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Aussie super funds bump up offshore allocations

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Funds have continued to increase their allocation to international assets over the past two years in the hunt for diversification as well as attractive returns.

NAB’s 11th biennial Super Insights Report has revealed that allocation to offshore investments by Australian superannuation funds has now reached 47.8 per cent, up from 46.8 per cent in 2021 and 41 per cent in 2019.

Large super funds have continued to spearhead allocations to international assets, according to NAB’s latest report, and a significant majority of large funds are also planning to further increase their international share in the next two years.

“A key finding is the continued internationalisation of investment portfolios, which highlights the ongoing challenge for large funds in deploying incoming capital to the domestic market without amplifying concentration risk,” commented John Bennett, executive, markets C&I sales at NAB.

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The report surveyed 41 super funds accounting for 85 per cent of the industry’s total assets under management (AUM) excluding SMSFs, which stood at $2.45 trillion as at 30 June or 8.5 per cent higher than two years earlier.

“Our objective is to contribute to the industry by providing detailed analysis and insights on key asset allocation trends, currency decisions and implementation, all of which can affect member returns,” Mr Bennett said.

Funds were found to be favouring unlisted asset classes, with private credit, unlisted international infrastructure and unlisted property ranking as the most popular. This is a departure from NAB’s previous report in 2021 when listed equities were most in favour.

“While there has been increasing scrutiny over illiquidity and valuations of unlisted assets, funds still view these asset classes as attractive for delivering long-term returns for members. It’s expected the relative exposure to these asset classes will increase in the new two years,” said Mr Bennett.

Another significant observation was that only 14 per cent of funds are planning to increase their offshore fixed income allocation, down from 67 per cent in 2021 and lower than any other asset class in the latest report.

Despite the low valuation of the Australian dollar, NAB’s report found that funds are hedging less of their international equity currency exposures than in 2021.

“In a perhaps surprising finding, both the heightened concerns about the health of 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 explained.

Eighty-eight per cent of funds said that the Your Future, Your Super (YFYS) performance test, which came into effect in July 2021, has influenced how they set their strategic asset allocation (SAA) and how they implement their investment strategy.

Funds were found to be considering absolute investment risk, relative peer performance risk, and YFYS risk when setting their SAA.

Meanwhile, approximately half of the funds covered by the survey have formal targets for achieving net zero, and a further 24 per cent are currently considering targets.

A higher proportion of smaller funds have yet to implement a net zero strategy, including 63 per cent of funds with less than $15 billion in AUM.

Index firm Scientific Beta recently warned that funds are at risk of regulatory action as they seek to balance the need to pass the YFYS test with their pledges to reach net zero.

Aussie super funds bump up offshore allocations

Funds have continued to increase their allocation to international assets over the past two years in the hunt for diversification as well as attractive returns.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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