(Bloomberg) — The guardians of Australia’s A$3.3 trillion ($2.2 trillion) pension funds industry have a tough task for 2023: bouncing back from their worst year in more than a decade as steep inflation outstays its welcome and interest rates keep ticking up.
While returns have been more palatable in recent months, the path ahead is anything but smooth with markets still on edge about monetary policy, the local regulator promising even tighter scrutiny and a war still raging in Ukraine. The Australian Prudential Regulation Authority is even warning of “serious” and widespread pressures facing some funds’ sustainability.
Bloomberg interviewed chief investment officers at some of the biggest pension funds — including Australian Retirement Trust Pty, Aware Super Pty, HESTA and Construction & Building Unions Superannuation Fund (Cbus) — about the outlook for 2023. Here’s a summary of their current thinking.
While CIOs don’t expect economic headwinds to ease significantly in the first part of 2023, they still see opportunities.
“We do generally view that inflation for most economies is getting closer to the peak,” said Damian Graham, CIO of A$150 billion Aware Super. “Interest rate increases will slow. And if you point to most economies, that’s likely to be the case if not now, then in the first quarter of next year.” The big question: how much weakness will flow through to the economy, and if that could spur rate cuts by the end of 2023.
Sonya Sawtell-Rickson at A$70 billion fund HESTA, said the fund lifted its cash holdings for its balanced option from about 3% to 8%. “Liquidity tends to be king in a crisis and so we want to make sure that we’ve got the flexibility to take advantage of opportunities,” she said, citing healthcare, technology and the transition to renewable energy as potential targets.
HESTA’s also cautiously monitoring events in China as the nation starts paring back its Covid-zero policies. While the fund had been overweight China, Sawtell-Rickson said it may pare back toward benchmark levels over the medium to longer-term, saying the market had priced in recent news “very quickly and very aggressively.”
Australian Retirement Trust — formed out of the merger between Sunsuper and QSuper earlier this year — now has about A$240 billion under management. CIO Ian Patrick told Bloomberg he was similarly cautious on China.
“It’ll almost certainly lead to a degree of optimism in equity markets, but I think that will be the initial euphoria at some pivot in policy, and then the emerging experience will be more telling,” Patrick said.
Aware Super’s plans to expand its global footprint are “progressing well,” said Graham. It’s currently focusing on Europe and may be looking to hire in private markets there, he said. Otherwise, the fund has been growing its investment team “pretty actively” and plans to next year as well.
Patrick said ART would aim to add between 8 and 14 staff to the investment team over the next 12 to 18 months.
Sawtell-Rickson said HESTA has been internalizing its investment team, and that will continue in the next 12 months. The fund has already added to its Australian equities and fixed-interest units, and is now looking to beef up its unlisted asset team. “If some great talent comes along, I think we’ve got an opportunity to incrementally add roles,” she said.
Unlisted assets continue to be a growth area for Australian pensions seeking higher-yielding opportunities both locally and abroad that aren’t as vulnerable to the rollercoaster of listed markets.
Aware Super’s allocation to private markets will likely be “slightly higher” this time next year, Graham said, cautioning that growth will be focused and only increase as good opportunities arise. Core areas of interest will be private equity, energy, logistics and residential retirement property space.
Kristian Fok at A$70 billion fund Cbus is also looking for opportunities, but will be biding his time. “Debt and lending will find its time, at the moment we don’t think that pricing is adjusted fully enough yet, but we think you as the real economy gets impacted and as it starts to impact businesses that that will create more opportunities for us,” he said.
ART’s Patrick said private credit was a focus for his fund, which he divided into two buckets: a fixed-interest substitute or a more opportunistic strategy.
“In both cases we think they are relatively attractive right now, particularly where the credit is asset-backed or has other strong underwriting protections associated with it,” he said, adding that the risk-return profile of private credit was “quite good” compared with equity markets.
Australian’s pension pool is projected to triple to more than A$9 trillion in the next two decades, but the number of funds is shrinking. APRA’s introduction of a performance test sparked a wave of mergers, by shining a spotlight on under-performing funds and prohibiting them from taking on new customers. Other mergers were part of broader industry consolidation.
While Patrick said that ART was open to more mergers, Cbus’s Fok said the immediate pressure of consolidation had eased. “The funds that were clearly in the firing line for the performance test have had to act, but the next level, I think they’re not going to merge unless they’re happy,” he said. “I think consolidation will still occur, just not at the frenetic pace.”
The industry’s newest entrant, US investment giant Vanguard, launched its much-anticipated low-fee product in November. It hasn’t ruled out looking for merger opportunities, but said it was focused on growing its own customer base first. “As opportunities arise, we’ll certainly look at them,” Vanguard Australia Managing Director Daniel Shrimski told Bloomberg last month.
A key policy development in 2023 will be legislation to enshrine the purpose of superannuation, which could spur further policy decisions such as rules around providing financial advice to members and tax concession arrangements. “I think what a purpose of super will do is give clarity to the superannuation landscape in terms of public policy debates,” said Martin Fahy, who heads the Association of Superannuation Funds of Australia.
The government has also tabled legislation that will require funds to disclose their performance in the same way as listed companies, though Aware’s Graham said the plans weren’t clear at this stage and he was yet to have any interaction with the government on this.
APRA’s six-monthly performance test recently failed four products for a second time and meant they were barred from taking new members. HESTA’s Sawtell-Rickson said she would like to see changes to the test. “Especially in a world where we are trying to encourage capital into things like the climate transition, it’s not clear necessarily that they’re quite aligned to benchmarks,” she said.
Meanwhile, ASIC is also ramping up its focus on greenwashing, and has already fined two companies. It recently named superannuation funds among the industries being investigated.
©2022 Bloomberg L.P.