Offshore allocation approaches half of super asset allocation

Offshore asset allocation is edging closer to half of superannuation funds’ total investment portfolios, driven by challenges in domestic markets. 

NAB’s Super Insights Report, which surveyed 41 funds comprising 85 per cent of the sector’s assets under management (AUM), has revealed the extent to which funds are setting their sights overseas.

The research found that allocation to international assets has reached 47.8 per cent in 2023. This is up from 46.8 per cent in 2021 and 41 per cent in 2019, demonstrating a slow yet rising trend towards the 50 per cent allocation mark. 

An overwhelming majority of large funds plan to further increase their international percentage over the next two years.

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John Bennett, executive of markets C&I sales at NAB, said this reflects how funds are shifting their investment processes to meet challenging market conditions and continued regulatory change.

“A key finding is the continued internationalisation of investment portfolios, which highlights the ongoing challenge for large funds in deploying incoming capital to the domestic market without amplifying concentration risk,” he explained.

NAB also observed funds’ preference towards unlisted asset classes when looking at offshore holdings. 

Private credit and unlisted international infrastructure are the most favoured asset classes, followed by unlisted property. Compared to 2021, listed equities were the most popular.

Glen McCrea, the Association of Superannuation Funds of Australia (ASFA) deputy chief executive, expected this trend to continue.

“While there has been increasing scrutiny over illiquidity and valuations of unlisted assets, funds still view these asset classes as attractive for delivering long-term returns for members. It’s expected the relative exposure to these asset classes will increase in the new two years,” he commented.

Finally, the report also revealed that 88 per cent of super funds indicated that the Your Future, Your Super (YFYS) performance tests impact how they set their strategic asset allocation and implement their investment strategy.

“Increased YFYS benchmark sensitivity is driving allocation to asset classes that are readily benchmarked according to many respondents,” the report stated.

In addition to the YFYS test, funds are also taking absolute investment risk and relative peer performance risk into account when setting their strategic asset allocation.