‘Quite extraordinary’: A quarter of your super is tied up in ‘dud assets’

We’ve all heard of the gargantuan profits generated by well-known Silicon Valley tech giants like Google, Microsoft, Amazon and Facebook.

It may surprise you, then, that they make up only a small fraction of the total asset allocation within most Australian superannuation funds.

The main reason for this is the risk they pose to the longer-term return profile of a fund.

Stock market investors have been enjoying a once-in-a-generation rally as central banks and governments try to manage the economic damage caused by coronavirus.

Recently, though, a wide range of stocks have been battered by a “correction” — defined as a 10 per cent fall from its recent peak — in the US technology sector.

High profile Australian stocks like Afterpay have also been hit.

Veteran stockbroker Marcus Padley says the big ups and downs in technology stocks are part of a normal price adjustment process after experiencing such a big run-up in prices in recent months.

He also points the finger squarely at a Japanese multinational conglomerate, SoftBank, which owns big stakes in many technology companies. He says the company has been actively selling large stakes in the tech giants.

Bad news won’t last forever

Analysts believe this mini “tech wreck” will most likely be confined to August and September.

However, in the years and decades to come, they say, the US tech giants will only grow bigger and stronger.

“What we’ve seen in the last five years is an ability for an online business to expand globally, rapidly, with a scalable product,” Padley says.

Sydney University’s technology expert Mark Pesce agrees.

A man is silhouetted against a video screen with an Facebook logo as he poses with a smartphone
We’ve all heard of the gargantuan profits generated by well-known Silicon Valley tech giants like Google, Microsoft, Amazon and Facebook.(Reuters: Dado Ruvic)

“The tech sector has been the shining star of the industrial economy for the past 25 years, and so that has to be part of any [investment] portfolio,” he said.

“There’s no question that you can’t really expect gains unless you have tech in your portfolio.”

Superannuation pre-mix investment options by international share asset allocation.
Superannuation pre-mix investment options by international share asset allocation.(Supplied: Canstar)

Tech missing in action

Here’s the problem facing super balances.

While record low interest rates and government economic support packages are supporting the broader stock market recovery, they’re also wiping out returns from cash, term deposits and bonds.

Australia’s biggest industry fund, AustralianSuper, invests roughly a quarter of all its money into these assets.

AustralianSuper Asset Allocation Balanced Fund (September 2020).
AustralianSuper Asset Allocation Balanced Fund (September 2020).(Supplied: AustralianSuper)

AMP is Australia’s largest manager of retail funds. It has a similar asset allocation in so-called “defensive” assets, that are designed to protect, or hold, the value of fund.

Padley says it’s “quite extraordinary” that so much of our super — roughly a quarter — is tied up in such dud assets.

He says superannuation funds need to pivot their investments towards Silicon Valley.

“It is only going to get bigger,” he said.

“Here we are with 25 per cent of our money buried in low growth banks, you know it really is quite extraordinary.

“I think superannuation funds if they want a low volatility, low cost international exposure, you’re probably going to find exchange traded funds [ETFs] are the way to go.”

ETFs are investment vehicles, essential “stocks” in their own right, which contain multiple stocks within them.

For example, a technology ETF might trade on the exchange and its value will shift depending on the change in stock prices of both Microsoft and Amazon.

Investment experts says superannuation funds could avoid some of the risk attached to tech stocks by investing in ETFSs instead of individual stocks.

‘Our focus is more managing risk’

It’s hard to tell what Australian super fund exposure is to US tech stocks.

Australia biggest industry fund Australian Super chose not to comment for this story. And AMP wouldn’t disclose how much of its tens of billions of dollars in funds under management are already tied up in Amazon and Microsoft.

The AMP logo on a building in Sydney
AMP did not disclose how much of its funds under management are already tied up in Amazon and Microsoft.(ABC News)

But its chief investment officer Lakshman Anantakrishnan was asked if, given the poor returns from cash and the bright outlook or US tech, AMP would consider giving its clients more exposure to US technology stocks.

“Chasing returns is important, but certainly our focus is more managing risk and managing risk on the downside,” he says.

“As markets continue to become more volatile in the period ahead, if you expose yourself to large losses, especially for people who are closer to retirement, that can have quite a substantials impact on your retirement outcome.”

Is there scope for change?

As for how super funds, from a practical or logistical perspective, could shift their investment towards US tech, it would need to be done via what’s known as their “mandated structures”.

Large super funds usually review their asset allocations yearly.

If it was decided more money need to be invested in tech, AMP would ask the trustees and they would give AMP permission to change the mandates as part of the Investment Management Agreements. 

The ABC asked the Assistant Minister for Superannuation, Financial Services and Financial Technology Jane Hume if there was scope for public sector super funds to embrace US tech.

The Senator said it wouldn’t be appropriate to comment on areas of potential investment, because it was up to trustees.

Australians will want bigger returns

It’s hard not to empathise with the million-plus Australians out of work right now and not earning any super.

It’s also hard to watch many younger Australians drawing down up to $20,000 in superannuation in order to get by.

The latest data from the banking regulator, APRA, shows applications for early access are still rising in number.

The latest data from the banking regulator, APRA, shows applications for early access are still rising in number.
The latest data from the banking regulator, APRA, shows applications for early access are still rising in number.(Supplied: APRA)

And let’s not forget the many workers who are underemployed and are not contributing to their super as much as they would like.

For millions of Australians, there is likely to be quite a bit of catch-up on their super balance — and once this crisis calms, they’ll likely be looking for funds to help make up the difference.