Superannuation has proved its stability as an investment in troubled economic times.
The average balanced fund made a gain of 1 per cent over the year to late March while the main stock market index, the S&P ASX 200 lost 5.1 per cent in value.
However, regulators have warned super funds to make sure their unlisted asset valuations are up to date.
Speaking at the Australian Institute of Superannuation Trustees’ biannual conference last Wednesday, both ASIC Commissioner Danielle Press and APRA superannuation manager Katrina Ellis called on superannuation fund trustees to be more proactive to ensure valuations of unlisted assets were accurate given the current market ructions, the Australian Financial Review reported.
Massive volatility on the share market saw stocks rise by 5 per cent between January 1 and February 3 only to slump by 7.2 per cent in the six weeks since then.
Chant West reported that the median growth or balanced fund with between 61 and 80 per cent growth assets lost 0.4 per cent in February while the share market lost 3.4 per cent over the month.
Alex Dunnin, research director at Rainmaker, says criticisms of unlisted valuations are unfounded. “Funds typically get reports on their value quarterly and this is becoming the industry standard.”
Voluntary valuations during crash
During the COVID market crash in early 2020, funds acted to reassure the market on unlisted valuations.
“Early in 2020 the funds made out of cycle valuations recognising that the equity markets had fallen so much,” Chant West research lead Mano Mohankumar said.
Those out of cycle valuations were made between the quarterly valuations most funds make to reassure investors that unlisted assets were traveling OK.
Now some funds “have actively built in trigger points” at which valuations are made out of cycle in response to market volatility and other economic concerns, Mr Mohankumar said.
While some of these valuations are conducted in-house by the funds and are therefore questioned by critics, Mr Mohankumar says this is often in the interests of members.
“People call for independent revaluations but you have to strike a balance because that costs money and it’s all members’ money you are spending on those valuations,” Mr Mohankumar said.
There is evidence that the funds were being conservative on unlisted valuations.
“Research shows that 66 per cent of the returns coming from unlisted property is [rental] income,” Mr Dunnin said.
That means that the funds are not valuing the unlisted assets at inflated values. A listed property trust might yield 7 or 8 per cent in dividends meaning their assets are valued more highly than unlisted funds.
“The concern about unlisted asset valuations in super funds is greatly overblown,” Mr Dunnin said.
Superannuation has been particularly challenged in recent times because both shares and bonds have been under pressure.
“Globally bonds lost 1.8 per cent in February while Australian bonds fell 1.3 per cent,” Mr Mohankumar said.
That mightn’t sound a lot, but remember the bond markets have been creating havoc in recent months, sending major banks like Silicon Valley Bank in the US and Credit Suisse in Europe to the wall.
The bond market shakeout caused by Liz Truss’s brief spell as UK prime minister last year also threatened the viability of the country’s retirement system.
Rate rise mayhem
That was caused by rising interest rates. As bond interest rates rise the value of older bonds held in portfolios falls to make their yield equal to that of the newly issued bonds with higher interest rates.
Australia has dodged those bullets to date, in part because of the structure of its investment markets.
“Bonds have always been a smaller part of institutional portfolios in Australia than has been the case in the US, Germany, the UK, the Netherlands or even Japan,” said independent economist Saul Eslake.
That has been because “until the last two or three years [when government debt blew out] there have been far fewer of them than in those countries”, Mr Eslake said.
Australian governments have tended to run smaller deficits and Australian corporations tend to borrow through the big banks rather than issuing bonds, meaning there are less bonds in the market for super funds to buy.
Australian super funds have also had a bigger exposures to shares than their foreign counterparts because they are typically defined contribution funds that don’t promise set retirement incomes, meaning they don’t have to own a lot of bonds that guarantee interest payments.
Alternative strategies have worked
Bonds are typically held by super funds to give some stability to portfolios but as we have seen in recent times that has not been the case as interest rates rise dramatically.
Australian super funds have cut their exposure to bonds significantly since the global financial crisis back in 2008 when the median growth fund lost a terrifying 21.5 per cent.
Bonds in 2006 made up 19.6 per cent of those portfolios but by 2022 this had fallen to 14 per cent and share exposure fell by 4.5 per cent to 54.8 per cent.
“The difference has largely been made up of alternative and unlisted assets,” said Mr Mohankumar.
Those investments, which include unlisted property and infrastructure as well as private equity and hedge funds jumped by 10.1 percentage points to make up 23.2 per cent of portfolios.
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