Transcription
It's, as I said, if you were to buy a real estate investment here in Sydney, for example, it's down the road. You can monitor it. You know exactly what's going on. But if you buy a real estate investment in Perth, Newcastle, or somewhere equally far or further away, it's harder to again oversee that. That brings a certain level of stewardship challenges.
Why do you believe what we've seen happen at Australian Retirement Trust could happen again? Well, there's two reasons behind it. One is the rapid growth of superannuation as a whole. And this means that at current value size of around 4 trillion plus, it's difficult for the domestic market to absorb this growth. So funds increasingly have to go offshore and roughly about 50% of the assets already offshore again because liquidity Australian market just cannot absorb that kind of growth.
Secondly, there is an increasing and a large dare I say bias but love affair with illiquid assets with many super funds. And so as the offshore investment rises in listed assets such as shares or fixed income the same is true within private equity infrastructure and of course real estate.
Given the size of Australia's super funds, are there alternatives to investing in those kinds of assets overseas? Um, I would say in how it's accessed. Um, currently there's two ways that Australian super funds access offshore investments. One, they outsource it to external managers. So, managers who are based overseas in London, Tokyo, New York, wherever. And obviously they invest it from their home market. The other way is through internalization. And so many super funds are building their own investment teams capturing economies of scale and hiring these teams to manage assets offshore.
That distance brings a certain level of stewardship challenges. It's, as I said, if you were to buy a real estate investment here in Sydney, for example, it's down the road. You can monitor it. You know exactly what's going on. But if you buy a real estate investment in Perth, Newcastle or somewhere equally far or further away, it's harder to again oversee that. That brings a certain level of stewardship challenges.
And so what are the implications for super fund members? Well, firstly, you want uh your super fund to be uh well diversified both domestically and offshore. You want your super fund to look at all assets including real estate, private equity, infrastructure. So what happened with ART is not an issue against the asset class nor is it an issue against ART itself. It just is a challenge going forward when you manage illiquid assets.
Is it also a challenge for advisers and the financial system as a whole? There are many who are raising alarm bells. IMF being one. I don't subscribe to that. Um, because the flip side of doing nothing in superannuation, the flip side of not creating this nest egg is equally if not worse. I guess the challenge for Australian funds is that in the last 10-15 years there's been consolidations. So the funds have been getting bigger from two ways. One is through natural contributions and the other's through again mergers and consolidation. Now we're talking about fewer funds with large sums of money. So I'm not too surprised that when something goes wrong, the dollar side stands out, but in the totality of the overall fund, it's not necessarily going to put the member at risk. So members really have to come to a a balance. Do I want a well-diversified portfolio? If I do, some of those investments will be challenged.
You don't think that the concentration poses a risk that one day one of the funds may get so big and face uh an issue um in say a time of great macroeconomic uncertainty where there are huge losses and the government may need to make a choice about whether it steps in to protect Australians. Excellent question and that's the biggest challenge that we face. Whereas Australian super funds have reaped the reward of consolidation and growth through again economies of scale. The flip side of that is the risk of too big to fail the moral hazard. Now we have a situation that if one of these funds were to suffer what are the consequences not just in assets under management in asset size but also number of members number of superannuants who are exposed to that super fund that brings that moral hazard to the front what happens then. There are some in the government who suggest well caveat emptor. I'm not a subscriber of that either. I refuse to believe a Labor or Liberal government would allow a major super fund to go hit with something that uh caused a major shock to the system. I just don't believe it.
ASIC warned today it will consider taking action against super funds and auditors which fall short when it comes to providing up-to-date and accurate information and valuations. How welcome a step is that? I think you have to look at over the last three to five years and you'll find that ASIC and APRA have been very proactive following the GFC. In the GFC, it was very hard to value many of these illiquid assets. For example, if you are with one major super fund, there was nothing stopping you from selling out of that super fund and going to another super fund. The super fund that you're selling out of would have to obviously give back the money. If everyone does that and a large portion of their assets are offshore or illiquid, it's harder to actually sell large sums of money in order to gain that liquidity. As a result, both the regulator and super funds themselves have been very proactive in trying to minimize what I call the governance gap that exists when you do this.
But given the risks that you have outlined here today, are there other actions regulators and indeed government can take to manage the systemic risks posed by growing super? Catch-22 if I may say so. It's a bit of the unknown unknowns. If for example pre-GFC would have suggested that a big investment bank like Lehman's would go broke, I wouldn't believe it. It would be hard for me to actually contemplate these systemic risks that you're referring to are real. If we look at economic history, they happen every 20 to 30 years. So why not now? The GFC was a major wake-up call for the regulator and the superannuation funds themselves. They've taken some great steps to improve that. Have they fixed everything? Probably not. Are there areas that they need to fix? Probably. Some of which they know. But the ones that scare me is the ones they don't know yet.
Rob Puggate, thank you. Thank you, Kristen.