Super Funds continue to increase allocation to international assets: NAB report

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  • Total offshore allocation of investment portfolios has reached 47.8% – large Funds leading the trend.
  • Funds have indicated a strong preference for unlisted assets, particularly international infrastructure, private credit and international property, with plans to increase exposure during the next two years.
  • Funds are hedging less of their international equity currency exposures than in 2021, despite the low valuation of the Australian dollar in the six months preceding the report.

Australian Superannuation Funds are edging closer to 50% allocation to international assets as they seek diversification and attractive risk-adjusted returns, according to the NAB Super Insights Report 2023, which was released today.

The 11th biennial Super Insights Report, which surveyed 41 Funds with combined Assets Under Management (AUM) exceeding A$2 trillion, revealed allocation to offshore investments has reached 47.8%, up from 46.8% in 2021, with a significant majority of large Funds intending to increase their international share during the next two years.

John Bennett, NAB Executive, Markets Corporate & Institutional Sales said the 2023 report explores how Funds are adapting investment decisions and implementation processes to reflect challenging market conditions and continued regulatory change.

“This report highlights continued internationalisation of investment portfolios and the ongoing challenge for large Funds in deploying incoming capital to the domestic market without amplifying concentration risk,” he said

Association of Superannuation Funds of Australia Deputy Chief Executive, Glen McCrea said the super industry is undergoing a period of considerable change.

“The NAB Super Insights Report provides valuable and comprehensive insights into the major trends across the super industry,” he said.

The 2023 report also revealed Funds were favouring unlisted international infrastructure and unlisted property. This is in contrast to the 2021 Report, in which listed equities figured most prominently.

“Funds still view these unlisted asset classes as attractive for delivering long term returns, and exposure to these asset classes is expected to increase in the new two years,” Mr Bennett said.

The results show some departure from previous report findings in terms of future international fixed income allocation, with more Funds saying they planned to decrease their allocation in the next two years. In 2021, a majority of Funds said they planned to increase international fixed income allocation.

The report also revealed that currency hedge ratios on international equities are at near historic lows, despite the low valuation of the Australian dollar in the six months preceding the report.

“In a perhaps surprising finding, both the heightened concerns about the global economy and the outlook for more growth orientated assets have, for the most part, overridden the incentives to reduce foreign currency exposure and take advantage of the historically cheap levels of the AUD, given the perceived defensive qualities of running significant short AUD exposure,” Mr Bennett said.

Other notable findings from the report include:

  • 57% of Funds changed their target currency exposure (or hedge ratio target) for the MySuper or Balance Fund in the past two years.
  • 88% of Funds indicated YFYS Performance tests influence how their fund sets their Strategic Asset Allocation (SAA) and implement their investment strategy.
  • When setting their SAA, the majority of Funds now look at absolute investment risk, relative peer performance risk and YFYS basis risk.
  • 35 out of 41 Funds invested in Emerging Markets (EM) with an average of 4.9% of their assets deployed in EM.
  • Approximately half of Funds in this year’s report have formal net zero targets, with another 24% currently considering.

 

Download a summary of the report here

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