Recently I have been reading and hearing about advisers predicting that unlisted assets, and therefore the superannuation funds with exposure to them, would suffer significant relative falls and that people could avoid this by switching funds or switching to cash and sharemarket investment options. I think it is quite likely that we will see some significant falls in commercial and industrial property values as the year progresses, including in many projects that have been marketed through financial planning networks.
This is inevitable as credit dries up and sales are forced by the banks. But considerable care needs to be taken in predicting that, because the Australian sharemarket fell by 40 per cent during 2008, it now represents strong value relative to unlisted assets such as infrastructure. First of all, listed companies are finding that, due to their inability to fully replace their credit lines, they are needing to go back to the sharemarket to raise capital, and needing to do so at a discount to their previous share price.
Such a trend is totally inconsistent with the view that the market has bottomed. Indeed it is an indication that further falls may be required. Secondly, the large falls in many stocks have been a function of some specific factors, such as a massive decline in resource commodity prices or the unwinding of complex, highly geared financing structures.
In some cases we have seen listed investment vehicles that have been geared at four levels: the assets themselves have been highly geared; the investment vehicle has had added gearing; the company managing the fund has itself been geared; and then the principal shareholders in the management company have borrowed against their shares.
It would be foolish indeed to compare such a state of affairs with, for example, an infrastructure vehicle of modest gearing managed by a debt-free management company. Many high-quality infrastructure assets will have much greater revenue predictability than the average listed company and often will have long-term contracts with government, providing very robust future revenue streams. Generalisations are highly likely to be misleading or so general in their nature as to be meaningless.
The point that most commentators seem to be missing is that in a credit-constrained and recessionary world there will inevitably be a flight to quality, defined principally by the strength and reliability of future revenue streams. Examples of these attributes will show up across all asset classes – debt, private equity, infrastructure and even within the battered ranks of listed companies. Strong superannuation funds with their own reliable cash flow will be best placed to exploit these opportunities.