Industry funds defend unlisted investments

Industry funds group Super Members Council (SMC) has put forward a strong argument for investment in unlisted assets, particularly infrastructure in a key response to the Australian Securities and Investments Commission (ASIC) discussion paper on private markets.

The SMC has taken issue with assertions in the ASIC discussion paper that there are risks associated with the scale and participation of superannuation funds in private markets, stating that there are “important benefits of such scale and participation”.

“Profit-to-member superannuation funds have long pioneered investment in unlisted assets, particularly infrastructure. Analysis by Frontier Investors for SMC shows that approximately 16.5% of assets of APRA-regulated superannuation entities are invested in unlisted/private market assets such as property, infrastructure, private credit and private equity (in a range of 7.1% on average for Retail funds to 20.9% on average for Industry funds,” it said.

“Investment by superannuation funds in unlisted asset classes has enabled higher returns, lower risk, reduced volatility and improved portfolio diversification. The investment strategies employed, coupled with a keen focus on costs, has enabled funds to add net value to members relative to market benchmarks – they are also global leaders in this regard.

“These attributes deliver strong benefits to millions of individual super fund members and the broader financial system. The role of superannuation as a powerful economic stabiliser2 is significant – this should have been more extensively highlighted in the Discussion Paper,” the SMC response said.

The response warned against changing the settings, arguing that “changes imposing liquidity constraints would clearly harm the best financial interests of millions of Australians”.

“New analysis by Frontier Advisers finds that if current preservation rules were relaxed such that superannuation funds could no longer act as long-term investors, and were no longer able to invest in unlisted assets, net returns could be lower by 0.3 – 0.6% each year,” the SMC said.

“A key benefit of unlisted assets for superannuation funds is that they diversify a portfolio, generally leading to net returns that are more stable when these assets are included. This is especially relevant in the current economic environment and instability in public markets associated with the new US administration’s trade policies,” it said.

“Overall, unlisted assets remain a relatively small but important proportion of superannuation fund asset investment. They do so while targeting and maintaining a prudent level of total liquidity to ensure they can pay members when required.”

“Super funds manage private market risk closely to ensure they can fulfil their regulatory obligations, especially during market stress events. This was evident during the March 2020 COVID period, with both APRA and the RBA noting that superannuation funds had managed liquidity well during this time. Funds were able to manage this stress event well because of robust liquidity management practices and prudential oversight.

“APRA Prudential Standard SPS 530 requires funds to have a Board approved liquidity management plan for each RSE within its business operations.”

“The one common factor between all private assets super funds invest in is that they comprise investments that are not publicly traded and therefore often considered illiquid. Frontier has observed that funds with a younger membership base and cash flows are better positioned to invest in unlisted assets than funds with an older membership base and negative cash flows.”