Is equities exposure super funds’ Achillies heel?

The very things which have held Australian superannuation funds in good stead since the global financial crisis (GFC) — allocations to equities — could prove to be their Achillies heel in the period ahead, according to new analysis from Towers Watson.

Drawing on the findings of the latest "Pensions & Investments/Towers Watson Global 300 survey", Towers Watson Australia senior investment consultant, Paul Newfield, pointed to Australian super funds having have recorded a five-year compound growth rate of 11 per cent a year, ahead of most other regions.

However, he cautioned that the two key drivers behind this growth had been the net inflows resulting from the compulsory superannuation guarantee and the fact that Australian super funds had a larger allocation to equities and other growth-oriented assets than other geographies.

"However, such allocations have the potential to open Australian funds up to more risk in the future," Newfield said.

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He said that with the context of more volatility finding its way into equity markets and with lower year-to-date returns so far in 2015 and with more modest returns expected in the year to come, the real challenge for Australia's retirement savings was how to continue to better diversify the drivers of superannuation fund returns.

Newfield said Towers Watson expected mature funds around the world to accelerate diversification away from equities and into other asset classes, as they continued to de-risk their portfolios and focus on total returns.

"Many leader funds have already transformed their governance structures to ensure they have a competitive advantage while transforming their portfolios, against a backdrop of anaemic global growth and benign inflationary conditions," he said.

Despite the perceived scale of the Australian superannuation industry, the Towers Watson survey revealed that no Australian funds had made it into the Top 20, although two — the Future Fund and AustralianSuper — had made it into the Top 50.