Morningstar sees Aussie super funds as unlisted investment pioneers

Mike Taylor

Managing Editor/Publisher, Financial Newswire

28 November 2024

The success of Australian industry superannuation funds in investing in private assets has prompted major research and ratings house, Morningstar, to use them as a case study in its 2025 investment outlook.

Morningstar says Australia’s superannuation funds have successfully pioneered investment in asset classes such as unlisted infrastructure and property for decades, and many have made forays into private credit and private equity.

“Today, around 16.5% of sector assets are invested in private assets, although for the largest cohort, so-called “industry” funds, this figure exceeds 20%, with unlisted infrastructure as the most popular private asset allocation,” the case study said.

“By allocating to private assets, Australian pension funds are playing to their strengths; their long-term investment horizon and liquidity profile neatly align with those of private assets. First, superannuation investors remain in the super ecosystem for decades. Second, with superannuation being compulsory—reaching 12% of Australian workers’ salaries in 2025—super funds can count on a steady, predictable stream of cash inflows to provide appropriate liquidity buffers. This enables a greater allocation to illiquid assets while being able to deftly handle sudden market selloffs and manage longer-term demographic risks.”

“As one of the key drawbacks of private assets—liquidity—is less of an obstacle for pension funds, the benefits of the asset class can be more freely utilized. A skilled private-asset investment manager can harness the complexity and liquidity premiums from direct investments. Private assets such as infrastructure can also offer direct access to key secular trends such as renewable energy. Additionally, classes such as core infrastructure also tend to have a revenue profile that offers strong inflation insulation, which was a benefit to investors in 2022 when equities and bonds both declined significantly.”

“Despite the benefits, private-asset investments by super funds have their drawbacks. Compared with public assets, valuations are infrequent—private assets are valued at intervals typically measured in months—and the local regulatory authority has only recently mandated valuations on at least a quarterly basis. A sharp, sudden economic jolt may see listed equities devalued instantaneously; private assets, meanwhile, may not be revalued for months thereafter. This can benefit members who switch out of their super fund before a private asset revaluation, while those remaining are left to absorb the eventual devaluation. For this reason, super fund policies around out-of-cycle valuation triggers are receiving increased attention. Valuation assumptions are another area of recent focus; robust vetting by the fund is required to ensure that private assets are appropriately valued.”

“Of course, private assets are an umbrella term for what is, ultimately, a diverse asset class. That said, the superannuation fund experience demonstrates that private assets can play a positive role for individual investors, albeit in a setting such as retirement planning, where their potential drawbacks are tempered, and their benefits can be more freely cultivated.”