Amazing Superannuation Statistic

The Superannuation industry in this country is huge.

So huge, that it’s set to hit the $2 Trillion mark by early 2015, truly extraordinary for a country of only 22 odd million people and with an economy thats only roughly $1.5 Trillion in size.

The industry also charges a hefty clip on fees too, with the professionals responsible for managing Australia’s precious life savings earning close to $20 billion last year.

It's roughly $2k for every Aussie contributing into the system, and they get a legislated pay rise of 9% per annum even if markets go nowhere, such is the nature of a percentage based fee model.

But this article is not about fees - but about another statistic from a short piece i read today (20th November 2014) in the Financial Standard, which really stood out, and that was the allocation to commodities.

As you can see from the attached article, according to the author, some $672 million is invested in commodities. This represents just 0.04% of the total pool of Superannuation assets, which is $1.87 Trillion.

The data quoted came from a just released APRA report, which can be viewed here

Equities comprise 50% of institutional superannuation fund assets, whilst 33% is in cash and fixed income, 8% is in property, with just 4% in infrastructure and a further 4% in ‘other’.

In reality, when you include commodities held through other vehicles, the number is probably higher, though not much in percentage terms, with research firm Chant West suggesting just 0.4% of the superannuation pool is invested in commodities, or about $7.4 billion total.

Either way, no matter which data source you use, the bottom line to this analysis is that that the exposure to commodities in Australian superannuation funds is incredibly low, even though some of the equity exposure is obviously related related to commodities (think mining companies like BHP, RIO, Fortescue and Newcrest).

This is especially relevant for gold, which has outperformed every major asset class in the decade to June 2014, as the following table highlights.

As a quick aside, the less than $7.5 billion total invested in commodities in Australian superannuation funds isn’t even equal to one year’s worth of Australian gold mining output, which is worth just over $10 billion at todays market prices.

The outperformance of gold over the traditional assets that dominate superannuation portfolios could well continue in the coming years, especially in light of the current economic challenges being faced locally and abroad, and the risks that could come to the fore in financial markets in the coming years.

As such, especially when you consider that gold tends to do best when real interest rates are low (like they are all around the world today), physical gold should be a core portfolio holding in the coming years as, apart from the opportunity for much higher prices, it also offers

• Portfolio diversification as it’s uncorrelated to traditional assets

• Protection against inflation should that pick up in the coming years

• A hedge against further falls in the Australian dollar

• A simple, liquid and transparent hedge against periods of severe market turmoil, like the GFC

Institutional superannuation funds, with their minimal allocation of client money to commodities as a whole, let alone gold specifically, could be missing an opportunity here, and it's one of the major reasons our SMSF clients speak to us about when they talk about why they set up a SMSF to start with, and why they're adding physical bullion to their investment portfolios.