Is there a hidden risk in your super fund?
How did so many super funds manage to shoulder such a volatile market period?
James Thompson’s opinion piece “Is there a hidden risk in your superfund?” (Australian Financial Review 2022) calls to light some dark behaviour happening under investors noses within the superannuation industry. Thompson begins by highlighting the “impressive resilience” of the performance of many Australian super funds, given the strong market downturn that investors have experienced this year. He compares the average return (negative 5.7%) in the default ‘MySuper’ balanced options from the 12 months ending September 2022, against that of a “tried-and-true 60/40 portfolio” (approximately negative 12%).
So how did so many super funds manage to shoulder such a volatile market period?
Almost 50% of Aussie super funds hold significant investments in “unlisted assets” (i.e. direct property & infrastructure, credit and private equity). Thompson strongly believes that most Australians don’t know what their super fund actually holds, let alone the risks that can be associated with these unlisted assets.
Unlike direct shares or managed funds, the day-to-day price of unlisted assets are not reported. As such, these assets are often utilised by superannuation funds to smooth a trend line and bolster results when required. Thomson elaborates on the risk associated with this lack of transparency – he believes that many super funds are underquoting the associated risk of their unlisted assets, in order to chase headline returns, while continuing to associate their investment options with terms like balanced or conservative. To further his point, he refers to the illiquid nature of these holdings, and the inability to move them off the books quickly if cash was required (i.e. for member withdrawals). In times of need, such assets can often be sold off for heavily discounted prices.
Thompson concludes that many Australians could be over-exposed to illiquidity risk, which is particularly important for those relying on superannuation to pay for their retirement. He believes that super funds must be held more accountable with their asset allocation and calls for a more uniform measure of risk measurement.
Here at Mulcahy & Co, our suite of portfolios provides a level of transparency that we believe is top tier. Not only do we hold little to no unlisted assets, but our clients have the ability to view the exact (to the cent) allocation of their funds. We wholeheartedly concur that liquidity and appropriate risk exposure are incredibly important factors to consider when deciding where your money is invested.
Click here to read the full article (a subscription to the Australian Financial Review is required)
If you have any queries or concerns about your super fund or other investments, please get in contact with your financial adviser at Mulcahy & Co.
Jesse Jury
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