Superannuation funds are overweight Australian equities and therefore exposed to market shocks, according to Willis Towers Watson.
The company’s Global Pension Asset Study found close to half of the Australian pension market’s equity allocation is invested in domestic stocks, said Willis Towers Watson senior investment consultant Paul Newfield.
“Australia has the second highest home country bias out of any country in the world. Around 50 per cent or more of our equities are in Australian equities, and when you think that Australia’s only around 3 per cent of the global equity universe, that’s a significant overweight,” he said.
Mr Newfield said this has held the Australian pension market “in great stead in the last 25 years”, as the local economy has enjoyed strong growth and avoided the recessions that hit other countries, but cautioned this overweight could be problematic.
“If you get a shock to equity markets, or you get a shock to the Australian local economy, the pain that we would endure would be more acute than what a more diversified, well balanced portfolio would endure,” he said.
Mr Newfield cautioned that pension portfolios should reduce “that significant overweight” by allocating one-third to Australian equities and the remainder to “the global universe of equities”.
Australia’s exposure to equities in general was also above average, Mr Newfield said, however this could be attributed to the country’s preference for defined contribution schemes as opposed to defined benefits schemes used in countries such as Japan and Canada.
“Equity allocation has often been intertwined with defined contribution. In defined benefit it’s all about the liability matching so often you have a higher bond allocation; you typically find those countries with higher defined contribution have more in growth orientated assets like equities,” he said.