Infrastructure and real estate more attractive than equities, Australian Retirement Trust says

The nation’s second-largest super fund sees a better return outlook for real assets following equities’ strong performance.

Australian Retirement Trust head of investment strategy Andrew Fisher.

Equities powered Big Super’s returns last year but real assets are now a more attractive prospect.

That’s the view of the nation’s second-largest superannuation fund, the $300bn behemoth Australian Retirement Trust (ART) which, after clocking up a 14 per cent return in its default option in 2024, plans to trim its exposure to equities and pump more of members’ money into infrastructure and real estate in the near term.

It comes months after the fund pushed millions of its members up the risk curve in a bid to turbocharge returns, throwing down the gauntlet to its rivals as competition for member growth heats up. “Over the next one to two years we are looking to reduce public market exposure and increase exposure to unlisteds, in particular real assets, such as infrastructure and real estate,” ART’s head of investment strategy Andrew Fisher told The Weekend Australian.

“For the past couple of years, we haven’t felt there was much of a reward (for being in illiquid assets). But looking forward, we think there is … so on balance, illiquid assets are being much more fairly rewarded (now) than they have been for a couple of years,” he said.

In the latter half of 2024 the fund’s deals in this segment of the market included taking majority ownership of Kiwi energy distributor Powerco and scooping up a stake in US-based renewable energy and transmission infrastructure platform Pattern Energy.

As it hunts for more unlisted assets, the fund is already underweight US and Australian equities, but likes Japan – and Europe, to an extent. “We’ve been overweight Japan since the introduction of the three arrows policy … It’s a long-term thematic … but if ROEs in Japan were 8 per cent across the board, equities (there) would be worth an awful lot more than they are today, and that’s not a particularly aggressive target in the context of the global economy,” Mr Fisher said.

In mid-2024, ART moved the bulk of its 2.4 million members into higher-risk investments, pushing default members under the age of 50 from the balanced pool of its lifecycle strategy to the high-growth pool, where 97 per cent of assets are in either equities or unlisteds and alternatives.

Higher risk comes with an expectation of outsized returns: the fund returned 14 per cent for calendar 2024, compared to an estimated 11.5 per cent for the median balanced fund, according to research house SuperRatings. (The median return for growth funds is not yet available.) As it hunts for growth in real assets, the major risk ART is watching is the threat of resurgent US inflation under incoming president Donald Trump and its flow-on effects to the global economy.

“(US) government spending is already high, and promises are for it to go up. So we have that, coupled with a higher budget deficit, the threat of trade barriers and tariffs and lower migration. All those things combine to push inflation up in the US. And that’s a big risk … if the US sneezes, the world catches a cold. It’s going to be very hard for US inflation to get out of control and the world to not feel the pain of that,” Mr Fisher said.

But this risk is only part of the reason for ART’s new preference for infrastructure and real estate.

“The bigger trigger for us has been the strong performance from the public markets relative to private. Private markets, and in particular real assets, are a lot more attractive than they were one and two years ago.”

The fund is less enthusiastic about the return outlook for private credit. The fund previously revealed to The Australian it had cooled on private credit as demand for the asset class soared, warning of lower lending standards and reduced returns as investors rushed in.

Investors chasing a tactical tailwind in this segment, now a multi-trillion-dollar industry around the globe, had probably already missed it, Mr Fisher warned.

“We were very enthusiastic about (private credit) over the last 12 to 18 months. It’s not that we don’t like it anymore, but it’s not nearly as compelling as it was 18 months ago,” Mr Fisher said.

“If more people are supplying capital in the space, then at the margins you expect spreads to compress a little, and yields will go down. So there’s definitely the supply/demand element.”

ART already has an outsized allocation to private credit: 5 per cent of the fund’s assets. ART’s $15bn exposure is more than double that of peer AustralianSuper.

For private credit and private equity, it believes the “exciting period is in the rear view mirror”.

“That doesn’t mean we don’t find them long-term attractive from here, but certainly that’s not where we would be tactically looking to employ large amounts of capital right now,” Mr Fisher said.