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When it comes to delivering a good investment return to their fund members, super funds mix a variety of investment assets and structures together.
A selection of local and overseas investments helps boost – and smooth – the investment returns credited to your super account.
To understand what your super fund is doing on your behalf, it’s worth learning a little more about these investments – particularly whether they are listed or unlisted.
Listed and unlisted investments: What are they?
Both listed and unlisted investments give investors the opportunity to buy an asset and potentially earn an investment return.
The key difference between listed investments and unlisted investments is the structure, with each one having a different way of buying and selling the investment.
Although the underlying investment asset (such as shares) is the same, the distinctive structures mean listed and unlisted investments usually perform differently.
1. Listed investments
Most investments made by large super funds tend to be listed assets, which simply means the investments are ‘quoted’ or ‘listed’ on a secondary market such as the Australian Securities Exchange (ASX) or the US-based NASDAQ.
Being listed means investors participating in that market can easily buy and sell their investments on a regular (usually daily) basis on the relevant market exchange.
In Australia, the main asset class listed on the ASX is Australian shares or equities. In addition, a number of other investment structures and asset class are also listed on the ASX, including:
- Bonds: A bond represents a product that reflects a fixed-term loan between a government or company and an investor – a bit like an IOU. Listing a bond product allows investors to sell the loan or bond to another investor at the market price.
- Hybrid securities: These listed securities combine elements of both debt and equity. Examples include the popular floating interest rate notes that convert to shares issued by the major banks.
- Exchange Traded Products: ETPs give investors exposure to shares or other assets by tracking the performance of an investment index (such as the US-based S&P 500 Index or a commodity like gold). A popular example of an ETP is an exchanged-traded fund (ETF).
- Managed funds: These funds pool the money of individual investors and include share funds, property funds, listed investment companies (LICs), Australian real estate investment trusts (A-REITs), infrastructure funds and absolute return funds.
- Warrants, options and derivatives: These sophisticated investment tools provide investors with alternative ways to invest in large companies, currencies and commodities.
2. Unlisted investments
Although most investors are familiar with listed investments, not every investment asset is listed on a securities exchange and traded daily.
Unlisted investments trade more infrequently and investors usually buy ‘units’ in a trust holding the underlying assets. The trust’s assets can all be invested in a single asset class such as property or private equity, or one large asset such as an airport or oil pipeline.
Many large super funds take the unlisted route when it comes to asset classes like infrastructure and private equity, as the investments involved are huge. Usually, super funds and other investors pool their money and each takes a part-share in the asset.
Super funds take this consortium approach as going alone on such a major investment would significantly reduce diversification within their investment portfolio, and increase the risk associated with such a sizeable investment.
Comparing listed and unlisted investments
|Listed assets||Unlisted assets|
|Public market||Private market|
|Continuous asset pricing when securities exchange is open.||Regular pricing (every 3–12 months) by professional valuer. |
Managed funds normally offer daily pricing.
Unstable pricing, often reflects market sentiment. May not reflect full asset value.
|More stable valuations. Based on estimated capital value and similar transactions.|
|Usually easy to sell the investment when the market is open (high liquidity).||More difficult to exit the investment quickly (illiquid)|
|Subject to market listing rules.||Governed by investment trust rules.|
|Often higher debt (gearing) levels.||Usually lower gearing for property and higher for infrastructure.|
Source: Table compiled by author from various sources, including ASX, investment managers and major super funds.
Why do super funds use both listed and unlisted assets?
A large superannuation fund’s investment strategy is usually built around the goal of creating a strong but smooth stream of investment returns over time.
For strong investment performance, funds usually invest in listed assets like shares. A common characteristic of these listed investments, however, is that their investment returns can be volatile.
For a smooth stream of investment returns over time, many super funds invest in unlisted investments linked to an underlying real asset like a shopping centre or office building. These assets are more likely to provide a stable flow of income to investors from rental payments.
By mixing more volatile investment returns from listed investments (such as shares), with steadier returns from unlisted investments (such as direct property or infrastructure), your super fund is aiming to stabilise and smooth the investment returns it credits to your super account.
Unlisted investments and super funds
Although large super funds use unlisted investments to help generate steady investment returns for their fund members, this approach is not without its critics.
There are concerns about the less frequent valuations of large unlisted investments and the difficulties involved in selling them quickly if the super fund needs to recoup its money rapidly.
As most large super funds allow their members to switch between investment options, the fund must have sufficient money available to allow it to buy and sell the necessary assets. This means super funds usually cap the level of unlisted assets they hold to allow fund members to readily move between investment options.