Australian superannuation funds have increase alternative investments such as private equity, unlisted property and infrastructure to take advantage of strong returns.
According to APRA, 25 per cent of super funds’ investments are held in unlisted assets, worth about $650 billion.
These holdings, which have come under greater APRA scrutiny for how they are evaluated, have provided good earnings for funds in contrast with share markets buffeted by rising interest rates and falling asset prices.
According to researcher Chant West, Australian funds have lifted alternatives exposure in various sectors by between 1 to 5 per cent in the past 22 years to 2022 with larger funds more equipped for direct investments.
This compared with 25 per cent in Australian equities, 30 per cent in international shares and 3 per cent in listed property and infrastructure.
HESTA head of portfolio management Jeff Brunton said the $72 billion fund’s alternative investments have consistently provided strong performance over many decades.
“We’ve had a long-standing, material allocation to unlisted assets including infrastructure, property, private equity and private credit,’’ Brunton said.
He adds the fund also has idiosyncratic investments such as structured royalties and insurance linked securities.
“In addition to a variable ‘illiquidity premium’ generally gained from unlisted assets, investment into unlisted asset classes can provide additional inflation protection, diversification, and asymmetrical return outcomes,” Brunton said.
He said each asset class had a position within HESTA’s portfolio for different reasons and these were adjusted over short, medium and long-term time frames depending on how it viewed their relative contributions.
HESTA, which has one million members mainly from health and community services sectors, announced a $240 million investment with affordable housing fund manager SHP in November for construction of built-to-rent homes.
At the time, chief executive Debby Blakey said the move would generate stable, long-term returns for members, catalyse an emerging investment sector and improve housing supply.
Industry super fund Hostplus is one of the largest investors in alternatives with 50 per cent of its default Balanced option invested in unlisted property infrastructure, private equity and venture capital.
The fund said its focus on long term meant it could invest in assets such as NSW Ports and Melbourne’s Southern Cross Station to help “smooth out the ups and downs of investment market cycles”.
UniSuper, with more than $115 billion in assets under management, announced a $1 billion investment of a 5 per cent stake in European mobile towers group Vantage Towers in May.
This followed a $105 million investment in an industrial property in the Port of Melbourne in January and partnering with IFM Investors in November to acquire a majority interest in Australian medical business PRP Diagnostic Imaging for about $800 million.
UniSuper head of private markets Sandra Lee said in a May update that the Vantage Towers investment provided long-term contracted cashflows and inflation protection and committed growth. The fund’s aim was to continue to explore alternative investments.
“Given we are sitting on a fair amount of cash we are looking at investments and assessing opportunities in various sectors including timberlands, transportation, renewable and private equity and we’re hoping to make a significant investment in forestry in the near term,’’ she said.
But not all alternatives were popular with Australian unlisted commercial property transactions at record lows, according to MSCI Real Assets research.
In the first five months of 2023, institutional investors, including super funds, had retreated from the sector by 85 per cent, with expectation of “several quiet years ahead”, said head of pacific real assets research Benjamin Martin-Harvey.
