Australia’s super fund managers are the Wizards of Oz, quaking behind a curtain of unlisted asset valuations and waiting for Dorothy to pull the curtain aside and expose their pitiful reality.
In fact super performances could be worse this year than the sharemarket, which is the reverse of what happened in 2008 when super funds on average outperformed the sharemarket by more than 50%.
If the sharemarket is steady this year or even goes up, and published super fund returns fall heavily – which is entirely possible, even likely – it will be an absolute disaster for the industry… and the Government.
After all, super is mandatory in this country. So far super funds have been a refuge from the horrors of the sharemarket for which politicians can take credit, but that will change in 2009 because their diversification into unlisted assets over the past decade will start to work against them. Those in the superannuation business talk about little else these days.
It’s simply because investments in direct property, direct infrastructure, hedge funds, and private equity are valued only periodically, often just once a year. What’s more, market valuations are not used, but rather discounted cashflows and net present value of income flows using capitalisation rates.
The future cash and income flows are little more than a guess these days, and capitalisation rates are moving sharply against the funds.
So it is imperative that super fund members get out while they can. The risk of staying in a superannuation default fund is now incredibly high.
If you can cash your fund in, do so; if it’s too early to retire, then switch to a 100% listed option within the fund. You will be overpaid by at least 10% for your default fund units and make an instant profit of that amount.
The listed versions of the funds’ unlisted assets have all collapsed in value, but in many cases the unlisted valuations reflected in the value of the core fund have not moved or even in some cases gone up. This is about to catch up with the funds in a big way.
The super funds’ median return in January was -1.85% according to SuperRatings, and for the year to 31 January it was -17.68%, even though Australian shares were down 5% in the month and 37% in year. The MSCI global index fell 40%.
This was generally reported as being dreadful and a cause for despondency and alarm, but in fact it was spectacularly good and normally there would be high fives around the super funds’ offices when such results were published.
But there are no high-fives, only fear, because every super fund CEO and chief investment officer knows what’s buried inside their funds, and they know what’s coming at them this year.
The allocations to unlisted assets varies widely of course, but a typical fund is roughly as follows: Australian direct property 7%; international direct property, 5%; international infrastructure 7%; Australian infrastructure 5%; absolute return hedge funds (growth) 3%; absolute return hedge funds (defensive) 3%; international private equity, 3%; Australian private equity, 1%.
The usual practice is to value a quarter of these portfolios each quarter, which means each asset is valued once a year.
However the two big industry fund vehicles – Industry Super Property Trust (ISPT) and Industry Funds Management (IFM) – revalue their entire portfolios every quarter.
The valuations are usually done by the major accounting firms, and audited by another one of them once a year in July.
In the December quarter, the $6.8 billion ISPT core fund suffered a fall of $370 million, or 5.4% for the quarter, which seems to have been the first decline. IFM’s Australian book was reduced by 5% in the December quarter and its offshore assets by 10%.
Listed property trusts have fallen at least 50%. In many cases listed infrastructure funds have dropped by much more than 50%.
So are the listed funds undervalued or are the unlisted funds overvalued?
And then there are the hedge funds and private equity funds, as well as the super funds’ own direct property and infrastructure investments (not via ISPT and IFM).
In many cases, geared hedge and private equity funds are now worthless because underlying asset values have fallen 50% behind a 60% gearing ratio. Many of these will only hit the super funds’ core fund valuations on 30 June this year, when the unlisted portfolios are valued and audited.
I repeat; get out while you can.
This article first appeared on Business Spectator