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Industry super funds and illiquidity risks

One difference between a typical industry fund and a typical retail fund is exposure to unlisted assets. Industry funds tend to invest more in them than their retail counter parts.


What is an unlisted asset?


First of all, a listed asset is one that is 'listed' on a secondary market, e.g. the ASX or the NASDAQ. These investments are easily bought and sold, traded usually on a daily basis.


An unlisted asset is therefore one that is not listed on a securities exchange and also not traded daily.


Key differences


There are many differences between them but I want to focus on two things.


Listed assets are more volatile as they are continuously priced while the securities exchange is open. Unlisted assets are priced every three to twelve months by a professional valuer. The effect is that returns appear smoother in comparison to listed assets, however the valuation of those assets is inaccurate as the periodic pricing means valuations will lag. In the chart below, we can see the smoothed returns of the unlisted property investments compared to the volatility of the listed ones.




On paper, the smoothed returns look good, but the question is how much is the investment really worth?


The second key difference between listed and unlisted assets is that listed assets are generally liquid, while unlisted ones are illiquid. Listed assets are easy to sell. It is more difficult to exit unlisted investments quickly.


Why does this matter right now?


By now you have probably heard of the government's measure to temporarily allow early access to super. Up to $10,000 will be accessible tax-free from mid-April for the current financial year, with a further $10,000 after July 1 2020.


Unfortunately, there are a lot of people out there without access to a financial adviser who will withdraw the funds making a big mistake in the meanwhile.


It can be argued that longer valuation process for unlisted assets can lead to the typical balanced/growth funds being overvalued. There will be funds holding assets at inflated prices. In fact, recently, several well-known industry funds have revalued their unlisted holdings downward.


The illiquidity of these investments may become an issue if large numbers of their members intend to make ten to twenty thousand dollar withdrawals over the next few months.


Hostplus has been quoted as having no cash since 2011, and almost no bonds either in recent years, preferring instead to invest in office buildings, pipelines and emerging technology. I don't want to pick on Hostplus. They may be okay. But the concern is that in a time like this when investors want access to cash, some of these industry funds with high exposure to unlisted assets will need to sell down unlisted, and as they are illiquid, it will be easier said than done.


Conclusion


Unlisted assets are not inherently bad. They have their pros and cons. In light of the current economic crisis and with the anticipated run on superannuation, we may see the unlisted asset strategies favoured by industry funds backfire.





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