Citing signals of economic transition and diversified benefits, Amundi recommends a significant portfolio allocation to gold following its +30 per cent surge since 2023. Investor Strategy News
Australia’s biggest super funds disagree on what the new Your Future, Your Super performance test should look like, but they both think the consequences for failure should be just as weighty – and apply to everybody equally.
Where big super will really invest next
The pace of internationalisation has slowed but the average superannuation fund now holds almost half of its assets offshore as they get too big for the ASX, according to the latest NAB Super Insights Report, which surveyed 41 super funds with a collective $2.04 trillion under management.
“The most frequently cited consideration is the “diversification and breadth of investment opportunities available offshore”,” the report says. “Allied to this response, and mentioned in almost equal measures, are the limitations on the size and breadth of opportunities domestically, relative pricing of investments domestically versus offshore and (related) the additional returns seen to be available offshore.
“Peer group asset allocation rated a mention, but only by a minority of funds (less than 25 per cent). One fund referenced a desire to decrease its carbon exposure by switching some domestic equity holdings to international shares.”
The big question is where exactly they’re putting their members’ money. In 2021 listed equities were the asset class most likely to be impacted by an increased offshore allocation, with funds eyeing an international equity market with significantly more depth than the fuddy old ASX. Now they’re way back at sixth, with private credit and unlisted infrastructure equal first, closely followed by unlisted property, where funds are eyeing investment in rental housing, logistics, data centres and life science real estate. But there’s also a small contingent that wants to head in the other direction.
“For those looking to decrease their unlisted exposure, the most frequently cited reason is the regulatory and reporting requirements (such as stress testing, valuation, and liquidity management),” the report says. “It appears APRA’s new guidance is starting to have at least some impact on some attitudes towards unlisted investments.”
“The development of new indexed products for members may also be a by-product of the YFYS test.”
NAB Super Insights Report 2023
But emerging markets aren’t expected to benefit much (more) from increasing internationalisation, with around 64 per cent of funds expecting their overall exposure to the segment to be unchanged in the next two years. Still, 26 per cent of the remainder expect to increase their allocation – and the events that were expected to damage super funds’ outlook for the segment, including the Russia-Ukraine War and China tensions, largely haven’t; two thirds of respondents said that they hadn’t changed how they monitored and managed their EM exposure as a result of either event.
“Of the third which said it had, the most important change reported was increased investment team focus and scrutiny on geopolitical considerations,” the report says. “Related to this was increased attention being given to the risk of assets becoming “stranded” in the future (as has been the case in some Russia investments).
“Though not significant at this stage, according to the survey, some consideration is being given to potential reductions in some EM investments, which could include seeking to follow equity benchmarks excluding certain jurisdictions (for example, MSCI ex-China) although we stress there is no evidence from the survey that this is yet occurring.”
But the big influence is, of course, the Your Future, Your Super (YFYS) performance test, which an “overwhelming number” of respondents (88 per cent) said influenced how they set their strategic asset allocation and implemented their investment strategy.
“When asked to elaborate, a common theme was that many funds now look at absolute investment risk, relative peer performance risk and YFYS basis risk when setting their SAA. Some funds also referenced increased benchmark sensitivity as driving allocation to asset classes that are readily benchmarked.
“Tighter rebalancing ranges and greater focus on optimal rebalancing to benchmarks was also a consistent message in fund responses. Some funds also referred to changes in their risk budgeting approach through a framework of tracking error limits around YFYS benchmark outcomes. The development of new indexed products for members may also be a by-product of the YFYS test.”
A majority of funds – 57 per cent – said they had charged their target currency exposure for MySuper or Balanced options in the past two years, with a decision to increase foreign currency exposure the reason for many of them.
“That more funds had moved to increase their target currency exposure (reduce hedge ratios) than reduce them (lift hedge ratios) is somewhat surprising as the AUD/USD exchange rate had been trading in the lower quartile of its historical (post-float) range in the six months or so preceding the survey.
“We might have expected this to have prompted more funds to have lifted their hedge ratio/reduced target FX exposure. Both the heightened concerns about the health of the global economy and the outlook for growth assets have for the most part overridden the incentives to reduce currency exposure/increase hedge ratios to take advantage of the historically cheap levels of the AUD, given the perceived defensive qualities of running significant short AUD exposure.”
The survey, which originally began as an investigation of currency exposure management, has evolved into a full blown industry temperature check encompassing investments, governance and ESG.
