Australian super funds drawn to Asian fixed income

Australian superannuation funds are tipped to raise their overseas allocations, notably to Asian fixed income, in the medium term after the Senate passed landmark legislation this week.

The Minerals Resource Rent Tax legislation and related Bills ensure that, among other things, the rate of the Superannuation Guarantee (SG) – the percentage of wages employers must pay in superannuation contributions for each employee – will rise from 9% at present to 12%.

This will be phased in gradually, starting with a 0.25 percentage point increase in 2013-14, eventually reaching 12% in 2019-20.

Further measures will see the abolition of the age limit associated with SG contributions, which had stood at 70, and the introduction of a low-income superannuation, which essentially refunds the tax on certain contributions by low-income earners.

While the near-term impact of these amendments on super fund investment strategies is expected to be negligible, given the gradual implementation, the fact that their pool of assets will grow substantially means more capital will be available for domestic and international deployment.

Of the A$1.3 trillion in superannuation assets, around 29% is invested in Australian equities, 24% in international equities, 10% in Australian fixed income, 6% in international fixed income, 3% in listed property, 7% in unlisted property, 8% in cash and the rest in largely illiquid assets such as venture capital, notes the Association of Superannuation Funds of Australia (Asfa).

Asked whether the association expects to see an increase in international allocations from super funds over time on the back of the new legislation, Asfa chief executive Pauline Vamos says: “I think two things will happen. Firstly the pool is going to get bigger, therefore you will have more money to invest overseas.

“More importantly, because Australia has an aging population a greater number of retirees will be looking for predictable income streams. But Australia does not have a deep and liquid bond market. Superannuation funds have predicted that the 6% international fixed income allocation could easily move to 10% over the next five to 10 years.”

Mark Delaney, chief investment officer for AustralianSuper, suggests that it will be the relative outlook and pricing between overseas markets and Australia that will be the key driver of flows.

“If conditions overseas improve, then they will be likely to attract more capital over the next five years,” he says. “Similarly, if assets in Australia become too expensive, that might be a factor as well [in increased overseas allocation].”

But he believes that superannuation funds will look for substitutes to their international fixed income exposure if developed market interest rates remain at rock bottom, as widely expected.

“Superannuation funds will likely reorientate their global portfolios, but I would think the substitution would not come from Australian fixed interest to international, but from developed markets to emerging markets, both in equities and fixed interest,” he says.

Delaney confirms that AustralianSuper does not have any exposure to Asian fixed income at present, either sovereign or corporate, but admits that this is an area of growing interest.

“Traditionally the choices have been developed market fixed interest or Australian government fixed interest,” he notes. “But the development of the Asian fixed interest market adds a third option.

“I foresee that Asian fixed interest markets will become a meaningful part of AustralianSuper’s portfolio over the next three to five years.”

Vamos agrees that the appetite for investing in Asia and emerging markets generally is increasing among superannuation funds in Australia.

“The bottom line is it is now easier to invest globally, particularly in a lot of the emerging markets, and Asia is a great story here in Australia,” she says. “The sophistication of regulation, the transparency of governance and the ease by which you can invest have all improved.”

She notes, too, that Asia is looking a lot more attractive from a fundamental perspective relative to developed markets. “There is a much greater understanding of the various drivers of various Asian economies, so very much you have an increased appetite [for Asian assets] in Australia,” she says.

The vast majority of the Australian public supports the increase in SG to 12% on the grounds that they want to enjoy a better standard of living after they retire. It is also supported by large employers, but has been objected to by a number of small employers, who argue they will have to pass on the increased contribution burden to their customers.

But Asfa research suggests that the increase in SG to 12% will lead to a 0.33% rise in (real) GDP by 2025 compared with the non-reform scenario -- on the understanding that the superannuation pool will have more to invest into Australian infrastructure, property and corporates.

There are about 300 Asfa-regulated superannuation funds accounting for two-thirds of the industry’s A$1.3 trillion in assets. There is also a growing segment of 450,000 self-managed funds which account for 31% and have grown up from virtually nothing over the past 15 years.

The average account balance in a self-managed fund is A$900,000, compared with A$50,000 to A$60,000 for accounts within Apra-regulated funds – indicating that self-managed funds are owned by the more affluent.