The increasing scale of Australia’s largest super funds has set them up to compete globally to invest in unlisted assets, underpinning their ability to generate superior long-term investment returns.

JP Morgan’s second The Future of Superannuation report, subtitled Optimising outcomes through global investment and unlisted assets and published this week, said the number of super funds has declined from 174 in the September quarter of 2021 to 137 in the market quarter of 2023, and it’s predicted to fall to as few as 75 funds by 2025.

The report highlighted JP Morgan Asset Management analysis of portfolio performance improvements that it said can be achieved through an allocation to alternatives such as infrastructure, transport leasing, real estate and timber land.

It said whether the allocation is funded pro-rata from the total portfolio, from the portfolio’s public equities allocation or from its fixed income allocation, risk-adjusted performance was improved.

The report added: “This aligns with our recent analysis, which also suggests that in light of the ‘Your Future, Your Super’ regulation, super funds prefer to take active risk through unlisted assets where they view there are more opportunities to add value, compared to the public market.”

Greater need for effective risk management

But with the improved return comes greater risk – particularly regulatory and political – and a greater need for effective risk management.

The report said that as larger funds search the globe for quality private assets, including infrastructure, real estate and private equity, they also faced the task of managing illiquidity and higher transaction costs, along with the issue of timely and accurate asset valuations.

This issue was highlighted at the recent Fiduciary Investors Symposium in the Blue Mountains, west of Sydney, where it was suggested that unlisted asset valuation methodologies in Australia are among the least developed in the world.

In the report, AustralianSuper head of international investments (and recently appointed deputy CIO) Damian Moloney, based in the fund’s London office, said the fund’s governance framework has “a dedicated and independent valuation team and a valuation committee in place to ensure there is proper oversight of the valuation of investments”.

UniSuper head or private markets Sandra Lee said in the report that the fund is planning to raise its exposure to unlisted assets.

“UniSuper has historically been a little bit lower in terms of our unlisted infrastructure and private equity exposure relative to our peers,” she said.

“So that’s going up a bit more – we’ve got dry powder, good cash levels, and we can be opportunistic in private market transactions.”

Looking offshore

Cbus chief executive officer Kristian Fok said the pace of growth of Australian funds has left them with little choice but to look for opportunities offshore.

“As you get bigger, and because of the positive cash flows, funds are growing faster than the investment opportunities in Australia,” Fok said in the report.

“Investing offshore also allows the fund to access investments that you can’t easily access in Australia, whether it’s biotech or other sectors.”

This view is echoed by Aware Super’s deputy CIO and head of international Damien Webb, who said that across asset classes the fund is finding “the need for global diversification; with this demand driving our recent strategy to expand our global footprint offshore, starting with the opening of a London office in late 2023”.

But not everyone in the report shared this view. Hesta chief operating officer Stephen Reilly said that it’s not quite as critical to be on the ground in offshore markets as it once was.

“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,” Reilly said.

“There are still huge benefits being there, but the benefits are a bit more nuanced than they used to be.”

Join the discussion