Illiquid, unlisted but less volatile

The Age

Friday July 31, 2009

Jan McCallum

Super funds like assets that hold value, writes Jan McCallum. SUPERANNUATION funds will not only have the slide in the sharemarket to show in their accounts to June 30, members will also see downward revaluations in unlisted assets held by their fund. The financial crisis has sparked a debate on funds' exposures to assets such as toll roads, airports and office buildings, that are not traded regularly and that are hard to sell.Fund managers argue that illiquid assets such as infrastructure and property have served members well, holding their value and paying a regular return when more volatile investments such as shares have fallen or interest rates have been low. Industry funds in particular tend to have a higher proportion of unlisted assets and last year generally outperformed funds with more exposure to shares.But critics warn that funds are at risk of a run if their levels of illiquid assets are so high that they cannot meet requests if there is mass switch out of a fund or members want to go into cash.Financial planners are also concerned that fund members are unaware of how much exposure they have to illiquid assets. Most fund members offered investment choice will opt for the default or balanced option, expecting it to invest in a range of investments, although what constitutes a balanced option varies widely among funds.Income Solutions principal financial planner David Ramsay has seen people in the balanced options of super funds with almost half their investment in illiquid assets.��It is not balanced at all and the member is not aware of it,�� he said. ��The main problem is the unlisted assets part of the portfolio. People need to monitor it and check on their exposure to unlisted assets.��Simon Eagleton, senior investment consultant of financial group Mercer, is concerned about a ��liquidity mismatch�� if funds with a high proportion of illiquid assets get a rush of members wanting to switch to cash or into another fund. Trustees have 30 days to meet the request and Eagleton says some funds have been lucky there has not been mass switching.Mr Eagleton says the superannuation system as a whole could be infected if a fund could not meet requests. ��There could be an undermining of the whole system, a reputational impact of people losing confidence in superannuation.��Since superannuation has become more flexible and fund members now have more choice of funds and investments, Eagleton says switching could easily happen. Members can often go online to switch, in some cases daily. But although more people have switched to their fund's cash option in the financial crisis, most have stuck with the balanced option.However, Jeff Bresnahan, managing director of research firm SuperRatings, says many funds have above-average holdings of illiquid assets but he does not see it as an issue. He points out there has not been a run on a super fund and believes the risk is overstated.��Most of the larger funds are very strong and have positive inflows because of the compulsory nature of superannuation,�� he said.Bresnahan says holdings of unlisted assets give funds a wider range of investments and over the past decade these assets have mostly outperformed their other holdings.He says unlisted assets such as infrastructure, private equity, hedge funds and property should not be lumped together. Infrastructure such as toll roads pay a regular, fairly predictable income over a long term while hedge funds can have risky strategies.MTAA Super, the industry fund of the car industry, holds a high level of unlisted assets such as property, infrastructure and private equity, which it says has insulated it from the panic in listed markets.Deputy executive director of superannuation Leeanne Turner says that although some members switched to cash because of the panic, it had not been a problem for the fund. ��Because we have a large weighting of unlisted assets liquidity is always a consideration, so we have a policy to manage that,�� she said.MTAA has a two-portfolio strategy: a market-linked portfolio holds assets such as cash and shares; and a second portfolio holds unlisted assets. The balanced fund holds roughly half in each.Turner says there are different definitions of what are growth and defensive assets or balanced strategies and the debate should focus on disclosure to members, so they know what assets their fund holds and can decide how they want their super invested.Last year's equity market crash meant that many funds found themselves with a higher proportion of their wealth in unlisted assets, because the value of their listed shares fell so much. The economic downturn has also hit unlisted assets, such as commercial property, which has fallen in value.There is no industry standard for valuing unlisted assets. Funds can get the value of their shareholdings from the sharemarket every day, but for buildings and infrastructure they rely on a valuer's appraisal, and some value quarterly, others yearly.The Australian Prudential Regulation Authority says super funds should get independent valuations of assets that are not regularly traded and should update the valuations regularly, "particularly in times of market volatility".The Investment and Financial Services Association says revaluations should be done if the market moves 5 per cent either way.APRA wrote to superannuation trustees in April warning them from unacceptable valuation practices it had encountered such as ��valuation shopping��: getting several valuations and choosing the best one.Financial planners say it can be hard to find out what unlisted assets are held by funds and the quality can vary greatly. David Ramsay says some fund members may be happy to hold a high proportion of illiquid assets but they should know what the assets are and how often they are revalued.Simon Eagleton says disclosure needs to be improved so fund members know how liquid their fund's asset strategies really are. He also says the liability side should be looked at and there should be a minimum notice period for people to switch between investment options.��Do we really need daily switching? Is that important? This is saving for your retirement.��

© 2009 The Age

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