Australia's pension funds will be forced to push more money into less traditional assets — such as apartment developments and even direct lending to companies — after the strong recent performance of equities and fixed-income left valuations lofty in public markets.
That's the assessment of investors managing money directly for, or on behalf of, the country's A$2.9 trillion ($2 trillion) pension pool, who gathered in Hobart this week. With 4 out of 5 retirement savers in funds that have a target return of more than 3% above inflation and a government heaping pressure on under performing funds, that's a tough ask, said Ross Etherington, chief investment officer of the A$5.8 billion ($3.9 billion) EISS Super. "We have to look at non-traditional asset classes to achieve those goals going forward."
With stocks and bonds moving higher together, investors are searching for other areas to diversify their investments to hedge against the fragile global economic outlook. For the world's fourth largest pension pot, that could mean more flows into alternatives and away from the almost 80% that currently sits in equities, bonds or cash.
"There will be a lot of pressure on investors to try and chase returns for the next six to 12 months," said Ron Temple, managing director and co-head of multiasset investing at Lazard Asset Management, who spoke at the three-day conference.
Australia's sovereign wealth fund, the A$162.6 billion Future Fund, last week reiterated future returns won't be as strong as recent years. AustralianSuper, the country's largest superannuation fund with A$165 billion in assets, told its customers in July that returns going forward will be lower than in recent years.
Possibilities for the pension funds include apartments and direct lending. Apartment developments are a "very stable" asset class despite Australian pension funds largely staying away from the sector in their home market, James Martha, head of housing at Nuveen Real Estate, said in an interview. Still, yields in the U.S. have fallen to about 6% this year from almost 10% five years ago, he said.
For IFM Investors' Lillian Nunez, there's an opportunity to directly lend to Australian companies where returns are above similar deals offshore. Ms. Nunez, the firm's investment director for debt investments, said the local deals are also more secure, meaning less risk of not getting your money back if there's a default.
But some still favor domestic equities. Stocks "look very attractive" and are ready for a period of outperformance after being beaten by their U.S. peers since the global financial crisis, according to AMP Capital Investors Ltd. senior economist Diana Mousina. She likes the relatively high dividend yields and the favorable tax advantage from franking credits.