In Like Flynn
Australia loves a punt. Between the pokies, the TABs, and two-up on ANZAC day, having a flutter is more than a hobby – it is almost a national imperative.
So it should come as no surprise that an OECD study conducted on pension fund allocation found that Australian retirement funds are by far the most aggressive among the 27 countries surveyed.
About 60 per cent of our retirement savings sit somewhere in the ‘global casino’, invested in local or international equities. The US and the UK are aggressive too – sitting fifth and sixth among the list in terms of stock allocation – but our Anglosphere mates are more gun-shy than us, to the tune of at least 10 per cent.
By way of comparison, German retirement funds have only a 10 per cent total allocation to stocks, while our fellow flag-bearers for banking conservatism, Canada, have 30 per cent in equities on the table.
Our bet is big. Not only is it the money we’ll be calling up for food and shelter when we’re too old to work, but the weight of savings in question amounts to more than the entire GDP of Australia.
So apart from the thrill of the bet, why are those entrusted with our nest eggs so gung ho by global standards?
Dr Stephen Nash, fixed income expert at FIIG Securities, has given the question a considerable amount of thought and has come up with a number of possible answers.
Firstly, a belief that those equities are able to provide a return that outperforms the erosive effects of inflation may pervade among local asset consultants. Dr Nash, however, dismisses this approach as weak at best, with better investment options available to guard against inflation.
Another reason is the nature of contributions in the superannuation industry. Because the law mandates that a set amount is contributed each year, as opposed to a set target returned on retirement day, there is a school of thought that pension funds may be a little more liberal in chasing returns and outperforming peers.
While that theory sounds good, there is little conclusive evidence to support the fact that a defined contribution pension is more risky, or has materially different asset allocations, versus a defined benefit pension. Data, admittedly from a few years back but at a time when defined benefit schemes were more prevalent, shows the same overall 60 per cent weighting to stocks in both pension types.
The long bull run also could have contributed to our bias towards equities. Our superfund trustees have become familiar with the returns that can be made with stocks, but have had few opportunities to become accustomed to the risks.
And by global standards, our punting club has had a good run. Australia was impacted by the ‘tech-wreck’ of 2000, but not nearly as adversely as the US technology stock-savvy investor, sucked into the market by ‘irrational exuberance’. Before then, US pension funds also placed 60 per cent in stocks, but the allocation has constantly fallen ever since. Around that time, Australia was on the cusp of a mining boom that has kept on going. Even this GFC hoo-ha has, for the most part, been wiped from memory as the commodities super-cycle continues to spin.
This love of stocks really is Australia-specific. As close as New Zealand, the punters lost their enthusiasm for the share market. The horrors of the ’87 crash saw NZ investors permanently put off stocks and is one of the reasons why their retail bond market dwarfs Australia’s, while the opposite is true of our respective stock exchanges.
Dr Nash also feels that a general lack of understanding, among Australians, about fixed income could be a factor.
An obsession with the stock market has long persisted, resulting in one the highest levels of stock ownership in the world. The infrastructure to access bonds is also simply not there. The man on the street will find it much easier to put his savings on an ‘exotic multi perm quinella’ at the trots than to buy a corporate bond, and it can probably be done in greater volumes. In the US, Europe and Japan the culture of bonds is far more prevalent, with thriving retail markets for fixed income securities.
While changing the equities bias within Australia’s investment community would be nothing short of a cultural revolution, there are signs that this is slowly getting underway. The early development of the retail corporate bond market may have been stunted by a renewed interest from wholesale investors and a recovery in stocks, but smaller deals by the likes of Heritage Building Society and Brookfield, and a order book of $A3 billion for the Commonwealth Bank’s new PERLS issue, shows that interest is piqued.
Dixon Advisory, a boutique investment firm that advises clients who self-manage their superannuation funds, has also seen overwhelming interest in its corporate bond funds. They’re close to locking up their fifth this year, with over $A200 million raised in their first four offers.
Regulators, too, are keen to see a market develop, as taskforces examine the workings of the superannuation industry and seek to ensure safer investment alternatives are available to retirees.
The form guide might not show it, but here’s a tip – the Australian public will be embracing bonds in 2010.
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