Centrepoint's Miriam Herold

While the coronavirus crisis and subsequent policy measures around superannuation access have revealed fundamental flaws in the management of industry funds, they have also raised questions about the research process behind approved product lists that recommend them.

As the risks to industry funds play out clients will eventually ask why their adviser didn’t see the red flags, and eventually the entire advice ecosystem – licensees, investment committees and research teams included – will need to review how it approaches fund assessment.

“Every investment committee and external investment firm would reconsider their research process in light of what’s happening with industry funds,” says Nathan Jacobsen, chief of mid-sized licensee Paragem.

Industry funds have outperformed retail funds for years, largely due to their dependence on the ‘illiquidity premium’; that is, the reward for investing in lumpy unlisted assets like property, infrastructure and private equity.

What seemed like savvy long-term investing actually had a small, but critical element of risk. Early super access – which could cause a run of up to $100 billion – has ignited concern that these funds won’t have enough cash to facilitate these payments, or will need to sell assets at distressed prices to do so.

Industry funds have seemingly obfuscated the depth of the issue by only marking down a fraction of the value of these assets, which brought into play the risk that fund unit pricing is not equitable.

The coronavirus has dealt industry funds another stinger; cohort risk, which refers to unique subsets of members like hospitality or retail workers being especially impacted.

Whether these risks were foreseeable is debatable. This crisis an extraordinary event, but one that should have been in scope for all concerned.

Challenge for researchers

Miriam Herold, head of research at Centrepoint – one of the ten largest dealer group owners in the country – provides an interesting context after putting industry funds onto its APL just last year on the advice of Lonsec and its sister research company, SuperRatings.

Like many licensees, Herold says Centrepoint will be guided by their researcher in terms of future adjustments after changes that “no one predicted”. She points out that the risks haven’t manifested as yet, so it would be premature to make sweeping changes to APLs right now. “It’s difficult to have a view on how to treat these funds at the moment,” Herold notes.

Herold says the crisis will provide APRA with an opportunity to consider its own fund guidance, but the prudential regulator will be hampered in the same way researchers are. “There has been no standard for comparison and classification of assets,” she says.

Haphazard and misleading labelling of assets is a core issue and one that plagues the industry. Researchers are constantly hampered because funds – both retail and industry – use labels as a lever to manipulate performance. It’s a problem Veronika Klaus, head of investment consulting at Lonsec, knows well. “That’s the biggest issue,” she says. “Classification.”

“All we can do is make the clients aware of the differences,” Klaus says. “Or at least try to show them the real underlying asset allocation.”