Australian pension funds’ major ‘wall of money’ to go overseas

Australian pension funds are sitting on a A$245 billion ($167.38 billion) ‘wall of money’ that will probably flow overseas because of a lack of domestic options, asset managers say.

Thanks to Australian laws requiring employers to contribute at least 9% of a worker’s salary to a pension, superannuation funds, as they are known locally, are the world’s third-largest pool of pension assets, worth about $1.9 trillion. The Australian stock market is worth only $1 trillion.

The nearly 2:1 ratio is the highest among major developed economies, according to Bank of America Merrill Lynch (BAML), and the imbalance is growing — as is the range of overseas markets and assets attracting those funds.

“We have the world’s tenth-biggest stock market but the third-biggest pension fund pool,” said Mark Warburton, BAML head of Australian equity capital markets. “There is a wall of money waiting to be invested.”

The Australian Bureau of Statistics puts the number at about A$245 billion.

Some of that money has stayed in Australia, such as the A$2.1 billion purchase in March education group Navitas by AustralianSuper, the country’s largest pension fund, and private equity group BGH Capital. But asset managers told Reuters the cash imbalance was putting pressure on Australian funds to find infrastructure, property, private equity and listed companies offshore.

Last month, AustralianSuper agreed to put up to $1 billion into India’s National Investment & Infrastructure Fund Ltd (NIIF), and has accumulated major stakes in listed companies such as drinks maker Diageo and consumer company Reckitt Benckiser. Superannuation fund-owned IFM Investors, one of the country’s largest infrastructure investors, also told Reuters it was expanding its listed equities business outside Australia.

“The scale is just enormous,” National Australia Bank head of markets Drew Bradford said of the potential overseas investments.

According to NAB, about 41% of the biggest funds’ assets are currently invested overseas. Nearly three quarters of those funds plan to increase such investments over the next two years, the bank found.

“You are going to have maybe the third-largest nominal pension pot money in the world with half or more of those investments held offshore,” Bradford said. AustralianSuper this year announced plans to open an office in New York and expand its London operations.

In Britain, pension funds assets are worth 1.4 times more than the local equities market, while in Canada it is 1.2 times, BAML figures show. US pension fund assets are almost equal to stock markets, at about $24.7 trillion apiece.

Analysts said pension funds’ available assets have been one reason for the Australian market’s performance this year. The benchmark S&P/ASX200 has risen 17.5% this year, according to Refinitiv data.

The US S&P500 has increased 18.82% during the same period, according to Refinitiv data.

The continued growth of Australia’s biggest funds - with some adding internal management teams - is also adding pressure on domestic fund managers. This year, five pension funds have announced mergers, and industry experts expect more.

Ian Fletcher, head of research at investment advisory firm Chant West, said fund managers were discounting their fees as their pool of customers grows smaller in number but heftier in size.

“If you want to get mandates from Australian pensions you need to charge 5 to 10 basis points less than in overseas markets,” Fletcher said. Ian Macoun, the managing director of Pinnacle Investment Management, which has A$54.3 billion of assets under management according to the company’s website, said domestic managers were suffering as super funds expanded and did more allocations on their own.

Reuters