Level of managed funds hits record high

Australia’s managed fund industry jumped in the December quarter of 2020 to strike $4 trillion for the first time, with a big increase in share values driving much of the gain, and a record amount being invested in offshore assets.

As at 31 December 2020, the consolidated assets of managed funds institutions hit $4.0 trillion, an increase of 4.4 per cent on the September quarter 2020, according to Managed Funds data from the Australian Bureau of Statistics.

The level of managed funds was boosted by rising global and local share markets. The value of Australian shares jumped 15.6 per cent to $556.1 billion, up from $481 billion in the September quarter, the ABS data show. The Australian share market rose 13.7 per cent, outstripping gains on international shares, which gained 5.7 per cent, as measured by the International Shares—MSCI World ex-Australia Net Total Return AUD Index.  

A record amount was invested overseas, with offshore assets help by all managed funds institutions, including superannuation funds, totalling a record $648.4 billion, up 6.7 per cent from the September quarter, exceeding the level held in Australian shares. In contrast, with interest rates falling to historically low levels, amounts invested by all managed funds in cash deposits fell by 6.5 per to $265.5 billion from the September quarter.

Superannuation funds rose 5.5 per cent or $160.8 billion to $3.1 trillion during the December quarter of 2020. Australians have been pouring money into their superannuation and into managed funds and the level of assets under management has quickly returned towards record highs after the market sell-off in March last year.

The jump in managed assets came despite the federal government allowing Australians to access their superannuation early to offset the financial pain of the covid-19 pandemic. Almost $30 billion was withdrawn between 20 April and July 26, according to official data.

Offshore investing lures Australians

Market watchers and asset managers say people are diversifying their portfolios away from Australian shares and property into assets abroad to reap potentially greater returns. According to CommSec, while the Australian share market offers some excellent investment opportunities, it makes up around 2.2 per cent of the world’s total by share market capitalisation.

Diana Mousina, senior economist with AMP Capital, says offshore investing is becoming easier for retail investors because of the access to exchange-traded funds.  In addition, “returns for international markets (mainly the US) have been higher than Australia over recent times which increases the value of those offshore investments and also pushes more people into those share markets,” Mousina says.

Much of the offshore money has gone to US shares, with its outperformance driven by technology stocks such as Amazon, Alphabet, Apple, Facebook, Microsoft, Netflix, which account for around 35 to 40 per cent of the share market index.

“In contrast, Australia has a high exposure to financials (30 per cent of the index) and materials (20 per cent of the index) which haven’t done as well in recent times,” Mousina says.

“Banks tend to underperform in times of low interest rates and global growth has been shaky which is negative for material stocks, along with the high US dollar over recent years which also hurts commodity prices.”

Felicity Thomas, senior private wealth adviser with Shaw & Partners, agrees on the need for investors to look offshore to diversify their portfolios. 

“Investors are seeking more investment options and opportunities so diversification amongst markets is highly sought after,” Thomas says.

“The majority of the Australian market is made up of financials and resources so if investors want to look for technology, they need to consider offshore investing. In particular, they ought to consider companies on the Nasdaq.

“The FAANGs (Facebook, Amazon, Netflix and Google owner Alphabet) alone are 15 per cent of the S&P 500 or $US4.1 trillion ($5.32 trillion) which is more than the entire Australian market; 40 per cent of the US market is technology, so the recent rally attributed to 40 per cent of the S&P 500 gains.

“That’s not to say that Australia doesn’t have great tech businesses; however, they are limited in our market and a lot do look to dual list on the Nasdaq once they get large enough in Australia.”

All asset classes gain

Yet over the December quarter, local shares jumped more than global shares on the back of stronger domestic economic data and rising commodity prices, surpassing gains on other major asset classes, as the chart below shows.

Asset class index returns

Source: GESB Superannuation (Australian Shares - S&P/ASX Total Return 200 Index; International Shares - MSCI World ex-Australia Net Total Return AUD Index; Global Listed Property - FTSE Custom EPRA/NAREIT Developed Index Net TRI AUD; Australian Bonds - Bloomberg AusBond Composite 0+ Yr Index; Global Bonds - Bloomberg Barclays Global-Aggregate Total Return Index Value Hedged AUD; Cash - Bloomberg AusBond Bank Bill Index)

However, over the longer term (over 10 years), international share investments have easily outstripped gains on domestic shares along with global listed property also producing higher returns (but with greater variability). On the other hand, cash has delivered the lowest (but most stable) returns, according to GESB Superannuation. This is illustrated in the chart below.

Cumulative asset class index returns

Source: GESB Superannuation (Cash - Bloomberg AusBond Bank Bill Index; Global Bonds - Bloomberg Barclays Global-Aggregate Total Return Index Value Hedged AUD; Australian Bonds - Bloomberg AusBond Composite 0+ Yr Index; Global Listed Property - FTSE Custom EPRA/NAREIT Global Index Values Local TRI; Australian Shares - S&P/ASX Total Return 300 Index; International Shares - MSCI ACWI Net Total Return Local Index)

Another market in which Thomas sees much interest is China. “They have a US$11.3 trillion share market and a population of 1.43 billion which is four times the size of the US population. We see a lot of growth potential over the next 10 years in the Chinese markets and economy. You can’t ignore China!”

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