Navigating the Shift: How Australian Super Funds Are Redefining Exposure through Currency Hedging and Infrastructure Plays

The Australian superannuation sector, managing over $3.7 trillion, is undergoing a seismic shift in its investment strategy. Once heavily reliant on U.S. equities and fixed income, funds are now pivoting toward global infrastructure and rethinking their currency hedging approaches. This transition is driven by geopolitical risks, volatile markets, and the hunt for stable, long-term returns. Let's dissect the factors behind this move and its implications for investors.

The U.S. Exposure Dilemma: Why the Shift?

Australian super funds reduced their U.S. equity allocations in 2024 by 159 basis points, particularly in tech giants like Apple and Nvidia. The catalyst? Market instability tied to U.S. protectionist policies, such as the Trump-era “Liberation Day” tariffs, which triggered $170 billion in retirement savings losses. Funds realized that overexposure to U.S. markets posed unacceptable risks.

The shift also reflects strategic rebalancing. While offshore investments now account for 47.8% of super portfolios, allocations to U.S. assets face scrutiny. Super funds are prioritizing diversification—35 of 41 funds now hold Emerging Markets (EM) exposure at 4.9% of assets—and favoring sectors with less correlation to U.S. volatility, such as global infrastructure.

Currency Hedging: A New Era of Prudence

Historically, Australian funds have been underhedged, maintaining FX hedge ratios of just 22% for U.S. equities. This was rationalized by the positive correlation between U.S. equity performance and the AUD/USD exchange rate—when U.S. stocks fell, the AUD typically weakened, cushioning losses. But this dynamic has unraveled.

The U.S. dollar's 7% decline in early 2025 and fears of a recession have forced funds to rethink. A stronger Australian dollar (now near its 200-day moving average of 0.6459) could erode returns on unhedged U.S. assets. Analysts like JP Morgan warn that partial hedging (30–80%) is now critical to mitigate volatility. For example, a 10% AUD appreciation (to 0.75) would turn a 10.3% U.S. equity return into a 5.8% loss for unhedged investors.

Infrastructure: The New Safe Haven?

While reducing U.S. equity exposure, super funds are pouring capital into global infrastructure, projecting a $110 billion allocation by 2035—up from $20 billion in 2023. Sectors like renewable energy, logistics, and data centers are top targets. The U.S. infrastructure deficit—aging roads, ports, and energy grids—offers prime opportunities.

Key investments include:- Switch Inc.: A data center giant backed by IFM Investors.- Freeport LNG: A U.S. energy project with a 99-year concession.- Indiana Toll Road: A long-term asset generating steady cash flows.

These projects align with super funds' decadal investment horizons, offering inflation protection and stable yields. The Albanese government's push to deepen ties with Southeast Asia and India adds geopolitical tailwinds, but the U.S. remains the largest destination, accounting for $400 billion of super capital.

Investment Implications: Where to Play?

For retail investors, the super funds' playbook offers clues:1. Hedge selectively: Use currency-hedged ETFs like FXA (Australian dollar ETF) or IEF (U.S. Treasury ETF with hedging) to reduce exposure to AUD/USD swings.2. Go long on infrastructure: Consider infrastructure ETFs like Xinfra (Australian infrastructure index) or global funds like GII (Global X MSCI Global Infrastructure ETF), which have outperformed U.S. equities by 5.8% annually since 2020.3. Diversify beyond the U.S.: Explore EM infrastructure plays via EMHI (iShares Emerging Markets Infrastructure ETF) or regional funds focused on Asia-Pacific.

Conclusion: A New Balance Sheet

The super funds' shift underscores a broader truth: diversification is resilience. By paring U.S. equity exposure, hedging currency risks, and plowing into infrastructure, they're building portfolios fit for a fractured global economy. Investors would be wise to follow suit—allocate to stable, real assets and guard against currency pitfalls. The future belongs to those who think in decades, not quarters.