PM Capital’s Paul Moore has raised concerns about the influence of Australia’s powerful industry super funds, suggesting their large-scale may be distorting equity markets and contributing to inflated valuations of Commonwealth Bank shares.
“Size kills,” Moore told delegates at the Stockbrokers and Investment Advisers Association Conference in Sydney on Monday. “Industry funds are the big issue. They’re the reason why you have CBA at the valuation that it is.”
By 10am, CBA shares were trading at $171.36, up more than 11 per cent this year and 40 per cent over the past 12 months – gains that many analysts see as increasingly divorced from underlying fundamentals.
Moore warned that the sheer size and benchmark-driven nature of super fund flows were creating market imbalances, particularly for large-cap stocks like CBA.
“The big issue in Australia is the concentration of industry funds. Whenever you get concentration of power, you get trouble,” he said. “The problem is, the industry super funds in Australia have supercharged the passive impact.”
He pointed to the bank’s lofty price-to-earnings ratio of between 25 and 27 times, which he said was comparable to – or higher than – global tech heavyweights.
“CBA sells on a multiple of 25 to 27x depending on earnings estimates. That is similar or higher than Apple, Facebook, Amazon, much higher than Google. The difference is those companies have compounded double-digit [growth] for the last 10 years, and CBA is 1 or 2 per cent,” he said. “That’s the impact of industry concentration and passive in Australia.”
Moore drew further comparisons to global peers, noting CBA trades at more than twice the multiple of JPMorgan, which is priced at 13 times earnings. He also likened it to Lloyds Bank in the UK, describing it as CBA’s “twin sister” with a similar loan book, earnings profile, and capital structure – yet valued at a third of the Australian lender.
“CBA sells at three times the value of Lloyds for the same earnings strength,” Moore said.
Cameron Gleeson, executive director at Betashares, echoed concerns about the dominance of large super funds in the market but pushed back on the notion that passive investing is to blame for CBA’s surge.
“It isn’t passive itself that has driven what has happened with the banks,” he said.
“Absolutely right, big super is the gorilla in the room. Your Future, Your Super has changed the way these fundamentally active managers have had to manager their portfolios.”
Gleeson pointed instead to reports of increased buying activity in the banking sector last year as funds sought to reduce underweights in key financial stocks – a dynamic that, he suggested, played a more material role in pushing up prices.
“There’s been comments around big super being at limits in terms of Australian equities, and they’ve reduced buying within Australian banks this year,” he said.
“If you want to break it down, it’s certainly big super that owns a quarter to a third of the Australian equities market, rather than straight index or straight ETF.”
The Reserve Bank has also warned that the sheer scale and growing influence of the $4 trillion superannuation sector – now equivalent to 150 per cent of gross domestic product and a quarter of all financial system assets – is emerging as a potential source of systemic risk, capable of amplifying market shocks.
Interestingly, a new report by KPMG has forecast continued consolidation in the superannuation sector, with mega funds tightening their grip on the market. The number of mega funds – those managing over $100 billion – rose to eight in FY2023-24, up from seven the previous year, with their collective market share increasing from 58.5 per cent to 63.1 per cent.
