In recent weeks there has been media and other commentary about the role of superannuation funds as investors, particularly what they are doing and may do in terms of influencing decisions made by the boards and management of Australian listed companies. Some commentators see superannuation funds playing an activist role, even displacing the traditional owners of control, that is, men of a certain age who belong to upmarket clubs in Melbourne (or Sydney) and who sit on multiple company boards. Certainly, superannuation funds are becoming increasingly significant investors in Australian listed companies and other investment classes.
Over the fifteen years from 2004 to 2019 super fund assets in aggregate increased a bit over four times the 2004 level, while the market capitalisation of the ASX is around 2.5 times what is was 15 years ago.
Growth in super fund assets is likely to continue to outstrip growth in the ASX market capitalisation. Market capitalisation of the ASX tends to grow in line with growth in GDP, but super fund assets are projected to grow from the current level of around 150 per cent of GDP to 170 per cent of GDP by 2030.
The increase in super assets relative to ASX market capitalisation has led to, and will continue to lead to, super funds adjusting how they invest.
In 2004 super funds held shares equivalent to around 25 per cent of the ASX market capitalisation, with this percentage increasing to a relatively modest amount to 31 per cent in 2019. Super funds do not dominate investments in the ASX.
Funds have cut their allocation to domestic listed shares from 33 per cent to 22 per cent on average over the 15 year period and the allocation is likely to fall further in the future. By 2030 superannuation funds are likely to still own less than 35 per cent of the overall market capitalisation of the ASX.
Super funds have been looking for the best available investments and the benefits of diversification.
They have increased allocations to international shares, infrastructure, hedge funds, unlisted equity, and unlisted property amongst other things. This has at times led to concerns by the traditional owners of super normal profits from private equity, that is, overseas based hedge funds and venture capital funds.
The superannuation sector is not very concentrated relative to other parts of the financial sector, with even the largest funds responsible for less than 5 per cent of total assets under management, with domestic shareholdings equivalent to less than 2 per cent of ASX capitalisation.
Although sometimes super funds will vote in similar ways, this is usually on the basis of advice from advisory bodies and is based on improving corporate governance getting the best possible outcomes for shareholders and fund members.
Super funds take their responsibilities as shareholders seriously, applying appropriate corporate governance principles to how they vote and deal with companies. While this is not always a comfortable experience for company boards, responsibility to shareholders can and does lead to better outcomes for companies and their shareholders.
Integration of ESG considerations into investment decisions is hardly anything new, but just how far trustees should go is a matter for debate.
The underlying arguments about the duties and responsibilities have bounced about ever since the case of Cowan v Scargill back in 1985.
It is clear that factors which will impact on the future financial performance of an investment can properly be taken into account by trustees. Bad corporate governance or investment in areas where future developments, if unchecked, will lead to poorer financial outcomes are examples of this.
A bit trickier is when future developments are already built into the price of an asset, or where ethical concerns loom stronger than financial.
Not investing in a company that relies on forced labour in an overseas country may seem clear enough on the financial and other risks involved, but other situations are less clear cut. What about an investment in a company that pays poorly overseas and locks its workers into firetraps to avoid stock being pilfered? What about a company that is flouting local employment laws? What about a company that is lawfully replacing employees with contractors?
One thing is clear; debate and discussion about the proper role of superannuation funds as responsible investors will continue in the months and years ahead.
