Big super leads charge towards investment internalisation

As super funds work towards internalising their investment functions, outliers have reaffirmed their intention of going against the grain, according to recent findings.

Wealth Data founder Colin Williams has collated APRA’s annual fund-level superannuation statistics from December, highlighting the proportion of assets differing fund types hold directly, as well as which assets they are largely invested in.

Although the asset allocation mix did not exhibit significant variations across fund types, retail funds were reported as having maintained a lower direct asset holding, averaging at 11 per cent.

In contrast, all other fund types, on average, possessed at least half of their assets directly.

However, Williams identified a correlation between the size of industry funds and their asset-holding capacity.

“For example, three industry funds that have in excess of $100 billion of total assets each, hold a combined 63 per cent directly. Whereas, for 10 industry funds that have less than $10 billion of assets each, hold 32 per cent directly,” he said.

Meanwhile, AustralianSuper, which reached $311 billion in member assets as at 30 June 2023, held 75 per cent of its investments directly.

Other industry funds that held over 75 per cent of their assets directly included HESTA, Spirit Super, and UniSuper.

Despite the patterns that appear according to fund size, some industry funds have defied the trend.

Notably, Hostplus had $96.5 billion of member assets as at 30 June, but only 1 per cent of those investments were held directly.

This appears to have been a successful move for the fund, as it had the greatest 10-year returns for all funds with more than $10 billion in assets, and nabbed the second spot for five-year returns.

On its website, Hostplus identified the benefits of working with external experts as opposed to adopting an internalisation strategy.

“We believe it’s in our members’ best financial interests to take advantage of the top investment thinking and resources locally and globally,” the fund has written.

“We leverage the expertise and intellect of investment managers and our investment consultant, JANA.”

However, Hostplus may not reflect the views of most super funds, according to Frontier. In November, a quarter of fund managers surveyed by the firm named the move towards internalisation by super funds as the biggest challenge to their business.

The study highlighted: “Over time the challenge of internalisation has been growing in terms of its prominence in responses. This year it has almost climbed into the top ranking with 25 per cent choosing it as their most significant issue.

“It is obvious that, while consolidation continues to loom as a threat for managers (and for consultants as well), the majority of that appears to be behind us and the challenge of larger internal teams now looms as the more immediate threat for managers looking to cling on to mandates.”

Where are fund types invested?

Regarding the investment preferences of different fund types, Wealth Data revealed that retail funds have a large preference for equities with 57 per cent of their funds invested there. The rest was divided between cash (11.18 per cent), fixed income (19 per cent), infrastructure (4 per cent), property (6 per cent), and other 3 per cent.

Industry funds had 51 per cent of their funds in equities, followed by 19 per cent in fixed income, 8.03 per cent in cash, 11 per cent in infrastructure, 9 per cent in property, and 2 per cent in other.

Corporate funds had the largest allocation to fixed income among the fund types, with 27 per cent of their assets invested there.