The Australian superannuation industry is set to invest more than $100 billion a year offshore, according to the chief executive of the Association of Superannuation Funds of Australia, Martin Fahy.
In an interview with Investment Magazine, Fahy said he expected that 75 per cent of every new dollar coming into the industry would now be invested offshore as the Australian compulsory super industry matures after three decades of operation.
He said Australian super funds could expect to see significant increases in their offshore exposure in areas from shares and property to major infrastructure projects.
The super fund industry is now seeing annual inflows of more than $140 billion a year in contributions from employers and members.
“Around 75 cents in every new dollar of contribution needs to go offshore from a concentration risk point of view,” he said. “It’s a key requirement for us to deploy capital.”
Overcoming the home bias
He said there was always a home bias in investing as super funds began by investing money domestically. But he said that it was now clear to the sector that it needed to step up its investment offshore.
Fahy also said Australia’s franking credits had initially created a bias to investing in Australian shares for the funds.
“The next decade is going to be about deploying capital internationally, particularly into private capital,” he said.
He added that the Australian economy was proving to be too small for the $3.5 trillion sector and that Australian superfunds have long invested in shares overseas, including in tech giants Google and Apple.
But he said they were now making major investments in infrastructure overseas, as epitomised by industry fund investment vehicle IFM Investors.
“Increasingly the Australian funds are diversifying into infrastructure opportunities and renewables in Europe and the UK,” he said.
The latest statistical analysis from ASFA shows that Australian super funds now have 23 per cent of their assets in Australian-listed shares with 29 per cent in international shares.
He said he expected the international component of this would continue to increase.
“The system is starting to change. As the super fund industry is maturing, it is reducing its concentration risk of investing in Australia,” he said.
“At the theoretical level, if you were a perfectly diversified pension fund, you would invest in the world economy pro rata to the size of the economy.
“You do have to have a well-considered and appropriate home bias.”
Canadian pension funds leading the way
But he said that the sector was now realising the importance of diversifying risk.
“What we are now looking at is how do we take our footprint offshore to North America and Europe? And what role will Asia play in our deployment of capital?” he said.
Fahy said Australian super funds were learning from the example of the big Canadian pension funds which began moving offshore some 15 years ago.
“Their international journey began about a decade or so before ours,” he said.
He added the Canadian pension funds were active investors in the Australian market, often partnering with local investors and local super funds.
“They are like minded, long term, patient investors,” he said.
“There’s a lot to be learned from what they have done in their international forays and what we also need to do differently.”
Fahy said the Canadian pension funds were now mainly $200 billion plus “megafunds” which had started investing offshore from around 2005, before the global financial crisis.
“They expanded into London and started deploying capital in Europe and they have now moved onto deploying capital in Asia.”
Relief at election promises
Fahy said the fund industry was pleased that superannuation was not an issue in the upcoming Federal election.
“We welcomed the fact that there was no change to the superannuation settings in the recent budget,” he said.
He added there had been agreement on both sides of politics to go ahead with the move for the superannuation guarantee to go to 10 per cent of wages last year and then up to 12 per cent by 2025.
“I think we are now in a set-and-forget mode across the political landscape (when it comes to superannuation),” he said.
“Superannuation wasn’t a budgetary issue and it’s not an election issue. It now enjoys widespread community support.
“There has been a commitment across the political landscape not to change the tax settings on superannuation. This allows the funds and the super fund members to digest the changes… [and] allows for a period of stability which builds confidence in the system.”