SuperRatings, the Lonsec-owned superannuation funds researcher, has prioritised conversations with 15 funds most likely to be impacted by liquidity concerns in light of the government’s new crisis measures in this area, the researcher has confirmed.
While it is not clear whether these conversations will result in changes to ratings of these funds – whether these funds’ products are shifted from their current status to ‘watch’, ‘alert’, ‘downgrade’ or ‘hold’ – decisions on the basis of these discussions will be made within the next fortnight, Kirby Rappell, SuperRatings executive director told Professional Planner.
Rappell declined to name the funds on this list of 15, but he noted that these funds all share three common attributes: members with lower average account balances, funds with a greater focus on young members and a reasonably high allocation to illiquid assets.
Rappell said on average it’s not unusual for funds to have up to 30 per cent allocation to illiquid assets. Overall he said funds have generally been quick to ensure they have appropriate cash levels to address liquidity at this time are in close and regular discussions with their asset consultants.
If SuperRatings changes its view on some of these funds in light of the conversations it’s having in coming days and weeks, it will likely lead to swift action by researchers and investment committees at the licensee, platform and advice practice levels, as many of the participants among the so-called ‘wholesale’ research community rely on SuperRatings. These participants use SuperRatings’ views as a basis for including super funds on approved product lists (APLs) and in the mix of separately managed accounts, model portfolios and other investment structures including platform recommended lists.
Top 10 advice network Centrepoint Alliance is one group that uses SuperRatings’ recommendations to determine which super funds it includes on its APLs, Centrepoint’s head of research Miriam Herald told Professional Planner recently.
More broadly, subscriptions to iRate, the ratings service the advice industry use to access SuperRatings views, has grown exponentially since it launched in the last two years, as demand from advisers to offer the relatively well-performing industry funds to clients has grown, Rappell said.
Liquidity consideration missing
Liquidity or assessment of unlisted assets is not mentioned in SuperRatings’ top-line assessment criteria.
The researcher bases its ratings on seven assessment categories, with its ‘investment’ category carrying the most weighting, accounting for 25 per cent of the assessment criteria. Other categories include fees & charges (weighted at 15 per cent for the purposes of the assessment criteria), administration (10 per cent), member servicing (15 per cent), governance (10 per cent), insurance (10 per cent), and qualitative overlay (15 per cent).
It’s only when you dig further into the researcher’s ‘investment’ category assessment criteria that you find an assessment criteria relating to liquidity.
SuperRatings’ investment category comprises of four subcategories: methodology, performance, risk profiles and process. It’s within this ‘process’ sub-category the researcher can account for liquidity as part of its assessment, in a sub-sub category entitled ‘Unlisted Asset Investments’ which has a 1 per cent weighting to the ‘process’ category.
While liquidity is a very small if not absent component of the assessment criteria that SuperRatings uses to review and recommend funds and strategies, Rappell said the impact of the coronavirus and the government’s subsequent emergency measures won’t necessarily lead to the researcher changing its ratings framework.
“Just because we live in extraordinary times it doesn’t mean we need to rewrite our entire ratings process, I expect it will stand up… we don’t want to be changing our ratings process on the fly,” he said.
Room for adjustment?
“I realise that the unlisted asset number, which is 8 per cent of the underlying investment process rating, could be seen as low,” Rappell noted in response to the minor role liquidity plays in its assessment of super funds. “However, this is complemented by looking how unlisted assets and overall portfolio construction fit together.”
“Our main focus from the GFC was the fact that the frameworks and processes have been a key focus, with these breaking down at inopportune times for funds. Subsequently we have spent greater time doing face to face meetings in ratings reviews and spending time sighting funds work on key areas,” he said.
“We are no doubt learning through the current COVID-19 crisis and will be including any learnings through our current review,” he added.
“While we have been talking to a wide number of funds, it is more acute for a small subset of those we are talking to. We recognise the work being done by funds to closely manage their liquidity positions.
“What we are seeing generally sits within scenarios that form part of funds stress and liquidity test, although at the more severe end of some fund’s scenarios,” he said.
In recent weeks Professional Planner and sister publication Investment Magazine have tracked the impact of government measures including the early release of super on super funds.
As part of this coverage, Hostplus and Rest have been singled out as the largest and most prominent funds with both concentration of illiquid assets and so-called ‘cohort’ risk – both of these funds had more than 40 per cent of illiquid assets in their balanced funds before the market rout, Investment Magazine has noted.
On Wednesday when this story published, every single one of the funds and plans associated with Hostplus and Rest reviewed by SuperRatings had received a ‘platinum’ rating by the researcher.