Where Pensions With A$430 Billion Are Putting Their Money Now

(Bloomberg) — Australia’s mammoth pensions industry is rethinking investments from bonds to equities and cash to private markets as it steels itself for slower global growth.

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While the nation itself may yet skirt recession, the OECD this week warned of the global economy sinking into a significant slowdown. Volatile markets and geopolitical crises handed Australia’s pension funds their worst period since the financial crisis this year, and they’re now focused on limiting any further losses in 2023.

Here’s how five funds of varying sizes with about A$430 billion in combined assets are positioning themselves for the coming year.

AustralianSuper (A$261 Billion)

The investment chief of Australia’s biggest pension sounded a note of caution about private markets, where valuations tend to trail their public counterparts.

“Because they lag, what tends to happen first is that liquidity dries up and there’s very few transactions and then the prices adjust,” said Mark Delaney. “So they’re the ones we’re most cautious on now.”

While the near-term looks volatile across most asset classes, there could be lucrative opportunities around a year from now as central banks potentially begin easing and prices start coming off, Delaney said. Credit markets, fixed interest and stocks are on his watchlist.

The fund started positioning itself for an expected global slowdown earlier this year and isn’t likely to materially change its asset allocation over the next 12 months, Delaney said. It had built up positions in cash and fixed interest — “things that we think could benefit from a downturn.”

Cbus (A$70 Billion)

The Construction & Building Unions Superannuation Fund, known as Cbus, is also positioning itself cautiously as global growth slows, but has cash ready to spend on the right opportunities, said Chief Investment Officer Kristian Fok.

“We’ve got money able to be deployed over time in the debt space,” he said, given the prospect of higher yields as growth slows. “We are still a bit underweight in fixed income, I think there’s a bit of room to go there.”

Fok said Cbus was also slightly underweight in listed equities, which gave it room to move and increase its exposure when the time was right. Strong cash flows meant the fund could add to its private markets portfolio by quickly pouncing on opportunities such as infrastructure or property, he said.

“Assuming that the global economy doesn’t collapse, they have quite robust revenues and many of them have inflation-linked revenues,” he said.

State Super (A$38 Billion)

This pension fund for government and public sector employees is closed to new members, and its existing savers have retired or are about to. That means it has negative cashflow and needs to tread extra carefully in wild markets.

“We’re seeing volatility hitting all parts of the portfolio,” Chief Investment Officer Charles Wu said in an interview. “Naturally that takes us to a more cautious stance and that does mean we remove some of the risk.”

The fund had cut some equities and credit holdings, and started reshuffling its currency basket as the strong US dollar continues to hit commodities markets and emerging markets. Harder-to-sell unlisted assets weren’t appealing as the fund needs to ensure it has enough money to pay out retiring members, he said.

While State had also recently reduced its exposure to China, Wu doesn’t rule out opportunities there in the future.

“That’s primarily risk driven, as both the geopolitical tension risk increases, as well as the impact from the zero Covid policy. Those are the reasons why we reduced the holding,” he said.

Brighter Super (A$30 Billion)

Brighter Super is snapping up more bonds. The fund has been scouting for fixed-interest opportunities “across the board,” but has been especially busy in the domestic market recently, Chief Executive Officer Kate Farrar said in an interview.

“We were somewhat underweight in fixed interest, relative to other people, which was probably a good thing to be over the more recent past,” said Farrar. “We think it’s a good time to rectify that now.”

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The fund’s domestic fixed-interest allocation has lifted by five percentage points in the past year, Farrar said. It’s also looking at opportunities in the asset class globally, she said, while infrastructure investments have helped weather volatility.

The fund is on a recruitment drive to boost its internal investments team, following the appointment of new chief investment officer Mark Rider in February. The unit will grow to about 28, including back office staff, said Farrar.

Equipsuper (A$30 Billion)

Equipsuper hired two portfolio managers last month as it seeks to lift its exposure to defensive and alternative assets. The fund has joined many of its peers in buying fixed income as it prepares for further volatility in global markets, with bonds now comprising about 12% of its default offering, Chief Investment Officer Andrew Howard said in an interview.

“We’ve nearly doubled our exposure to bonds over the course of the last six to eight months,” he said. “That’s broadly in line with our strategic asset allocation at the moment.”