Super funds have more than doubled their exposures to global equities in the past 15 years, but it’s a misconception that the surge came at the expense of Australian stock allocation, the Investment Magazine Fiduciary Investors Symposium has heard.

As assets under management balloon to more than $3 trillion across the APRA-regulated superannuation industry and it outgrows the domestic market, funds are increasingly directing capital offshore in both listed and unlisted asset classes. The strength in US listed equities performance has also turned it into one of the stronger return drivers across local portfolios in recent years.

But AMP Super head of portfolio management Stephen Flegg said the popular narrative that super funds are cutting Australian equities in favour of overseas listed assets is a “myth”.

“We go, ‘well there’s all these exciting things overseas, so by definition, Australia mustn’t be as good’,” Flegg told the symposium in the Blue Mountains, noting APRA data that while industry-level global equities allocation increased from 17 per cent to approximately 35 per cent in the last 15 years, Australian equities have remained stable at around 24 per cent across the period.

“Funds are allocating more to offshore equities, but they’re not funding it necessarily from Australian equities.”

Australian investors have some good reasons to have a home country bias – though Flegg argued the terminology itself has an unfairly negative connotation – including franking credits, currency advantage and market familiarity.

“Sometimes you’re harshest on the ones you love the most… You hear people say ‘oh, we have a home country bias, and it must be irrational and it must be bad’,” he said.

“We pretend that home country bias is just unique to Australian equities, but if we look at bonds, it’s higher in bonds than equities and arguably makes less sense.

“We look at property, we look at infrastructure. In all of these spaces, home country bias is stronger than what we have in the equity space. Also, it’s not [a phenomenon] unique to Australia.”

Various roles of Australian equities

Seamus Collins, chief investment officer of the $21 billion Team Super, said that overseas listed equities are more attractive than Australian equities in the current market. The fund has reduced its domestic equity allocation in its SAA and tilting program, while allowing some Australian equities managers to broaden out their mandates to global stocks.

“In the immediate future in Australia, obviously we’ve got inflation issues. We’re in a tightening cycle, so you’ve got these short-term headwinds. Australian household balance sheets are ridiculously strong,” he said.

“Coming out of COVID and huge levels of government spending and government programs, they’ve got these fortress balance sheets, which means it’s going to be virtually impossible for the RBA to drive down consumption, because consumption is underpinned by confidence, and confidence is underpinned by wealth.”

Meanwhile, the US market has a stronger AI thematic, Europe is having a fiscal expansion off the back of defence spending, and emerging markets have seen stellar performance from semiconductor demand and government policy supports.

“Obviously Australia’s market is incredibly concentrated across materials and finance, and so you’re getting those narrow thematics. And in relative terms, we just see those as less attractive in the short-term,” he said.

“There are [also] long-term structural challenges and headwinds for Australia, and the question is whether the lucky country’s luck has run out.”

But while super funds might be constrained from making significant allocation cuts in Australian equities due to peer alignment, Queensland state investor QIC is less worried about the prospect and took steps to address its home country bias 15 years ago. It currently has a 5 per cent allocation to domestic stocks. The bulk of QIC’s capital is non-tax paying which means franking credit is of less utility for the fund.

“We looked at where we wanted to seek alpha, and our approach is very quantitative, so we want to leverage the breadth of the global market and more capital offshore than domestic 15 years ago,” QIC head of capital market Matthew Zweifel said.

“We looked at our actual portfolio… we knew we would have a home country bias in our real estate, our credit, our infrastructure sectors. So it was a pretty easy decision back then.”

But today, QIC’s portfolio is very exposed to the technology thematic whereas the materials and physical sectors are underrepresented, which is making the fund reconsider the role of Australian equities in its portfolio.

“Starting from a very low weight, Australian equities are potentially beginning to, from a structural perspective, [become] something different and diversifying.”

Active management under pressure

While investors might be split on the outlook for the Australian economy, one thing they agreed on is that the game has changed around active management in the local stock market.

Elise McKay, co-portfolio manager at Pendal, said there are structural changes at play: the ASX is seeing greater volatility, price movements and transaction volumes, but lower transaction sizes and liquidity.

“We know that there’s evidence that does suggest that the participants and the way that the market have evolved, so we as active managers have to evolve as well,” she said.

“For example, [we are] being cognisant that the marginal buyer is no longer a fundamental investor who’s looking at a two-to-three-year investment horizon, it’s someone who’s looking at a three-month investment horizon.

“Then we think about how do you manage position size, how do we… manage exposure to the banks, for example, where the fundamentals are disconnected.

“Flows do matter. Fundamentals absolutely need to still come first, but ultimately, you do also have to be cognizant that flows shape how markets work in the short term.”

Team Super historically has taken more active risks in domestic equities compared to other developed markets, where its equities investments are more than 70 per cent passive. But the fund’s active Australian equities managers have been under pressure in the past 12 to 18 months.

“It knocks your confidence a little bit around, not just your active manager community, but whether, in fact, Australia is still a really strong alpha destination,” Collins said.

“One of the reasons for the Australia priority, perhaps rather than bias, has been that the history has shown it’s an active management market, that there’s attractive stock picking in small caps.

“For us over many years that was successful, in marked contrast to developed markets where it’s an active manager graveyard.”

AMP Super’s Flegg observed that many super funds are moving towards a quant-first approach as the local market develops and creates additional liquidity.

“The other thing that we’ve been working on, that I think probably aren’t unique to us, is the role of a completion portfolio in funds. You look down through the underlying managers, and you get to sit in a privileged spot of seeing how they’re all positioned,” he said.

“Every so often, they [the managers] all align on things, and from a risk management perspective, you want to do some activity at the top level.”

McKay said that while current market conditions are challenging, they also create more dispersion of results that active managers can take advantage of. For example, the performance spread between the top and bottom quartiles of the top 1000 telecommunications, tech and media companies is around 180 per cent as of May, exacerbated by the SaaS sell-off.

“It is very unlikely that in certain sectors that everyone will win or everyone will lose. We think that there will be winners or losers, and there’s an opportunity to take advantage of those,” she said.