Australia Equity Strategy: Superannuation

We estimate total assets within Australia's Superannuation system will approach AUD 12 trillion by 2050, which represents an almost tripling versus where Funds Under Management currently sits. Although we can see net inflows to the system switching to outflows by around 2033, even modest assumptions on future asset price returns will see overall system Funds Under Management continue to swell over coming decades. We also find that today's under 25 year old worker can expect their Superannuation balance to hit USD 3 million by 2067.

A decade ago Super money accounted for about 39% of the ownership of the overall Australian equity market cap. This proportion has now grown to 49% such that Super funds hold a disproportionately large share of their domestic equity market versus what is seen in other key pension markets around the world. Even though Super funds have realised they are near capacity in local equities, we are wary of the risks posed to the strong home country bias by any scaling back of dividend franking policies.

The system's growth has led Australians' overall wealth to be even more linked to house prices given domestic commercial banks feature as such large holdings within Super funds. At the same time, the recently introduced performance tests are now potentially changing risk/reward for asset managers. The twin forces of passive money and Super flows could lead to funds being over allocated to the largest stocks, and therefore we see grounds for the key local equity benchmarks to consider placing a cap on the weighting of top stocks.