Forward push: AustralianSuper chief investment officer Mark Delaney in Melbourne. Australia’s largest pension fund wants to put more money into private market investments and will further boost its exposure to overseas assets. — Bloomberg
NEW YORK: Wall Street banks are jostling for business from Australia’s pension funds as the world’s fastest-growing pool of retirement savings looks to hedge its chunky overseas investments.
Bank of America Corp hired industry veteran Scott Breakwell last month from Deutsche Bank AG to lead its foreign exchange forwards trading desk in Sydney amid growing business from pension funds.
Goldman Sachs Group Inc and Citigroup Inc are among other global lenders bidding to meet the increasing demand from these money managers Down Under.
The largest funds collectively control more than US$650bil in assets outside Australia.
Constrained by the relatively small size of Australia’s own private and public markets, its pension funds have ramped up investments abroad in recent years to almost 50% of their holdings.
That’s a boon for banks which can handle the swaps and other derivatives needs of managing that capital on the funds’ behalf in parts of Europe, the United States and Asia.
“Australia is only so big,” said Nick Sims, co-head of investment banking for Australia and New Zealand at Goldman Sachs in Melbourne.
“As these funds gain more international exposure in their portfolios, which they will have to as they receive inflows, they will by definition have to think about foreign exchange exposure.”
Take the two biggest pension players, AustralianSuper and Australian Retirement Trust (ART), which together oversee around US$390bil.
AustralianSuper grew the notional amount of swaps, a preferred hedging tool, used across its portfolio by 53% to A$55bil (US$36bil) in the last financial year, according to data from the fund.
ART, meanwhile, said notional exposure in the derivatives used for foreign-exchange hedging doubled to A$70bil over the past five years.
Serving Australian pensions has become “extremely competitive”, said Aaron Ng, Citigroup’s short term interest rate trading chief for Asia North and Australia, Asia South and Japan.
Super funds are a major target for the bank given the expected growth in assets, he said. “It’s definitely significant and it definitely has the attention of all of our global businesses.”
The two giants of Australia’s A$3.6 trillion pension industry – the world’s fourth largest – are emblematic of its rapid expansion, which far exceeds peer markets.
The nation’s pension assets are forecast to more than triple to A$13.6 trillion by 2048, according to a Mercer report last month.
The increase in derivatives usage is also part of banks’ strategies to expand revenues from global trading operations while building tighter links with Australia’s funds that command greater clout in global finance.
“There’s a growing focus for Bank of America to service our superannuation clients,” said Mark Elworthy, Sydney-based head of fixed income, currency and commodities trading for Bank of America in Australia.
“We’re putting a lot of investment into it,” he said, adding that “we want to do everything we can to be fully prepared for all of their needs”.
Options markets indicate hedging costs have come down in recent months. Still, uncertainty remains over the timing of central bank policy adjustments this year, with the Australian dollar having weakened against the greenback during the Federal Reserve’s hiking cycle.
Carol Kong, economist and currency strategist for Commonwealth Bank of Australia in Sydney, said the Aussie dollar could rise to 77 US cents by the end of 2025 from its current level around 66 US cents.
“Interest rate cuts can further brighten the global economic outlook which is a positive for commodity prices,” she said.
As well as for hedging currency risk, pensions use derivatives to manage liquidity and to tilt portfolios to reflect anticipated short-term market moves.
They can also be used to control idiosyncratic factors, such as increased portfolio concentration in large US technology stocks.
These funds are building offshore investments in public and private markets – from stocks and bonds to direct lending, private equity, infrastructure and more esoteric holdings such as farmland that all require hedging against Australian dollar liabilities. — Bloomberg
