Super funds pile up cash

Risk-shy superannuation funds have been holding more of their employee contributions in cash rather than investing them in equities as part of a trend that may eventually form a mini-bubble in equities demand, unleashing a fresh force when the share market rebounds.

In the last nine months, the average Australian superannuation fund has nudged up its cash allocation to 7.5% beyond the 4%-to-7% range it typically holds, according to data from Rainmaker Financial.

For some funds, cash holdings have shot up to 10%, Rainmaker's Andrew Keevers says. ''If superannuation funds wait for another six months at those levels, it would start to impact their investment strategies.''

International equities - which historically include such names as Fannie Mae, Bear Stearns, and Lehman Brothers - represents the greatest risk for fund managers fearful of losses.

''Managers are hoping to re-enter the international equities markets before Christmas,'' Keevers says. ''They're waiting for the true values in international equities to come out.''

The bulk of investments in superannuation funds are in equities, bonds and alternative investments. International equities make up about 24% of the average superfund's holdings, after domestic shares which comprise about 29% on average.

And the outlook for Australian equities provides little comfort for superannuation funds, either.

Domestic shares have lost one-third of their value since the benchmark S&P/ASX 200 index peaked at 6828.7 points at the beginning of November 2007.

For fund managers, ''it's still a wait-and-see type situation,'' although ''they're conscious of the cash building in their portfolios.''

Those portfolios are likely to create a mini cash-bubble, says SuperRatings managing director Jeff Bresnahan, which could cause a burst of equities investments later when managers begin ploughing money back into shares as they're required to by their fund's investment mandates.

''They've been sitting on cash for quite a large number of months,'' Bresnahan says, putting the average cash holding at 8% to 10%. Some funds have moved into the teens in recent months, he says.

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Super funds pile up cash | smh.com.au