment switches just before unlisted properties are revalued.”
Meanwhile, UniSuper is on the hunt for more data about how emerging trends like working from home will effect its investments in toll roads and office property and is eyeing international sustainable opportunities in the United States and Europe as its appetite for private assets grows.
“Australia’s obviously got some opportunities, but given our domestic challenges around policy direction, it’s been a little bit more challenging to find high-quality renewable deals,” said UniSuper head of private markets Sandra Lee (pictured). “I think we will see more opportunity offshore, for example, in the U.S., where renewable projects will be much more supported given the IRA.”
Funds are also increasing the pace of investment internalisation, with Aware – which still runs a heavily outsourced model – planning to manage about half of its asset base in-house to lower fees and expand its “palette” of potential investments.
“We’ve been pushing really hard to get our internalised strategies up and running, whether it’s equities, real assets, or cash and credit,” Webb said. “Thus far that’s contributing meaningfully to boosting net returns by bringing overall fees down and we continue to be on that journey.”
While internal teams have a relatively fixed cost base and give funds a greater degree of control over where money is going, they can also create governance challenges around “preserving the original culture of the organisation” and ensuring that performance matches those of external managers.
“We’re looking for the best returns and we’re big enough now that we can look wherever they are,” said HESTA COO Stephen Reilly. “But living in a ‘Zoom’ world, I think that question of how much you can get done without putting your feet on a plane has a different answer now than what it did three years ago. There are still huge benefits being there, but the benefits are a bit more nuanced than they used to be.
“Size makes a fund able to consider offshore, but it’s more important to have relationships with experts than the wrong person on the ground anywhere.”
