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Welcome to Firstlinks Edition 562 with weekend update

  •   30 May 2024
  • 18

The Weekend Edition includes a market update plus Morningstar adds links to two additional articles.

Imagine a multi-asset fund manager listed on the ASX. It’s been successful for decades by mostly investing in Australian equities, bonds and listed property/infrastructure, and that success had resulted in it gathering a large amount of funds under management. They start to gradually diversify into other assets such as overseas and unlisted investments. Then, they announce that they’re going to move much more aggressively into these newer areas. They say it will not only help with diversification but also prospective returns.

What would happen to the share price of this fund manager? As a best guess, the market would look sceptically at the announcement, and analysts would ask hard questions about the move to diversify beyond the manager’s core competencies. There’d also be queries about the risks involved given the poor track record of Australian companies which have ventured overseas.

While the above example is simplistic, the strategy of this fictional multi-asset manager is analogous to that of many of our large super funds. Yet, there’s been barely any questions asked about how the size of the super funds is essentially forcing them to diversify further into alternative and international assets, and the risks that this entails.

To infinity, and beyond

First, let’s put the size of our super funds into perspective.

New figures from APRA this week show that superannuation assets will soon hit $4 trillion. In the year to March, total super assets increased 11% from $3.46 trillion to $3.85 trillion. Over the past decade, super assets have approximately doubled.

The industry superannuation funds' share of assets continues to grow, reaching 35% at end-March, with corporate funds being the main losers and SMSFs holding steady.

Australia’s pension assets are the fourth largest in the world. Super assets are now 145% of total GDP, compared to 108% a decade ago – the fastest growth versus GDP of any country.

Residential property is still the largest asset in Australia by far, at more than $10 trillion, or 2.6x the size of super funds.

However, Deloitte projects that super assets will grow to about $11 trillion by 2043, or close to 200% of Australia’s GDP.

Total superannuation assets

Superannuation assets as a proportion of nominal GDP

A recent KPMG report suggests that super funds are about to be hit by a wave of Baby Boomer outflows, yet this is likely a significant overreaction. It’s true that some of the large retail super funds are experiencing net outflows as their clients withdraw money. However, industry super giants are still growing strong. Net-net, super assets are expected to still increase significantly in coming decades.

Size is already creating challenges for super funds. These funds have always had a lot of equities exposure – initially primarily in Australia, though now more internationally.

Super fund allocation to equities

The reason for having greater holdings in international stocks is not only to get exposure to sectors and returns that Australia may not offer, but also because the super funds are simply getting too big for the Australian share market.

Deloitte estimates that investments by super funds were 34% of the total market capitalization of the ASX. And it expects that share will grow to almost 50% by 2043.

Proportion of ASX market capitalization represented by super funds

Super funds’ diversification beyond Australia has accelerated of late. NAB’s Super Insights Report suggests that allocations to offshore investments by funds rose to 47.8% in 2023, up from 46.8% in 2021, and 41% in 2019.

The funds have also been diversifying into unlisted assets, which now account for about 20% of total industry allocations.

Maintaining domestic allocations “not practical”

Australian Retirement Trust’s Head of Investment Strategy, Andrew Fisher, had some fascinating things to say about the challenges faced by mega funds at the Morningstar Investor Conference in Sydney last week. He said it’s “not going to be practical” for the larger funds to continue to maintain the current level of domestic allocations.

“I’d be lying if I said $280 billion of assets to invest is not a challenging task at times”, he said.

“It is a lot of money and we’re forecast to go to $500 billion by the end of the decade, those are the internal numbers we’re dealing with.

“Realistically, it’s not going to be practical for us to continue to maintain the level of domestic allocations, particularly listed market equity allocations that we have.”

It’s not just an equities issue. With Australia being one of the first countries to privatise infrastructure, locating opportunities in the domestic market has become more challenging, according to Fisher.

“The market is finding new and innovative ways to create infrastructure - digital infrastructure is quite popular now - but realistically, there’s some underdeveloped markets offshore where we’re likely to see better opportunities,” he said.

Fisher suggested that the fund still holds a “strong preference” for domestic investment where possible.

“Our members are Australians, their liabilities are linked to Australian inflation, and the best protection against that is investments in the domestic economy.

“We certainly will be strongly committed to investing domestically, but there is an inevitability with scale that we’re going to have to increasingly move offshore, and also an inevitability with being one of the first mover countries in the infrastructure space - there’s only so much infrastructure that can be sold,” he remarked.

It explains why Australian Retirement Trust opened its first overseas office in London in mid-March.

On the same panel as Fisher at the Morningstar conference, UniSuper’s Head of Private Markets, Sandra Lee, said her fund had taken a different tack to investing internationally. Rather than launching an office overseas, UniSuper has chosen to partner with “high quality managers” operating globally.

Lee pointed to the “complexity in going overseas”, including currency hedging and finding a common language with a different team of co-investors.

Sizeable issues

There are two key challenges that size brings to Big Super. First, concerns returns. Consider Australian Retirement Trust mentioned above. It manages $280 billion. To get a 7% return, it needs to make $20 billion a year. If its funds increase to $500 billion by 2030 as they project, then they’ll need to make $35 billion. Earning that sort of money is far from easy.

Warren Buffett once said that “it’s a huge structural advantage not to have a lot of money.”

“Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers,” he said.

Buffett isn’t lying. While he spoke of his hedge fund above, even the numbers from his listed company, Berkshire Hathaway, show that his outperformance has dwindled as Berkshire has become larger.

The other risk that size can bring is if diversification becomes ‘diworsification’. The core expertise of super funds has traditionally been in Australian listed stocks, bonds, and real estate. Deeper moves into international equities make sense though require a broader skillset.

The funds’ increasing exposure to unlisted assets also brings opportunities and risks. Yes, private assets are currently offering higher returns than stocks and bonds. The trade-off is that they’re illiquid and offer much less transparency.

You don’t have to look far to see the risks with unlisted assets. Whether it be current wrangling over Healthscope’s debt, the yo-yo valuations of Australian tech startup Canva as revealed by Franklin Templeton (though not by Australian super fund holders), and redemptions being frozen at several large private equity funds.

There’s plenty that the large super funds must deal with, and getting the rewards versus risks right will be a big task in the years ahead.


In my article this week, housing looks like becoming a key election battleground as the Liberal Party proposes to cut migration numbers to "restore the Australian dream" of home ownership. It got me thinking about this idea of The Australian Dream. Where did it come from? What does represent? Is it still relevant? And, is it the best definition of success and prosperity?

James Gruber

Also in this week's edition...

The introduction of a tax on the unrealised gains accumulated in superannuation funds greater than $3 million in value may also become an election issue. Clime's John Abernethy hopes it does, but he also challenges our politicians and bureaucracy to think in different ways to utilise the strategic and unique benefits of our massive superannuation. One idea: infrastructure bonds.

We're often quoted life expectancy at birth but what matters most is how long we should live as we grow older. Graham Hand says that it's surprising how short this can be for people born last century, so make the most of it.

What can poker teach investors? Ophir's Andrew Mitchell and Steven Ng say one key concept is what poker players called 'resulting'. That is, the tendency to judge a decision based on its outcome rather than its quality. It's something that happens a lot in investing, though should be avoided at all costs.

Should you buy and hold an artificial intelligence portfolio? John Rekenthaler looks back at the performance of Internet stocks to see if it offer clues about the wisdom of such a strategy.

MFS' Robert Almeida thinks we're entering a new, higher cost environment that will hit the P&Ls of companies in many sectors. He's more bullish on commodities, as there's a supply shortage and increasing demand via mega trends including AI and green energy.

Electric vehicle demand has stalled, surprising many. What's behind the slowdown, and is it a temporary blip or something more long-term? The Firetrail team provides some answers.

Two extra articles from Morningstar this weekend. Jon Mills makes a case for Newmont shares and Joseph Taylor looks at the valuation of Soul Patts' big three equity holdings.

Lastly in this week's whitepaper, Payden and Rygel, an affiliate of GSFM, breaks down the opportunities in securitised credit.


Weekend market update

On Friday in the US, stocks ended the month in fitting fashion, as a ferocious late rally pushed the S&P 500 from the red to a near 1% advance on the session, extending May’s gains to north of 5%. Treasurys enjoyed a moderate bid across the curve, with 2- and 30-year yields declining by three and four basis points, respectively, to 4.89% and 4.65%, while WTI crude fell to US$77 a barrel, gold retreated to US$2,328 per ounce and bitcoin edged lower at US$67,600. The VIX tumbled below 13.

From AAP Netdesk:

The Australian share market on Friday finished on a high note, snapping its three-day losing streak with gains that accelerated in the late afternoon to close out May firmly in positive territory. The benchmark S&P/ASX200 index on Friday rose 30 points in the final 30 minutes of trading to finish up 73.5 points, or 0.96%, to 7,701.7, while the broader All Ordinaries rose 74.9 points, or 0.95%, to 7,970.8. A day after erasing all its gains for the month, the ASX200 ended up finishing the month up 0.49%, defying the adage "sell in May and go away". It lost 0.34% for the week, however - its second straight week in the red.

All of the ASX's sectors except for property finished higher on Friday, with consumer staples the biggest mover, rising 1.9% as Woolworths added 2.0%.

In the heavyweight mining sector, goldminers shone. Northern Star added 2.8%, Evolution added 2.4% and West Africa Resources rose 7%. Elsewhere in the sector, BHP gained 0.5% to $44.51 and Rio Tinto added 1% to $128.96, while Fortescue edged 0.2% lower at $24.74.

In the health care sector, Telix Pharmaceuticals and Avita Medical both posted double digit gains on the back of some good news for both companies. Telix soared 15.3% to an all-time high of $18.15 after positive data from a small clinical trial evaluating its potential prostate cancer treatment, while Avita Medical added 12.4% to a six-week high of $2.99 after receiving US approval for an advancement in its spray-on skin treatment for burn victims.

All of the big retail banks were higher, with CBA up 1.3% to $119.54, NAB adding 0.9% to $33.91, ANZ advancing 1.2% to $28.25 and Westpac climbing 0.2% to $25.98.

In other news, fast-food chain Guzman y Gomez on Friday announced it would list on the ASX in late June, once it has completed a $242.5 million public offering, the second biggest of the year. At the offer price, Guzman will have a market capitalisation of $2.2 billion, making it a likely ASX200 component.

From Shane Oliver, AMP:

  • Major global share markets fell over the last week, as higher bond yields weighed. For the week US shares fell 0.5%, Eurozone share lost 1%. Japanese shares fell 0.4% and Chinese shares fell 0.6%. This still left US shares up 4.8% in May and global shares up 3.8% after the weakness seen in April. Bond yields pushed higher again, not helped by weak bond auctions in the US possibly suggesting that investors may be getting concerned about the widening US budget deficit which is now above 6% of GDP and will likely worsen if Trump wins the upcoming election. Oil, metal and iron ore prices fell, but the $A rose helped by a slightly weaker $US.  
  • Australian inflation surprisingly rose in April. The uptick in the Monthly Inflation Indicator to 3.6%yoy from 3.5%yoy was disappointing and contrary to our own expectations for a fall. The main drivers were weather related food prices, tobacco, health insurance premiums, fuel prices and continued rapid increases in rents and general insurance. Worryingly for the RBA, underlying measures of inflation edged higher with the trimmed mean inflation rate rising to 4.1% with ongoing sticky services inflation.
  • The further uptick in inflation keeps the risk of another RBA rate hike high and reinforces that rates will be high for longer. This was reflected in money market expectations that swung back towards pricing in the risk of another rate hike and pushed back expectations for a rate cut till late next year.
  • But inflation is likely to resume its downtrend and the economy is looking weaker, so we still see the next RBA move as being a cut. The RBA is likely to again consider the case for another rate hike at its 18 June meeting just like it did at its May meeting. However, while the risk of another hike is high (particularly in August if June quarter inflation is higher than the RBA expects) the most likely scenario is that rates will remain on hold: the rise in monthly inflation to 3.6%yoy in April may not have been a surprise to the RBA as its forecasting 3.8%yoy inflation this quarter; the monthly CPI Indicator is very volatile; much of the monthly rise in May looks to have been seasonal with the CPI up 0.7%mom but the seasonally adjusted CPI up 0.2%mom; May tends to be a weaker month with the CPI falling in 4 of the last 6 Mays; cost of living measures will help pull down headline inflation in the second half of the year; and weak spending in the economy (evident in retail sales and construction over the last week) will continue to bear down on inflation by making it harder for companies to raise prices. In short, the April rise in inflation is not enough to push up the RBA’s inflation forecasts for inflation to be back in the target band in 2025 and 2026, which would be necessary for it to hike again. 

Curated by James Gruber and Leisa Bell


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June 05, 2024

On topic Norges investment bank ( the super fund for Norway) has an excellent site.I think every other fund would do well to copy it. The exact number of shares in each company they own,click on to any area of the world. The transparency is great. Why they invest in some companies but not others. The long term growth from 1996 I think. The reason why it is there,the same reason Keating gave,we might have problems with the dependency ratio in the future. Try this,it seems to be a good idea. They have a podcast ,In good company I think it is called.A 30 minute talk to CEOs of companies.One of them was the Credit Suisse crisis ( I think).The CEO of the rescue company telling what he is allowed to tell,and what they were thinking might happen. Growing up did you think this would be your career. NO,I just wanted to play for Inter Milan,I still do. The podcast is usually good if I remember to listen to it while cycling..So much choice,E books,music and podcasts,what to do ?. Wish it would stop raining so I could get out.

June 03, 2024

On super funds,a podcast I listen to when I remember,I listened to it last night.A UK podcast where they haven't had compulsory super for long,6 years perhaps.The usual how many acronyms can you think of to make it complicated.SIPPS, ISAs,the list is endless,and the people think it is great,it must be,look at the complexity.

Same problem as Australia.A man is dying,terminal illness.He wants to take out his small amount of money and go on the holiday of a lifetime with his partner. Unfortunately ( but fortunately for the super fund) he just never seems to be able to fill the forms in correctly.No matter how many times he tries,or how much advice he gets,the forms are never filled in correctly.We would love to give you your money,we know you are dying,you keep telling us .You have supplied medical certificates,unless you fill those forms in correctly you will not get your money back,we cannot give you that money.No doubt they are heartbroken as they keep on clipping the ticket.

Wish it would stop raining to get out.tyne

Wonderful isn't it.

John Peters
June 02, 2024

In the 1990's, I was managing $16bn which covered all the investment classes and have noted that there has been a drift to investing internationally for the obvious reasons. However, I have been, quite unsuccessfully, trying to elevate this debate to a more Australian centric level. Being a man in his late 60s, I remember my parents and grandparents setting up their "suedo" super through property acquisition. Accordingly, capital formed was re-invested into Australian assets. The ground breaking introduction of compulsory super was a typical "Keating" solution to a number of problems (notably the strain an aging population would have on Government coffers and strengthening Unions). However, like anything of this nature there were unforseen implications. Key amongst this has been the impact and investment of capital formation within Australia. Put simply, we have provided a tax incentive to form enourmous capital pools but have about a third of this shipped offshoe. Yet, Australia is a net capital importer. So we give an incentive to form these funds then pay a premium to bring the funds back to Australia - NUTS The obvious counter arguments, as outlined in this comment, is that the size of markets cannot take such investment. To this, I would point out that the bulk of overseas returns relates to the currency and, in todays markets, it would be easy enough to synthetically create international exposures without physically moving the funds offshore. Needless to say any policy that kept these funds in Australia would have an enormous impact on interest rates, the cost of capital and the Australian dollar. I believe all for the good but it heighlights there is a "higher"macro impact to be considered.Imagine what the impact of injecting trillions of dollars into the Australian economy would be. Ironically, any such move would only re-inforce the viability of the Australian superannuation industry.

June 01, 2024

Does anyone have any thoughts on Vanguard Superannuation?

May 31, 2024

I enjoyed the article, whilst looking from the outside (in my SMSF). I tracked all your correct use of apostrophes and possessives, but came up short against.. "Yet, there's barely been any questions...".
You meant (I hope) to say... "Yet, there've barely been...". The plural, or singular, as they/it may be, dictate/s the " 've" versus the " 's".
I hear and see "there's" creeping like a plague across our fair language. Let us all strive to preserve the " 've"s in reference to descriptions of plurals.

June 02, 2024

"creeping like a plague":

... and the "have got it" [eg "I've got it"].
Did you "got it" or do you "have it"?
"I got have it" would make more sense.

May 30, 2024

What is with Australian Super Funds reluctance to invest in Australian agriculture? Canadian & USA Pension funds are some of the biggest investors in Oz Agriculture. To me looking from the outside this looks like one area they could direct more investment.

Graham W
May 31, 2024

Agree with this also their extreme reluctance to invest in bullion.

June 02, 2024

Super isn't a piggy bank for what people want to buy,or think should be bought.I would think if you had a self managed fund you could buy agricultural land. What have the long term returns been?. As for gold then from memory gold hit the high point in 1980 @ ~ US$850. The accumulation chart started at A$ 1000. Gold is now at ~ US$ 2300,I don't know I have no interest in it. AXJOA is ~ A$ 96,000.Companies produce income from dividends,gold doesn't. Plot gold against the dow, the dow was slightly less than 850 back then.Call it the same. Gold at 850,or buy the dow at 850.Gold at ~ 2300 the dow at ? 37,000..I don't check prices,or indices every day or whatever. Take gold back to 1971, $35 ,came off the gold standard. 53 years years later and gold still isn't 100x what it was then. A good hedge against inflation,possibly, but you want better than that.

June 03, 2024

Mobile phones and me don't get on .Obviously that was typed as 100x, don't know why it came up as 10x

Graham W
June 03, 2024

Australian gold sovereigns in 1994 were $140, now $1400 assuming no numismatic value increase. No counterparty risk. Definitely a good hedge against inflation in my opinion.

June 03, 2024

I agree Graham.Counter party risk is somebody has to pay you that price .How liquid are they?. How much income will they produce for you in the coming 12 months.

How do they compare with the things I said.Then the most important point in the whole game.How much did you spend then ,and how many did you buy @ $140 each.That is when the rubber hits the road .How did the roller coaster ride go as prices rise and fall.Would you think that those coins will outperform the acc index over the next 30 years,they might,and they might not. The decision is always the same,where to allocate money on the knowledge known today.

June 04, 2024

I had a quick check Graham ( why doesn't it stop raining).You mentioned bullion,I take that as metal,not coin.Coin is a small niche market but it doesn't matter.
1924 coin. $1980
1911 coin $995 ( Perth mint)
1866 coin $1380
1914 coin $20 mark that one as a scam
1870 coin $2495
1910 coin $1003. ( Ainslie bullion,the only mention of bullion,doesn't matter).

These are selling prices,the first 6 that came up on E bay etc .What is the spread on these coins?

Graham W
June 04, 2024

I just mentioned coins ( sovereigns ) to demonstrate that a tenfold increase in value in 30 years was achieved. Total purchases back then was about $50,000 for family and friends. A perfect investment to gift to family, easily divisible and one of the few things that the government has no knowledge of. Bullion purchases were more significant and purchased through our SMSF. The bullion was withdrawn in specie in pension phase ( very acceptable capital gains that were zero taxed ) and again being held for family security purposes. No holding costs in our SMSF and auditor was happy. Overall as I obtained very reasonable returns in our SMSF, preferred the security and didn't want better than that. BTW I am not Swiss.

June 04, 2024

Well done .You got the result you're happy with,that's all that matters.Gold seems seems to be a love/ hate thing.I just never got the point of it .You don't have to chase down every last $ , chase down the result you're happy with.

BUT,always a but.People never seemed to get the point of what I did.Bought the big 4 banks way back when and reinvested dividends until the result was achieved.Dividend income was higher than work income. Tool kit locked for the final time, bye bye, I'm out.

I'm out now,stopped raining,cycle checked,all good for 6 hours of peace and exercise.

Have a good one

May 30, 2024

Great article!
It comes when I was thinking about consolidating my super into Australian Super and found out their 1 year net return is below medium. I suspected it's due to key personnel movements, but after reading this article, I feel it might be because they are too big in their Fund Under Management.
I hope you can highlight some strategy. Should we move to a smaller fund?

May 31, 2024

I wouldn’t be using a 1 year return to benchmark a fund. A 5 - 10 year return comparison for a long term asset like super is a more appropriate time frame for comparisons.

May 30, 2024

When $200 billion is transferred out of Industry Super Funds, when Senator Andrew Bragg's Super Home Mortgage Offset eventually commences, that will reduce their size nicely.


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