Go west, and go east

Australia’s great wall of retirement money will need to increasingly move offshore if investors are going to be truly diversified.

Australia’s compulsory superannuation system has already produced the world’s fourth largest managed investment pool. Looking ahead, some analysts are wondering whether the domestic market can support the weight of incoming retirement savings.

And the answer is, most likely not. Australia’s listed assets are concentrated in a few major industries that dominate the market. The market capitalisation of the country’s six largest companies accounts for about 40 per cent of the entire market.

Superannuation contributions are mandated to rise from 9.25 per cent at present to 12 per cent by 2020. As a result of that legislated rise, along with natural growth, the pool of managed investment funds is forecast to increase to some $7 trillion in 2030 from around $2 trillion at present.

Just for comparison’s sake, Australia’s current pool of funds under management is larger than the nation’s total GDP, or the total capitalisation of the ASX.

“As the compulsory superannuant pool grows, it is clear Australia simply doesn’t have the breadth or depth of asset base to accommodate this weight of money,” argues Charlie Aitken at Bell Potter.

The country has proved a tempting lure for international fund managers, with 17 of the world’s top 20 global investment managers having established a presence here.

Even Australia’s yawning infrastructure needs may not be enough to absorb the influx of retirement savings looking to find a home.

One potential outcome is that domestic assets are going to become outrageously expensive (which, as a rising proportion of SMSFs are lured into investing in the property market, is a distinct possibility).

Alternatively, investors are going to have to look offshore for suitable investments, making Australia a much larger exporter of investment capital than at present.

Wealthy investors looking for value are starting to realise this. Aitken reports that many of the family offices that he speaks with have already started to increase their allocation to offshore assets, partly to diversify away from currency risks.

He says family offices are either investing with offshore hedge fund managers or investing directly in equities, with a clear bias towards technology, pharmaceuticals and other sectors that are barely represented in the local market.

As the Australian currency drifts back to more normal historical levels from 105 US cents to 90 cents and below, this will only enhance returns. The family offices that began this strategy a year or so ago will have already benefited mightily from the Aussie dollar’s decline.

Increasing diversification towards offshore assets will help reduce the risks of an overly rich domestic superannuation system. One way for individuals to gain this exposure is through locally listed wealth managers with existing offshore funds, of the likes of AMP, Macquarie and Platinum Asset Management.

Some Australian investors are going directly into the US housing market, seeing greater value there as the sector recovers.  It was surprising to see a front-page New York Times piece recently headlined “G’day from Bushwick”, telling the tale of Australian investor Alan Dixon who was renovating a property in Bushwick, a gentrifying neighbourhood in Brooklyn.

The row house was just one of the more than 500 properties that Dixon’s Canberra-based fund has purchased in the past two years. Instead of flipping the properties for profit, the fund buys dilapidated townhouses and brownstones from Brooklyn and Queens to New Jersey at bank auctions, does a gut renovation, and then rents out the properties for a steady, dividend-like income stream.

Dixon’s ASX-listed US Masters Residential Property Fund has grown from $70 million to $380 million in two years. (Alan Dixon is the son of investment consultant and chairman of Dixon Advisory, Daryl Dixon.)

More Australian investors will need to think outside of the domestic box when it comes to finding a home for their growing pile of superannuation dollars.