Asset allocation and Australia’s superannuation industry

May 31, 2013 / By

One of the critical lessons of the global financial crisis for Australia’s superannuation industry has been the importance of asset allocation. The performance of fund returns over 1 (0.3%), 5 (-0.7% p.a.) and even 10 years (5.2% p.a.) have been less than stellar (Australian Prudential Regulatory Authority (APRA), 2012) and left many questioning their strong weightings to listed shares.

According to APRA (2012) the current default strategy for an Australian superannuation fund is roughly 51% shares, 14% fixed interest, 9% cash, 2% listed property, 8% unlisted property and 16% to ‘other’ investments. While the default strategy does not provide any specific mention of direct real estate allocations, recent estimates suggest that large funds hold only around 4% of their portfolios in direct real estate assets (Reddy, 2012).

Real assets are becoming a larger part of superannuation fund portfolios. While limited data exists on Australia’s superannuation funds future asset allocation strategies, anecdotal evidence suggests that their direct real estate holdings could increase to around 10.0%. At a global level, the Canadian Pension Plan Investment Board (CPPIB) has increased its allocation to real estate from 4.3% in March-2007 to 10.6% in March-2012. At the same time, CPPIB has raised its allocation to infrastructure from 0.4% to 5.8%. The National Pension Service of Korea (NPS) has also indicated that alternative investments will account for more than 10.0% of its portfolio by 2016, an increase from its current level of 2.5%.

While industry funds are starting to re-assess their allocation strategies, less is said of the much larger and faster growing Self-Managed Super Fund (SMSF) sector. The SMSF sector has grown to become the country’s largest superannuation sector by number of funds and asset size. It comprises superannuation funds established and managed by individuals or families. As at 30 March 2010 there were around 423,000 SMSFs, equating to around 30% of all superannuation assets. SMSFs have been around for more than 30 years but have experienced rapid growth in the last few years. In the five years to June 2009 the sector grew from $132 billion to $332 billion, reflecting an annualised growth rate of 20.0%.

The asset allocation decisions of SMSFs are not dissimilar to the industry funds. While data is difficult to obtain, Russell Investments’ annual report on the SMSF sector provides a good starting point. According to this report SMSFs currently have an average allocation as follows; 49.2% to shares, 4.7% to fixed interest, 25.6% to fixed interest, 2.6% to listed property trusts, 1.1% to unlisted trusts and 2.3% to direct commercial property. Notwithstanding some of the more technical difficulties, there may be a case for SMSFs to consider a greater allocation to direct commercial real estate. With large funds now making the move into the sector, time will tell if the SMSF sector will follow.


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