Super funds are in a unique position. They can diversify their asset allocation by providing credit to non-financial businesses in the market for debt; as well as increasing the availability of credit to businesses that need it.
A recent Industry Super Australia report highlighted the benefits of Australian businesses borrowing from super funds to include the long duration availability and Australian Dollar denomination, removing currency fluctuations from the risk list.
Growing constraints on bank-based lending has seen super funds able to partner with banks to provide more comfort for corporates through the lending process. Large super funds like First State Super have hired ex-banking teams to front their lending strategy to put in place the controls, checks and return strategies well established within bank-based lending.
The corporate bond market could be a further diversifying tool for super funds to access long term returns as the superannuation industry heads into more of a growth phase. Cash, government bonds and gold have made up much of the defensive assets available to super funds, however some of the corporate debt taken up by those funds has originated overseas where corporate bond markets are more established, particularly in the United States. The Murray Inquiry noted in 2014 that 80 per cent of corporate bonds available to super funds originated overseas, a number that has no doubt decreased as the Australian marketplace has become more important.
The Industry Super Australia report also highlighted the importance of returns as a driving factor in the inclusion of any corporate debt allocation. Members funds have the potential to assist corporate Australia with their capital needs, but returns must be in line with required parameters. The report also noted that corporate Australia needed to acknowledge the role of consistent and ongoing contribution inflows. This is important to members and their retirement needs but also to businesses to access those funds through debt funding.