Australia’s superannuation industry is facing some of the most challenging investment markets of the last two decades. This is coupled with intense regulatory scrutiny and merger activity, prompting funds to invest heavily in their operational capabilities in an effort to bolster portfolio returns.

J.P. Morgan’s inaugural Future of Superannuation report last year (in March 2022) captured the industry’s views and expectations, and you can read about the report findings in J.P. Morgan’s Superfunds article last year by Nick Paparo and download the 2022 report at the end of the article.

This year, J.P. Morgan’s 2023 Future of Superannuation report reveals how the industry’s size is allowing funds to become global investment players leading the charge towards unlisted assets. Merger activity continued strongly through 2022 and early 2023, in line with J.P. Morgan’s first survey, which found more than half of executives expected there to be fewer than 75 funds left by 2025.

Those predictions proved largely correct, with 137 funds remaining by the end of March 2023, down from 174 in the September 2021 quarter, and more mergers have since been announced.

Some mergers were prompted by the introduction of APRA’s performance test, which initially called out 13 funds in mid-2021. Since then, investment markets have become far more challenging, pushing the median fund’s return into negative territory over the full year and for the fifth time in the past 35 years.

While executives initially surveyed were concerned that the performance test would encourage benchmark-hugging, J. P. Morgan said the funds spoken to this year remained focused on their existing investment strategies in the face of these challenges.

Unlisted assets have been a significant driver of their long-term outperformance. While funds also see opportunities in listed vehicles – and remain mindful of illiquidity and valuation issues – their appetite for private market assets continues to grow.

Some funds say they are ramping up their internal investment capabilities to make bigger deals, including offshore. It is a strategy closely tied to their increase in size, with several funds now managing more than AUD$100 billion in assets each.

Following are the key highlights from the 2023 report:

1. The record pace of super fund mergers has matched the predictions made by fund executives a year ago. More than half of the executives in the Future of Superannuation report predicted there would be fewer than 75 funds left by 2025. There were just 137 funds remaining by end of March 2023, compared to 174 in the September 2021 quarter, and more mergers are in the pipeline.
2. Some of the largest funds with assets above AUD$100 billion are using this scale to increase their offshore investment across a range of asset classes and set up global offices to explore new opportunities. Fundsin the AUD$50-$100 billion range have taken a ‘wait and see’ approach regarding the benefits of offshore offices and continue to assess the strategy.
3. Funds are using their growing scale to continue building internal investment teams to manage certain asset classes or co-invest alongside their fund managers. The strategy is delivering greater investment insights at lower cost.
4. Unlisted assets are set to play an ongoing key role in portfolios, with a particular focus on infrastructure, which has delivered historically strong returns. Funds are maintaining their investment strategies despite a highly uncertain investment and economic outlook.
5. The growing size and complexity of portfolios is placing new importance on gathering quality data to reveal investment insights and manage risk. Funds are investing heavily in their operating infrastructure to drive future performance.

This year’s J.P. Morgan Future of Superannuation report demonstrates how funds continue to look at ways to support their members as the industry works to deliver optimal outcomes for all Australians. For further insights and information, you can download a full copy of the 2023 report here.