Big super’s unprecedented bets in Trump’s America face rising risks

And the risks, not to mention the costs, of that larger-than-ever allocation to the US are rising.

This week, some Australian-listed miners had a win with new plans to sink more US and Australian government money into critical minerals.

US President Donald Trump used the occasion to highlight a deal with the Australian government and key super funds to invest more money stateside, heralding it as one of his administration’s “billion-dollar deals”.

That prompted opposition Treasury spokesman Ted O’Brien to criticise the Albanese government for telling super funds how to invest.

If that’s actually happening, there is scant evidence so far. But O’Brien was right to highlight the issue of big super’s big bets on America.

The Super Members Council, which represents the nation’s largest industry super funds, noted the sector’s investments in the US would reach $US1 trillion ($1.5 trillion) by 2035, up from about $US517bn currently, meaning there isn’t too much work to do to reach the aspirational target struck between Trump and Anthony Albanese.

Except, there’s a growing problem.

Trump’s erratic economic policies threaten not only to derail the quality of investment options inside the US, but also to weaken the US dollar.

Over the year to date, big super’s big bet on the S&P 500 index has paid off. It’s outperformed the local market, climbing about 14 per cent compared with 10 per cent for the ASX.Over the past three years the gains are even better, a 78 per cent return in the US compared to a 31 per cent gain by the ASX 200.

So far, so good, but it is the wider exposure to Trump’s America now accumulated inside the nation’s biggest funds, including AustralianSuper, that is the concern – including fears percolating through the unlisted investment sector from the bankruptcy of the First Brands Group.

The big super funds have grown so rapidly that they had to move offshore – whether they wanted to or not. In fact, they would have fallen foul of Australian regulators if they concentrated any further in the domestic market.

In recent months, the level of offshore exposure at the funds has been raising eyebrows inside investment banks. Deutsche Bank noted that, in terms of moving money offshore, the equity allocation of Australian funds was about the top of global ranks.

Moreover, those big bets presented excellent returns when there was some currency stability between the US and the Australian dollar. That is now changing, with clear and present signals that the US dollar is beginning to drop against most key currencies, including the Australian dollar.

Over the year to date the US dollar has fallen sharply against the Australian dollar, while the slide against major currencies in the first half was the worst for 50 years.

If you need confirmation the big funds are worried about this, it’s worth noting that Deutsche Bank also reported the funds had begun to lift the so-called hedge ratios, which means they are steadily seeking more protection from a fall in the US dollar.

In making these moves the big funds have to pay more in hedging fees, a cost that will come straight off the bottom line of returns to their super investors.

Should the party stop on Wall Street, the influence of Australian super funds on the US financial administration will be zilch, a distinct contrast to their influence in Canberra.

And make no mistake, those risks are rising. Even the most simple indicator, the VIX ‘fear gauge’, bounced to its highest level since April in recent weeks.

No amount of hedging will avoid big losses not if but when the US markets reverse course.

This article first appeared in The Australian as Big super’s unprecedented bets in Trump’s America face rising risks