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Why don't super funds allocate more to infrastructure?

With the economic recovery from the Covid-19 pandemic underway in Australia, there have been increased calls to stimulate the economy with infrastructure investment. Taking a leading role in this discussion are superannuation funds.

Why is this? The short answer is returns. Using APRA data. I examined if there’s a link between infrastructure allocations and superannuation fund returns. To do this, I regressed the ten-year superannuation fund return (in 2019) on the log of total fund assets (a measure of size, I used logs because of the spread of the amount of assets under management) and the average infrastructure allocation for the period APRA has data (2014-2019). I found that a 1% increase in the infrastructure allocation, on average, increases ten-year returns by 11 bps. Whilst this is only a simple examination of the performance of superannuation funds, it does show that infrastructure allocation is related to higher ten-year performance . 

None of this is a surprise, as I have previously mentioned in an earlier article, the returns and risk of unlisted infrastructure is very attractive to superannuation funds. In fact, in 2019 alone, APRA reports that 87% of superannuation funds have some exposure to infrastructure. However, there is no uniform allocation to infrastructure with superannuation funds on average allocating between 0 and 1% of their assets to infrastructure as shown in the chart below. It shows that these allocations are dispersed, with some funds allocating up to 16% of their assets to infrastructure. Despite this being the case, this allocation is strongly related to the type of superannuation fund with industry funds allocating, on average more than 6% of their assets to infrastructure (for the period 2014-2019) while retail funds allocate just over 1%.






This differences in allocation can be explained by several factors. However, the one factor I examine in this articles using the APRA data is expense considering investing in infrastructure, and other private asset classes can be expensive. To examine this, I regressed the average Investment expense ratio (from 2014-209) on the average 2014-2019 infrastructure allocation, using log total fund assets as a control. I find that a 1% increase in infrastructure allocation corresponds with an increase in the average investment expense ratio by 1 bps. Whilst this is small, this is still a statistically significant increase in costs. This is the opposite of what is the current aim for investors.

All in all, what I find from this simple analysis including infrastructure into a superannuation fund’s portfolio is acceptable given that it is associated with a better 10-year return. However, this also increases the costs that the fund has to pay. As economies move towards investing further in infrastructure to boost economic growth and superannuation funds take the lead on this, it continues to raise the question, can we make investing in infrastructure cheaper

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