Max Pacella
Investment Analyst
Macro & Markets
16 Jul, 2021

Capital flows – the movement of money into a particular asset class or market segment for the purpose of investment – are the impulse of demand, where increasing/decreasing levels of demand for a constant level of an asset will naturally result in market movements

Flows operate within a very basic supply/demand dynamic which exists within all markets: flows either soak up supply (by buying large amounts of assets) or provide supply back to the market (by selling large amounts of assets).

To put that slightly differently, flows provide liquidity into a particular segment of financial markets.

 If you invest $10 billion into a market worth $100 billion, this will not only materially push the price of assets up in that market, it also provides more liquidity for investment and trading within those assets – and the opposite is true if you redeem $10 billion.

Like most financial indicators, flows need to be considered in light of the fact that they are a lagging indicator, and show what’s happened in the market in previous weeks or months not necessarily what is going to happen.

In the Australian market, there are few institutions better suited to impact the market through flows than our superannuation funds.

As of 31 March 2021, there was $3.127 trillion AUD (Source: APRA) under management between APRA-regulated funds and self-managed superfunds (SMSF).

Superfunds operate over decades-long time horizons and have the benefit of reliable inflows to inform investment decisions. Their scale and investment horizon means their allocation to various asset classes and market segments has important implications for our own investment decisions, to know where flows (and liquidity) are present in the broader market.

With the above in mind – and as APRA releases their latest data on fund allocations – let’s review where our superannuation industry is positioned within the market.

Some High-Level Statistics

Our domestic superannuation sector is split between several types of funds (as at March 2021):

Fund TypeAssets ($ billion)Examples
Corporate59.2Funds specific to (usually large) companies’ employees
Industry857.6Not-for-profit, open to all; Australian Super, HostPlus
Public Sector561.8For government employees; QSuper, Aware Super
Retail651.2For-profit, usually run by banks; Perpetual, AMP
Other209.9Miscellaneous super structures
SMSFs787.1Private superfund, managed by the members/trustees

Source: APRA, Mason Stevens

Our superannuation market was the fifth largest in the world last year (source: Willis Towers Watson), and this year has grown total assets by 13.9% YoY – this is relatively consistent with our 20-year growth rate of ~11% p.a.

By 2035, this market is expected to grow from $3.127 trillion to between $6.1 and $8.5 trillion according to the Association of Superannuation Funds Australia (ASFA) – interestingly, the forecast total super assets as a % of GDP continues to rise, going from 148% today to 180% by 2035.

As the table shows above, Industry superfunds hold the largest portion of our total assets, which is a trend that is likely to continue given their growing size and not-for-profit nature creating an appeal to new customers. Likewise, Industry and Public Service superfunds have delivered the highest returns over the last 10 years according to Atchinson Consultants:

The reasons for the discrepancy are likely due to differences in fee structures – as even small management fees can accumulate to large values over 10 years – as well as the difficulty retail funds have found attracting new members over not-for-profit offerings, which materially impacts their ability to make strategic investments.

Asset Allocation and Flows

Examining the movement of flows and asset allocation between March 2020 and March 2021 provides a compelling insight into markets, since that exact time period has been a historic bull run after an equally historic market sell-off during COVID-19.

Examining the average asset allocation across the entire superannuation market:

Asset ClassMarch 31 2020 (%)March 31 2021 (%)% Change
Cash13.510.1-25.2%
Domestic Fixed Income11.311.30.0%
International Fixed Income8.98.1-9.0%
Domestic Equity18.722.821.9%
International Equity24.226.911.2%
Property8.37.8-6.0%
Infrastructure6.05.8-3.3%
Commodities0.10.2100.0%
Other3.52.6-25.7%

Source: APRA, Atchinson Consultants, Mason Stevens

The predominant shift over the last year has been a more aggressive tilt, cutting cash weightings by one quarter to re-weight more heavily towards domestic and global equity.

Side note, the “other” category largely refers to exposure to hedge funds or ‘alternative’ assets.

That weighting to equities is significant in terms of flows, both from a market sentiment and liquidity point of view.

Let’s do the maths on the YoY re-weighting towards domestic equity:

  • 4.1% increased allocation to domestic equities (assumed to be only ASX-listed)
  • $3.127 trillion AUD in superannuation assets
  • 4.1% x $3.127 trillion = ~$128 billion AUD

This is a market-moving quantity of assets being purchased in domestic equities.

Now consider the actual value of all ASX-listed securities:

  • $2.3 trillion AUD total market cap (March 2021, source: ASX)
  • $128 billion / $2.3 trillion = ~5.55%

For what seems like a simple re-weighting of just over 4%, our superannuation market added flows that represented over 5% of the entire capitalisation of the ASX Small Ordinaries. The impact flows have on markets cannot be understated when you consider volumes such as these, not exclusive to equity but to all assets in which these superfunds are invested.

Going With the Flow

Flows are not the be-all and end-all when it comes to market movements, as we are all aware.

But being aware of where large, market-moving institutions are positioning themselves can give regular investors an insight into market sentiment and liquidity.

If you know that a superfund who is receiving 9.5% of each member’s wage is investing a quarter of their portfolio into domestic equities, you know that there is a supply/demand dynamic at play in the market that you can position around.

There are many interesting instances where a market will rise or fall sharply as a result of flows from a single institution, and where this occurs this can also help risk management to know why this movement occurred, or how to “go with that flow”.

The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.