Australia’s major super funds are under increasing pressure from APRA to improve standards and methodologies on valuing their unlisted assets.
The prudential regulator is seeking to use a more principles-based approach to valuations, putting the burden on trustees to ensure valuations are up to date and marked-to-market inside the $3.5 trillion super fund industry.
Morningstar conducted analysis on the illiquid holdings of five of the country’s largest super funds − Australian Retirement Trust, Australian Super, Aware Super, Cbus and UniSuper.
Annika Bradley, Morningstar director for manager research ratings, says funds suggesting such holdings are “about right” did not give members the full picture.
“About right doesn’t give enough context because some of those funds that have 20 per cent in illiquid assets will be in outflow because their members are decumulating and they are in retirement,” she says.
“Therefore, a 20 per cent allocation to illiquid assets for that fund is potentially too high relative to a fund that has 20 per cent illiquid assets that are actually in material inflow because their members are 25 [years old] and contributing to the fund.”
A recent example of investing in an illiquid asset is UniSuper’s recent $1 billion purchase of a five percent share in Vantage Towers, a British infrastructure business that broadcasts signals for big communications companies such as Vodafone.
According to Morningstar’s analysis, the investment was a positive addition for UniSuper’s 620,000 members given the scale of the asset size and the portion of unlisted assets vis-à-vis the other asset classes in the total portfolio.
“In the case of UniSuper, based on their size and based on where their unlisted holdings are and without understanding the details of the deal, I think it certainly sounds like an appropriate addition to their portfolio,” Bradley says.
“When these funds are buying large infrastructure assets, I think the level of work that it takes for them to invest in something like that, you almost don’t want them making only a $50 million investment, because relative to the size of their portfolio, there is a trade-off between the time it takes for the investment teams to do the work and the bite size of the deal.
“When these funds are at $100 billion plus, in the context of their total portfolio, sometimes a reasonable-sized deal like that can make a lot of sense.”
Investment horizon
Another key consideration is how long a super fund should hold illiquid assets.
According to Bradley, illiquid assets such as infrastructure and private equity have a lengthy investment horizon.
“I think that illiquid assets certainly have a role to play in investors’ portfolios. If they are managed appropriately, I’ve seen strong returns generated across the likes of private equity and infrastructure for investors over five- and 10-year time horizons,” she says.
Transparency of the disclosures in terms of illiquidity levels is another critical factor but “at the moment the portfolio holdings disclosures talk about unlisted assets, not illiquid assets,” she says.
“We really don’t have public disclosure as to the level of illiquidity, so the liquidity ladder is probably the most useful thing because an average doesn’t really give you as much detail as you need,” Bradley says.
“They could liquidate 80 per cent of the portfolio in less than a year, that is a really useful data point, but not one that is available to us publicly.”
