Super funds are on the cusp of having more money invested offshore than in the local market, according to a new survey by NAB.
The nation’s superannuation funds are edging closer to having half their assets invested overseas, as international markets, equities and unlisted investments, in particular, attract Australian money amid the potential for better returns.
The benefit of the currency exposure has also boosted super returns over the past two years, according to a new survey.
Over the past two years, super funds have grown their assets offshore to an average 46.8 per cent, NAB’s latest FX hedging survey reveals. This is up from 41 per cent in 2019 and comes amid a hunt for greater diversification and more attractive returns on offer overseas.
And with 61 per cent of funds reporting plans to further increase the amount invested in foreign assets, there’s every chance this could be the year the industry tips over the 50 per cent mark.
With the rise of the mega fund – the nation’s largest super fund, Australian Super, holds $25bn in assets under management – the larger pool of opportunities offshore will only become more appealing.
Already, the Covid-19 pandemic has hastened the acceleration to overseas assets, according to NAB executive general manager for markets Drew Bradford.
“Australia globally has about 2 per cent of the world‘s assets. So a truly balanced fund would have 2 per cent in Australia and 98 per cent offshore,” Mr Bradford said.
“I’m not sure where we’ll find the equilibrium, but it could be two-thirds to 75 per cent over time. There’s definitely been an acceleration (in overseas investing).”
While industry, retail and corporate funds race toward the halfway mark, public sector funds have already crossed that threshold, the survey found. The retail fund sector will likely be next over the line, followed by industry funds.
Super funds had traditionally pushed into international equities to gain overseas exposure, but unlisted assets, including infrastructure investments, were of keen interest in the current environment, Mr Bradford said.
“Money going offshore has been trending towards infrastructure, there’s just more availability,” he said. “It seems the projects in Australia are very, very keenly sought, so the price is quite aggressive for infrastructure projects here. You get a much better return offshore.”
New money was going offshore at a rate of about 70 per cent versus old money, which was closer to the 50 per cent mark, he said.
Not only were super funds pushing more funds offshore, but they were doing it to get the currency benefit as well as the underlying asset exposure.
“Managers are focusing on the FX more and more and then making decisions that are FX-based, as opposed to just going and investing in the US equity market and therefore getting a US dollar exposure. Or investing in infrastructure in Europe and getting euros,” Mr Bradford said.
“They’re making one decision by investing in infrastructure, and then making a second decision: do I want US dollars or euros?”
On the hedging side, another trend was apparent: while funds were keen to hedge illiquid assets, they were choosing a “hedge-lite” path on overseas equities.
“It’s interesting that they want to effectively know their Australian dollar returns when they’re investing in an infrastructure project, because it is illiquid,” Mr Bradford said.
Over the two years of the survey, NAB estimates the currency element has added about 6 per cent to fund returns.
With such a benefit, funds were invariably turning their minds to having currency as a separate asset allocation, Mr Bradford said. But amid its rise in prominence in fund holdings, currency was now the biggest investment risk after equity market risk, he warned.
Meanwhile, the “Your Future, Your Super” reforms designed to improve fund accountability had also become a significant factor in managers thinking about foreign currency, the survey found.
The performance test was forcing managers to really consider the risks, Mr Bradford said.
“Forcing people to concentrate on why they‘re making that decision is a good thing.”
“And people will focus on the currency risk even more because that comes into play. You’d hate to get an X mark because you didn’t look at the currency risk even though you got your asset decisions right.”
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