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How super funds invest is currently the focus of something of a war of words in Canberra, so it can be confusing for fund members to know whether or not they should be worried about how their retirement savings are being invested.
A regular area of dispute when it comes to super fund investments is unlisted assets. Some funds – particularly large industry funds – have made significant allocations to this asset class as part of their overall investment strategy.
Despite being a commonly used asset by large investors, most super members don’t really understand what these assets are and why their fund invests in them.
Why does my fund invest in unlisted assets?
To help their fund members successfully save for their retirement, super funds create a broad investment portfolio that includes a wide variety of different assets and asset classes (such as shares, property, bonds and cash).
The fund’s trustees use these different assets to ensure the fund has a well-balanced and diversified investment portfolio. This approach generally includes using both listed and unlisted assets.
Over an extended period, unlisted assets have proven to be a successful investment for super funds. They are also widely used by large international investors (such as sovereign wealth funds and university endowment funds), responsible for developing investment portfolios with long time horizons.
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In general, unlisted assets are considered long-term investments and are a good fit with a super fund’s objective of assisting members to save for their retirement over their entire working life.
What are unlisted assets?
Most fund members are familiar with listed assets like shares (which are listed on public exchanges like the Australian Securities Exchange), but are less familiar with unlisted assets.
An unlisted asset is an investment not listed on a trading exchange. They can include property (large office buildings), infrastructure (toll roads and power grids), private equity (investments in start-ups or existing companies) and corporate debt.
Unlisted assets can be accessed either directly or through specialist investment funds. Some of the larger industry funds, for example, have taken direct stakes with other big investors in unlisted assets such as Australia’s key ports, toll roads, pipelines and airports.
In other cases, they have invested in special funds set up and managed by large investment management firms specialising in a particular asset class.
Differences between listed and unlisted assets
Listed and unlisted assets are often based on the same ‘family’ of assets (such as property or infrastructure), but whether the asset is listed or unlisted makes a big difference in how it performs as an investment.
For example, one super fund might buy a direct stake in one or more toll roads, while another buys shares in Transurban, an ÄSX-listed company that builds and operates toll roads around the country.
Although both funds are investing in the same asset type – toll roads – the different structures used in listed and unlisted assets mean they are fundamentally different investments, so their price and investment return don’t move in tandem.
Due to their unlisted structure, unlisted assets have a number of characteristics differentiating them from listed assets, which is a key reason super funds use them both in their portfolios.
|Listed assets||Unlisted assets|
|Priced daily in the sharemarket as the asset is bought or sold||Price estimated quarterly, six-monthly or annually by independent professional valuers|
|Price can be affected by sentiment towards the sharemarket generally, plus the outlook for the particular business (share) and the industry in which it is operating||Price based on the estimated value of the asset and recent sales of similar assets|
|Prices tend to go up and down more often||Valuations tend to be more stable|
|Often have complex investment and management structures||Simpler investment and management structures|
|More liquid, so easy and quick to buy or sell||Less liquid|
|Higher returns are achieved by taking higher risks, resulting in a lower risk-adjusted return||Good returns adjusted for the generally lower level of risk taken|
|Dividends and income streams tend to be more volatile||Tend to generate steady, secure income streams|
What are the benefits of unlisted assets?
Unlisted assets are generally long-term investments that provide different benefits and investment returns to listed assets like shares. They complement your super fund’s investment in listed assets and smooth out the overall investment performance of your fund. They also reduce the investment risks facing your super fund by allowing it to spread its money across a range of assets and different investment structures.
Some of the main benefits provided by unlisted investments to a super fund include:
Investing in both listed and unlisted assts spreads the risks of investing and helps reduce the chance of a low or negative investment return to fund members.
The investment returns from assets linked to local and international sharemarkets generally move in tandem (high correlation) and are strongly influenced by trends in those markets. Unlisted assets, however, are less influenced (lower correlation) by sentiment in the listed markets, so they help diversify the risk in your fund’s portfolio.
All this means that in periods of strong economic growth the value of unlisted assets tend not to rise as much as listed shares, while in downturns they normally don’t fall to the same extent. This reduces the overall volatility of the portfolio and smooths out returns.
2. Steadier income stream
Unlisted property and infrastructure assets tend to provide regular, steady income streams to investors.
This can be rent from a business tenant on a fixed-term contract, or the tolls received from a toll road operating under a long-term agreement with a government. In contrast, the income stream from listed assets is more unpredictable.
3. Good risk-adjusted returns
Unlisted assets usually achieve good returns considering the level of risk taken to achieve those returns compared with many other asset classes, as high returns usually require taking more risk.
How are unlisted assets valued?
Listed assets are priced daily in trading markets like the ASX using the price of the last sale transaction.
Because big unlisted assets are not bought and sold every day, their pricing is much less regular. Most super funds have their major unlisted assets revalued every quarter, while less significant unlisted assets might only be valued six-monthly or annually.
Regular revaluations ensure the assets owned by your super fund reflect their likely current value in the fund’s financial reports and the investment returns credited to fund members’ accounts. Without regular revaluations, super funds could be listing assets in their financial reports at inflated or lower values than they are actually worth.
Unlisted investments are valued using an estimate of the current ‘fair value’ of the asset, whether it’s a large shopping centre or a toll road.
The actual valuation of the assets is undertaken by a professional valuer who is external to the super fund. The valuer uses best practice guidelines set by bodies such as the Australian Property Institute and International Private Equity and Venture Capital Valuation Board to determine the current value of the asset.
The proposed valuation is then cross-checked by the valuer against recent sale transactions for similar assets and also takes into account current market conditions.
Super funds are required to follow the processes outlined by APRA and the Australian Accounting Standards when developing current valuations for the investment assets they own in their investment portfolio.
How valuations affect your super account
Unlisted assets are a well-accepted part of the investment portfolios held by large, long-term investors, both here and overseas.
Your super fund is required to undertake regular valuations of these assets to ensure you are receiving an appropriate return from the investment option you selected for your retirement savings.
When a new valuation for an unlisted asset is received by your super fund, it is immediately reflected in the fund’s daily crediting rate for any investment options affected by the change. This alteration to the daily value of the investment option is done to maintain equity among fund members.