With hindsight, the decision to invest relatively large amounts in unlisted, illiquid assets has been a winner for industry funds.
In recent times some master trusts have started to move in the same direction and have increased their weighting to unlisted assets. These are small steps, however, largely because they and their parent organisations have long memories and unlisted assets pose challenges for funds with daily unit pricing.
Few can forget the pain of the early 1990s when a ‘run’ on unlisted property trusts caused many to freeze redemptions, restructure and seek liquidity by listing on the stock exchange. Reputational risk is a strong motivator, and master trust operators have been conservative about liquidity (maybe too conservative) ever since.
We have commented in previous articles that the advent of choice of fund has elevated the importance of liquidity. Industry funds no longer have captive memberships, so they need to be mindful of the possibility of redemptions, especially if they deliver consistently poor performance. That said, the prospect of a serious ‘run’ on any reputable fund is somewhat remote.
Nonetheless, there are legitimate concerns that some funds are going too far down the unlisted route. How much illiquidity is too much? That is a value judgement for super investors to make. Our view is that a prudent exposure is somewhere between 20% and 30%.
This is partly based on research of large overseas college and university endowments, which have an average allocation to unlisted assets of about 40%. To our mind, as endowments never have to repay the monies gifted (although they do have annual spending requirements), this sets a ceiling on unlisted assets. Super funds can use this example to gauge their own exposure bearing in mind that members can switch funds and change investment options almost at any time.
So far, we have focused on the listed versus unlisted decision and the consequences for fund performance. This is one reason – but not the only reason – why industry funds have performed so well relative to their commercial competitors.
Other reasons for their success include:
- underweighting international shares and overweighting Australian shares and property in the 2002 to 2006 period when the Australian market significantly outperformed;
- reducing equity exposures and building up their cash reserves in the latter stages of the bull market; and
- substituting core infrastructure and absolute return strategies for bonds in the defensive component of their default portfolios to enjoy superior returns while maintaining the same degree of diversification.
Table 4 illustrates the effects of substituting core infrastructure for bonds using the returns from Industry Funds Management’s infrastructure funds as an example.
These decisions reflect well on the funds and on their investment consultants. Whether they indicate a sustainable advantage is a matter of opinion.
The decisions regarding exposures to international shares, equities and cash are more about medium term strategic ‘tilts’ than long term asset allocation. Getting these tilts right consistently is difficult. So it is hard to claim this as a sustainable advantage.
The advantage of investing in alternatives, however, is sustainable if master trusts do not follow suit. But changes are being made, and some master trust portfolios are beginning to look more like those of industry funds.
We have commented before that the master trust offering is not just about returns. They do generally provide a superior member ‘experience’, including personal advice. They also service advisers better, which ultimately benefits members.
It seems an obvious comment, but members really should get independent, professional advice before they switch funds or investments, particularly if their motives are for performance reasons. Importantly, they need to be satisfied that outperformance is likely to continue and that they are taking into account all of the services offered.
Note: Performance for the IFM funds is net of fees and tax. Performance for Australian and international bonds is based on the relevant market indices.
|Table 4: Performance of Infrastructure vs. Bonds - Periods ended 30 June 2008 (% pa)|
|1 Year||3 Years||5 Years|
|IFM Australian Infrastructure||5.1||8.3 ||11.6|
|IFM International Infrastructure||11.8||14.6||n.a.|
|International Bonds (hedged)||7.9||4.9||6.0|