While their long-term investment horizons have allowed industry funds to plow hundreds of billions of dollars into unlisted assets for decades, UniSuper chief investment officer John Pearce says that as members begin to retire, funds may now be hitting portfolio limits for illiquidity.

“The stats are that, towards the end of this decade and as we get into the next decade, the industry will be in net outflow because of the demographic challenge that we have,” Pearce told Investment Magazine’s CIO Series podcast.

“I think we’ve seen peak exposure to illiquid assets in terms of a percentage. As we grow, we might allocate more, but if you’ve currently got a 25-30 per cent exposure, it’s probably going to stay around there. I can’t imagine that’s going up.

“We’ve got to be mindful. If you’re looking at an infrastructure investment that you’re going to be holding for 10-15 years, you could potentially be in outflow in five years and that’s a block of liquidity you’re tying up. So we’ve got to be mindful.”

Adding to that pressure, Pearce says, is the “resurgence” of retail super funds and platforms, which has seen the likes of Netwealth and HUB24 take the lead in competitive flows after years of industry fund dominance, attracting new members through greater investment choice and higher service standards than those typically offered by profit-to-member funds.

“The platforms are absolutely killing it in terms of net flows – the HUB24s and Netwealths – and that’s a near-term strain on liquidity. That’s competitive flows; industry funds are still in net inflow due to contributions, but I think that’s going to add to stress and maybe there will be more discussion about liquidity constraints.”

Like many industry funds, UniSuper is no longer an upstart organisation that can always move fast and break things. But while Pearce concedes that the fund was at a “pretty mature stage” in its corporate life cycle, he said it was still innovating.

“It’s definitely plateaued. Having said that, we’ve just employed a really bright young guy and established a new global equities portfolio, which is an exciting new strategy. I’m not saying that the period of innovation is over, but the really sharp growth that we had in the formative years has certainly slowed down.”

AI could also be a “game changer” for the fund, Pearce said, and the business model it has in two years could be very different to the one it has today,

“I don’t want to exaggerate, because there’s a lot of exaggeration that goes on in terms of how companies are deploying AI. And quite often they’ll give you examples of normally technology improvements.

“We’re not looking at investment-wide solutions at this stage. We’ve subscribed to everything AlphaSense, Bloomberg, Claude, etc. And each team is working on stuff that’s adding value for them. We’ve got the fixed interest team using AI to spot pricing anomalies on the yield curve. We’ve got teams using it to estimate liquidity. And we’ve got out portfolio managers using it for stock research, and stuff that used to take three, four hours is now taking a fraction of that time.”

UniSuper head of digital and customer experience Brendan Donoghue will discuss how the fund is implementing artificial intelligence at the Investment Magazine Fiduciary Investors Symposium, held from 12-14 May in the Blue Mountains. Eligible asset owner delegates can register here.