We recently showed the real impact that poorly disclosed unlisted assets could have on Hostplus members over the coming years.
REST is another Industry super fund with a large allocation to unlisted assets that is now heavily exposed to transfers and redemptions. As at 29 February they had $58bn and 1.7m members, overwhelmingly from the retail sector.
In an email sent to members and employers on 30 March, the CEO, Vicki Doyle, made the following comment.
In recent years, we took the view that Australian and global share markets were overvalued and vulnerable to a shock event, like this pandemic. For that reason, we’ve been reducing the number of shares we held in the Core Strategy for the past few years. We’ve also increased the amount of money invested in defensive assets like cash.
According to the REST website, the Core Strategy currently has 13% in bonds and cash and 40% in Australian and International shares. So what about the other 47%?
The Core Strategy’s other investments include property, infrastructure, and other assets not listed on the share market.
There’s little disclosure around what these assets are, how much they are worth or whether they can be easily sold. If members knew that, they would be able to form their own views about whether the assets are indeed ‘defensive’.
In our view a defensive asset must have at least 2 qualities:
- evidence that it is resilient in periods of share market downturns; and
- it can be easily sold.
REST unlisted assets – how defensive are they?
We don’t know how often these unlisted assets are valued but the 10% decline in the REST Core Strategy unit price in March 2020 provides some clues.
Like Hostplus, REST has some specific sector funds. It is reasonable to assume that their sector performance is mirrored in the Core Strategy fund. Applying their performance to the Core Strategy sector weightings provides a good indication of their contribution to the Core Strategy performance.
- The Australian share fund declined 25% in March. Australian shares comprised around 16% of the Core Strategy portfolio so this decline contributed around -4%.
- The International share fund declined 12% in March. International shares comprised around 22% of the Core Strategy fund so contributed around -3% to the decline.
- Cash added 0.1% in March and comprised around 12% of the Core Strategy fund so contributed around 0%.
- These three assets in total explain around 7% of the 10% decline.
Therefore the remaining 50% of the Core Strategy including other unlisted assets only contributed around 3% of the decline.
What is the real value of the Core Strategy unlisted portfolio?
Again, we don’t know but it is highly likely that property, private equity ports, airports and wind farms would have taken a massive hit.
Let’s start with Property. In March the listed Australian property sector declined 35% and the overseas listed sector 22%. If the REST property portfolio is evenly spread between local and overseas the equivalent traded assets have declined 29%. How can REST explain this massive difference?
What about the remainder of the unlisted assets?
Infrastructure which comprises 11% of the portfolio has not appear to have been devalued by REST despite the fact that the Dow Jones infrastructure index has fallen 23% and the Australian infrastructure index 18% in March.
19% of the REST Core fund is held in ‘Other’ which includes Equity Strategies, Private Equity, Agriculture and Credit.
Once again we have no idea what these investments are, but it is a fair bet they have taken a significant valuation hit.
It is misleading for fund managers to claim that privately held assets have a different value than publicly traded assets. First and foremost, extensive gearing can convert relatively stable cash flows from a real asset into a very volatile and risky financial asset.
In addition, there are often great restrictions to exiting from private assets such as handcuffs, pre-emptive rights, extensive due diligence and the ability to provide information to prospective purchasers.
These constraints all contribute to private ownership being more risky than comparable listed assets.
Because unlisted investments are illiquid they cannot be sold to pay members who transfer into cash or redeem their units.
If the unlisted investments have not been properly valued, members who transfer into cash or redeem their units at the current price potentially do so at the wrong value. The remaining members pay for this as well as suffering their own losses when the unlisted assets are finally revalued down or sold.
How big is this problem for REST?
Other superfunds have reported a 2-3% switch out of MySuper options to cash but no-one knows yet how many members will redeem. Since REST’s members are, or rather were, primarily employed in the retail sector it is reasonable to assume that they will take the opportunity to pull out the maximum $20k tax free.
Many will be young and desperate with immediate cash needs. The average member balance is around $35k so there could be well over $20bn walking out the door.
How can REST fund this amount of money? Certainly not through selling its entire holdings of Australian and international shares. The CEO commented as follows:
During the past few years, Rest has been strategically reducing the number of shares we hold in the Core Strategy: − The Core Strategy currently has a 38% allocation to the overseas and Australian shares asset classes – a lower allocation compared with recent years.
So REST has consciously adopted a strategy of lowering its exposure to an asset class whose liquidity is now desperately needed in a period of stress. They had $22bn of traded shares as at 29 Feb. In the unlikely event that they have not sold down some of these shares they are now worth around $16bn.
No wonder the exposed Industry funds are going to the government and RBA cap in hand!
It has been reported that the RBA is considering lending money to fund the redemptions with a mortgage over the fund’s assets. It is unconscionable that the assets of the remaining fund members who retained trust in the system should be pledged to support payments to those who rushed to the gates. It is even more unfair that the remaining members should pay for the failings of the managers and trustees of these funds.
Where to now for the super industry?
Stockspot has for many years tried to blow the whistle on the dangers of unlisted assets in super funds, particularly when these assets are being self-reported as ‘defensive’. The risks of these investments are compounded by the lack of disclosure.
In the wash-up to the crisis there will be many welcome changes enforced on our industry.
We see the following changes as critical:
Complete transparency in portfolio reporting
Potential investors in super funds will then be properly informed of the portfolio risks and will thereby be in a position to make informed investment decisions. The level of secrecy and non-disclosure by public funds has always been unacceptable but it has taken the current crisis to expose it.
We are very proud that Stockspot investors can get real time direct access to the details and value of every one of the investments that we hold on their behalf, as well as underlying assets.
In addition to disclosing both the individual holdings and their value, the trustees of public funds should be required to meet the level of disclosure mandated for financial institutions such as banks and insurance companies. They are required to report the maturities of both their assets and liabilities as well as derivative instruments. It is incomprehensible that fund managers are not held to the same standards as the listed companies they invest in.
Whilst it is unrealistic to demand a daily revaluation of unlisted investment, the basis for their valuation should be disclosed, including any discount caused by factors causing illiquidity in that investment. Investors and their financial advisors will then be aware of the impact of significant market movements on these valuations.
The reputation and trust in our $3tn super industry has been damaged by this issue and needs to be restored.