Tim Boreham, The Australian, 7 August 2000
The use of superannuation to bolster national savings is aimed at enhancing economic development. In our continuing series on foreign investment, TIM BOREHAM asks: will it work?
THE foreign ownership of home-grown icons such as Arnotts and Speedo and essential industry like Victoria's electricity business strikes at the heart of many Australians. "What the Australian Government calls foreign investment is mainly foreign acquisitions. It should be called the sale of Australia," the Australian Owned Companies Association says. Earlier this week the shadow federal Treasurer, Peter Costello, made it clear that he was aware of the potency of foreign investment as an election issue. "Labor is telling us they have opened up Australia to the world," he told a Committee for the Economic Development of Australia conference this week. "They aren't kidding. "They opened it with a huge `for sale' sign and a huge `on loan'announcement." Foreign buyers, it is commonly argued, export the profits and have no interest in the acquisition, other than as a mediumterm cash cow. While few would support the idea of foreigners acquiring assets at giveaway prices, the negatives of foreign involvement may not be as compelling as detractors maintain. Add Australia's reciprocal investment offshore - now running at about $130 billion - and the pros and cons of foreign investment become less sharply defined.
With the benefit of the stored superannuation billions, Australia increasingly has the opportunity to leverage off these funds, utilising cheap foreign equity capital while maintaining control at the same time. The Prime Minister, Paul Keating, emphasised this point in combative style last year when he referred to fund managers as donkeys and lemmings unwilling to invest in long-term projects for the nation's interest. "The challenge is to develop a new funds management industry that supports the greenchip companies, that's not just out there chasing blue-chip stocks," Keating said. According to federal government figures, superannuation assets have already reached $200 billion and are forecast to reach almost $400 billion by 2000 and $2000 billion by 2020. As a share of gross domestic product, super assets will grow from 40 per cent to 120 per cent in 2020. In comparison, foreigners have invested $375 billion in Australia, comprising $156 billion in equities and $210 billion in borrowings. Net liabilities stand at about $245 billion. The salient question for policy makers is how much of the superannuation money should remain onshore and where the funds should be invested. While unimaginatively allocated - mainly into listed equities and cash - the superannuation billions are still invested predominantly onshore.
The Association of Superannuation Funds of Australia estimates that 85 per cent of the super funds are still invested in Australia.About 36 per cent of the locally invested amount is channelled into listed equities. ASFA's executive director, Susan Ryan, believes that contrary to popular belief this offshore component has remained fairly steady in the past decade. Ryan says Australian funds must be expected - and allowed - to seek rapidly growing equity markets elsewhere. "But it does not mean we will be left in Australia with insufficient capital," she says.
Fund managers stress that members can hardly be denied the chance to invest in places such as the Indonesian stock market, which has had annual capital growth of more than 50 per cent. They also cite the need to spread risk and that certain exposures in Australia are not available. AMP, Australia's biggest fund manager, has slightly more than 50 per cent of its assets still invested in Australia. AMP has a philosophy of preferring to invest locally and claims to have $2.7 billion. It is also a key backer of $500 million Development Australia Fund, relaunched in October, which directs its investments to nonlisted projects.
But AMP Investments' business development manager for private investments, Les Fallick, says the institution is essentially instructed by the fund trustees representing investors. He said: "Because Australia comprises only 2 per cent of the world's stock markets, even if we wanted to we could not invest all of it in Australia." Fallick also cites risk diversification and the need for consistent rates of return. "Different markets are in different parts of the cycle. Australia is well-placed at the moment while Japan is in recession. "Also, some assets are completely unavailable. For example, if you want to invest in big mainframe computers, if you want to build international jet aircraft, there is no such investment."
BT Australia's executive vice-president for wholesale funds management, Doyle Mallett, says the best-performing sector on the US market is high technology, an exposure which cannot be obtained in Australia. Mallett estimates the average offshore investment of all the funds at 22 per cent.BT Australia invests about 28 per cent of its own managed funds offshore, compared with as much as 40 per cent in the 1980s. On BT's investment philosophy, Mallett echoes the mantra of investing wherever the clients want to go. But he says if the rate of return is comparable in Australia, the company "may err on the side of the (local investment)".
ASFA's Ryan says the industry is locked in serious debate about how much the foreign-invested portion of super funds will increase, the result of the thinness in the local capital market. "But we think our educational efforts to raise awareness of available assets (locally) will work and keep it in the vicinity of 15 per cent," she says.
On the question of directing the locally invested funds, Ryan admits the funds have displayed an uneven pattern of investment in small and mid-sized companies, with the average being 2 to 3 per cent of funds. The two biggest operators in this sector, State Superannuation Board of NSW and AMP Investments, invest about 4 per cent to 5 per cent of their funds under management. Ryan points to the other side of the equation - the increasing flow of overseas money into Australia, especially on the part of huge US pension funds. This trend, she suggests, should be seen as a fair quid pro quo for Australian investment offshore and, given the long-term nature of the funds, a desirable development in its own right. "These funds have been roaming around the world for investments," she says. "They have roamed over here a bit already but will come much more.
It is part of coming to terms with globali sation." According to the Australian Bureau of Statistics, about 25 per cent of foreign inflows are directed to the traditional avenue of the share market. But according to Mallett, the nature of the foreign inflows has changed for the better. In other words, the hot (speculative) money has been replaced by long-term commitment. When interest rates were high, the foreign inflows tended to be short term. More recently, Mallett says, there has been a notable movement to equity investments, such as BTR's buyout of its Australian subsidiary, BTR Nylex. Thanks to compulsory super, it would appear that Australians can treat such investments a vote of confidence in the antipodean economy - in a positive light. But the figures on superannuation growth, although dazzling, should be put in perspective. Vince FitzGerald, the architect of the Federal Government's national savings and retirement income policy, is keen to do just that. FitzGerald warns that superannuation should not be seen as a panacea to the national undersaving problem, which is ultimately reflected in foreign investors making up the shortfall.
The real solutions, FitzGerald suggests, still rest in increasing national savings by reducing consumption expenditure. On this note, FitzGerald points his finger at the expenditure record of the public sector, especially the Labor Government's. FitzGerald describes Commonwealth overspending as the "major contributor to the decline in our national savings over the past 20 years". FitzGerald's bearish view is that Australia's foreign borrowings are funding rampant consumption rather than business investment which, in real terms, has declined. Furthermore, the flow of money into super will be dwarfed by the flood of savings into nonproductive assets, especially housing. "I believe it (compulsory super) will bring about an increase (in national savings) but we should be a little bit more humble than has become the fashion about how much," FitzGerald warns. "The flow of funds into superannuation is and will foreseeably always be - dwarfed by the flow of household savings into nonfinancial assets, mainly housing. According to Fitzgerald, super comprises well under half of households' financial assets and only about 15 per cent of total assets.
The growth in superannuation assets over the past two years has been outstripped by growth in household debt - now at more than $250 billion. FitzGerald, a great supporter of compulsory superannuation, says national savings patterns "cannot be transformed by working on one still relatively small slice alone". It is a relatively small slice - $200 billion and growing fast - which is likely to dominate the foreign investment debate well after the election votes are cast.