Large Australian funds will be increasingly drawn to the deeper market of investment opportunities overseas, which will bring benefits but also new challenges to the sector, according to Damian Graham, CIO of Aware Super–Australia’s second largest fund.
Aware’s portfolio is “probably broadly 50/50 domestic and offshore” at the moment, Graham said, but most large funds “will clearly continue to invest in probably a growing proportion of assets overseas as we get larger.”
In a discussion hosted by Investment Magazine, in partnership with AIA Australia, as part of its Future of Super podcast series, Graham said the desire to have a strong understanding of the supply chains of companies, particularly regarding governance and other ESG factors, had led Aware in less familiar jurisdictions like China and Brazil to tilt more heavily towards private markets “where we can have a high level of control and a high level of understanding of the businesses that we’ve invested in.”
Having people on the ground in those locations will be crucial and Aware will “also have people based around the world in the next one or two years,” Graham said.
Advantage of familiarity
But Australian assets will always remain a focus and have their own inherent advantages, most notably the advantage of familiarity and closeness.
“There are some benefits in investing domestically as well,” Graham said. “Being close to the market, being close to the relationships and understanding the dynamics, the demographics, the trends in your local market, can provide great opportunity. So we always will look at the Australian market as a strong opportunity set.”
The podcast episode discussed issues around governance in addition to globalisation. Superannuation assets under management in Australia have grown to around double the nation’s GDP, with concern about the implications of this rising influence of mega funds sparking a new inquiry by the House Economics Committee, looking at potentially negative consumer outcomes from market concentration.
But Louise Davidson, CEO of the Australian Council of Superannuation Investors, said funds’ rising influence will be a force for good as they exercise voting rights to raise ESG standards in Australia and manage long-term risks to their investment portfolios, such as climate change. ESG issues are no longer characterised as “feel good” issues, but rather financially significant factors to be managed well, she said.
“This growing influence, so to speak, of super funds is something that’s getting more attention at the moment,” Davidson said. “But it’s something that super funds both in Australia and around the world have been doing for a long time, because it is such a critical part of making sure that they deliver financially for their members.”
Conversely, companies’ poor management of ESG matters can be a major liability for investors, Davidson said, pointing to recent corporate scandals involving sexual harassment at financial services giant AMP, and miner Rio Tinto’s destruction of a culturally significant cave at Juukan Gorge in Western Australia.
With super funds’ reliance on proxy advisers also coming under scrutiny, Davidson said proxy advisers are a “cost efficient and effective way for super funds to get good advice about companies” to influence voting decisions leading up to the busy AGM seasons.
These advisors facilitate greater engagement between funds and the myriad companies they invest in, she said.
“I think the engagement process is sometimes mischaracterised,” Davidson said. “It takes hundreds of company meetings every year, and many of those companies are deliberately building long-term relationships because they value the constructive to-and-fro that we have on issues.”