Australian Pensions With A$1.8 Trillion Assets Seek Google

Apr 14, 2014 12:22 am ET

(Updates with world’s largest pension pools in third paragraph.)

April 14 (Bloomberg) -- Jo Townsend, who manages A$28 billion ($26.3 billion) in pensions for Australian retail workers, allocated almost all new equity investments in 2013 offshore. That’s a departure from two years ago.

“The top 10 stocks in the Australian market are worth over 50 percent of the benchmark,” said Townsend, chief investment officer of the Sydney-based Retail Employees’ Superannuation Trust, known as REST. “We haven’t been allocating additional funds with Australian managers in the last two years.”

Australian pensions, which manage the world’s largest pool after the U.S., U.K. and Japan, have been putting more money offshore, including in the U.S., Europe and emerging markets, and in stocks such as Google Inc. and Walt Disney Co. The foreign flows overturn a long-standing bias in favor of local equities and highlight the challenge of investing A$1.8 trillion of pensions that have outgrown a domestic equity market dominated by a handful of industries.

“Australia is a very small pool, with very few opportunities compared to globally,” said Nader Naeimi, the Sydney-based head of the Dynamic Asset Allocation Fund whose investment choices influence more than A$50 billion of holdings at AMP Capital Investors Ltd., Australia’s biggest fund manager.

The trend in favor of international assets “will become more prominent,” Naeimi said, adding that the Australian market did not give exposure to sectors such as technology and life sciences. He advises having 80 percent of funds invested overseas.

Google, Disney

The Australian share market represents just 2.3 percent of world-market capitalization, according to Bloomberg-compiled data. At the end of December, the value of Australian investments in foreign equities was higher than foreigners’ holdings of the nation’s stocks for the first time, according to the statistics bureau.

AustralianSuper, the country’s biggest pension manager, had 40 percent of the A$65 billion it managed in foreign equities and bonds as at June 2013 compared with 31 percent two years earlier, according to its annual report. It expects its assets to grow to more than A$100 billion in the next five years, according to its website.

It is focusing on developed markets, especially U.S. equities, as the world’s biggest economy recovers, Alistair Barker, Melbourne-based investment manager at the fund said.

The pension either bought or increased its stakes in Google, Walt Disney, Visa Inc., United Parcel Service Inc. and Honeywell International in the 12 months to June, according to its annual report.

AustralianSuper’s balanced fund returned 15.6 percent in the year through June 30, outperforming the median balanced fund, which returned 14.7 percent, it said.

Too Big

Australia’s pension funds will likely allocate 60 percent of their equity investments to foreign markets within 10 years, up from 48 percent currently, said Martin Goss, Melbourne-based senior investment consultant at Towers Watson & Co.

“The Australian market can only absorb so much,” Goss said. “Individually some pension managers and collectively the funds have grown too big for the Australian market.”

At A$1.5 trillion, the nation’s sharemarket is the world’s 11th largest, according to data compiled by Bloomberg. The nation’s four-biggest lenders -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. -- BHP Billiton Ltd., Rio Tinto Ltd. and telecommucations firm Telstra Corp. make up 46 percent of the benchmark S&P/ASX 200 Index.

Increased Returns

The country’s pensions allocated more money offshore than ever last year as the Australian dollar sank 14 percent and the country’s resources investment boom that had been the main driver of economic growth waned.

“Taking out the bias to Australia and putting that in international equities has increased returns substantially,” said REST’s Townsend. REST’s core investment strategy returned 15.3 percent in the 12 months to March 31.

The pension fund that looks after the retirement savings of 1.9 million people has 32 percent of funds in overseas equities and 23 percent invested in Australian equities.

REST late last year preferred European shares due to opportunities from an economic recovery on the continent and emerging-market securities because of the long-term growth possibilities, she said. The pension fund invests overseas through external fund managers.

Currency Decision

By the end of December, the value of equity investments by Australians in foreign markets was A$23.1 billion more than foreign investors’ allocations to Australian equities, the first time a net asset position was recorded, the Australian Bureau of Statistics said March 4.

The increased foreign exposure isn’t without risks, such as from foreign-currency moves and finding competent asset managers.

AustralianSuper treats currency as a separate decision from the allocation, Barker said.

The majority of money invested offshore by pensions is through external managers, many of whom are beating a path to the door of the Australian funds in the hope of a mandate.

“One of the biggest challenges is that going offshore creates additional demand on the portfolio operations around things like custody and you are operating around the clock,” Barker said. “Having the right partner is really important to get the execution right because you can lose money if you aren’t careful.”

AustralianSuper is considering hiring its own team to invest in global equities after offshore holdings exceeded Australian shares for the first time last year, Chief Executive Officer Ian Silk said in an interview March. 14.

International Outperformance

The pensions’ historic preference for Australian shares is in part driven by high dividend yields and a tax incentive. The Australian share index offers a dividend yield of 4.4 percent compared with 2.6 percent for the MSCI ACWI global index, which covers both developed and emerging markets. Investors can claim tax deductions on dividends received from Australian companies that have paid tax on their profits.

A rise in the value of the Australian dollar from a low of around 48 U.S. cents in 2001 to $1.10 in 2011 and an economy boosted by a resources investment boom encouraged funds to keep money at home. The ASX 200 Index gained 67 percent from 2001 to 2013 compared with a 41 percent gain for the MSCI ACWI Index.

“We had a cheap and rising currency, commodity prices and double-digit growth in China,” said AMP’S Naeimi. “Our market was totally charged. Now we have the exact opposite. With a falling currency, international shares will outperform.”

Domestic Bias

The Australian dollar lost the most among 10 major developed currencies in 2013 and is expected to decline to 87 U.S. cents by Dec. 31, according to the median estimate in a Bloomberg strategist survey.

Even with the increased investment offshore, Australian pension funds are still the most domestically focused after U.S. managers, and more so than Japan and the U.K., according to Towers Watson’s 2014 Global Pension Study.

Australia introduced a compulsory pension system in 1992, known as superannuation, to which employers contribute on behalf of workers. Since then, the rate of contribution has risen to 9.25 percent of employees’ salaries and is set to climb to 12 percent by 2019.

Deloitte Touche Tohmatsu Ltd. estimated in a September report that the pool of Australian pension assets will grow to A$7.6 trillion by 2033.

“For some time now, we’ve been urging our super clients to consider raising their overseas investments, particularly in equities but also in bonds and alternative investments,” said David Stuart, the Sydney-based head of dynamic asset allocation at Mercer, the consulting firm of New York-based Marsh & McLennan Cos.

Diversifying Assets

Australian pension funds’ assets grew on average by 14 percent a year between 2003 and 2013, the fastest growth rate among 13 pension markets surveyed by Towers Watson, according to a report Feb. 6. That means the assets grew almost fourfold compared with a two-and-a-half times increase in the size of the country’s stock market over the period, according to data compiled by Bloomberg.

“Historically Australian funds have had a very large domestic allocation and it paid off over the last 10-15 years as the boom in China boosted returns.” AustralianSuper’s Barker said. “As China’s growth model changes the out performance is unlikely. Funds certainly need a diversified portfolio and that means investing overseas.”