You've been warned....

for all those who love industry funds read this warning from Alan Kohler, MTAA comes to mind....

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Super fund whiplash

Super fund returns have been bad lately, right? Wrong. They have been fabulous – so good, in fact, that they are actually an illusion.

Australia’s super fund managers are the Wizards of Oz, quaking behind a curtain of unlisted asset valuations and waiting for Dorothy to pull the curtain aside and expose their pitiful reality.

In fact super performances could be worse this year than the sharemarket, which is the reverse of what happened in 2008 when super funds on average outperformed the sharemarket by more than 50 per cent.

If the sharemarket is steady this year or even goes up, and published super fund returns fall heavily – which is entirely possible, even likely – it will be an absolute disaster for the industry … and the government.

After all, super is mandatory in this country. So far super funds have been a refuge from the horrors of the sharemarket for which politicians can take credit, but that will change in 2009 because their diversification into unlisted assets over the past decade will start to work against them. Those in the superannuation business talk about little else these days.

It’s simply because investments in direct property, direct infrastructure, hedge funds, and private equity are valued only periodically, often just once a year. What’s more, market valuations are not used, but rather discounted cash flows and net present value of income flows using capitalisation rates.

The future cash and income flows are little more than a guess these days, and capitalisation rates are moving sharply against the funds.

So it is imperative that super fund members get out while they can. The risk of staying in a superannuation default fund is now incredibly high.

If you can cash your fund in, do so; if it’s too early to retire, then switch to a 100 per cent listed option within the fund. You will be overpaid by at least 10 per cent for your default fund units and make an instant profit of that amount.

The listed versions of the funds’ unlisted assets have all collapsed in value, but in many cases the unlisted valuations reflected in the value of the core fund have not moved or even in some cases gone up. This is about to catch up with the funds in a big way.

The super funds’ median return in January was -1.85 per cent according to SuperRatings, and for the year to January 31 it was -17.68 per cent, even though Australian shares were down 5 per cent in the month and 37 per cent in year. The MSCI global index fell 40 per cent.

This was generally reported as being dreadful and a cause for despondency and alarm, but in fact it was spectacularly good and normally there would be high fives around the super funds’ offices when such results were published.

But there are no high fives, only fear, because every super fund CEO and chief investment officer knows what’s buried inside their funds and they know what’s coming at them this year.

The allocations to unlisted assets varies widely of course, but a typical fund is roughly as follows: Australian direct property 7 per cent; international direct property, 5 per cent; international infrastructure 7 per cent; Australian infrastructure 5 per cent; absolute return hedge funds (growth) 3 per cent; absolute return hedge funds (defensive) 3 per cent; international private equity, 3 per cent; Australian private equity, 1 per cent.

The usual practice is to value a quarter of these portfolios each quarter, which means each asset is valued once a year.

However the two big industry fund vehicles – Industry Super Property Trust (ISPT) and Industry Funds Management (IFM) – revalue their entire portfolios every quarter.

The valuations are usually done by the major accounting firms, and audited by another one of them once a year in July.

In the December quarter, the $6.8 billion ISPT core fund suffered a fall of $370 million, or 5.4 per cent for the quarter, which seems to have been the first decline. IFM’s Australian book was reduced by 5 per cent in the December quarter and its offshore assets by 10 per cent.

Listed property trusts have fallen at least 50 per cent. In many cases listed infrastructure funds have dropped by much more than 50 per cent.

So are the listed funds undervalued or are the unlisted funds overvalued?

And then there are the hedge funds and private equity funds, as well as the super funds’ own direct property and infrastructure (not via ISPT and IFM).

In many cases, geared hedge and private equity funds are now worthless because underlying asset values have fallen 50 per cent behind a 60 per cent gearing ratio. Many of these will only hit the super funds’ core fund valuations on June 30 this year, when the unlisted portfolios are valued and audited.

I repeat: get out while you can.

 

What happens when everone decides they want out at the same time? I presume the super fund trustees will be forced to either freeze redemptions or sell down the only assets they have which have a decent level of liquidity - listed shares. Another fall coming?

I have a retail super fund with my super balance all in the cash/fixed interest investment option at present. Even if it is safe there, I'm guessing this revaluing will occur over an extended period so I would be effectively stuck in this option till the cleanout has occurred. Maybe its time for me to roll this all into a SMSF?

 

Hi YoungGun,

It is VERY SCARY that the MTAA Superannuation BALANCED fund is 97% growth (What the???). As most forum readers are probably already aware, a "standard" (if there is such a thing) balanced fund is 70% growth and 30% defensive. Apparently MTAA don't think the "standard" balanced fund has enough growth assets in it...

MTAA Super: Balanced

As YoungGun said, get professional advice!

Cheers,

Dan

PS This is general information. Before making an investment decision speak to your FPA registered Financial Planner.

 

From now on more and more baby boomers when they hit 60 are going to want to start withdrawing lump sums and/or periodic amounts from their super funds. Therefore going forward there could be more money going out rather than coming in to these super funds when the full weight of baby boomers retire. With many of the industry funds holding substantial large unlisted assets it will be interesting to see how they deal with this. Liquidity could become a major problem. I certainly wouldn't be putting my future retirement funds into a fund they invests heavily in unlisted assets.

Interestingly Daryl Dixon recently expressed a similar view to Kohler.

Cheers - Gordon

 

This is an issue I and my business partner have been telling clients in industry funds for some time now. Although I usually detest the rubbish from Alan Kohler, he has certainly hit on a major issue that good old bernie fraser on those ads doesn't want to mention.

Also, on a side note, by him saying, "make sure your super fund has a "industry fund" symbol" doesn't that constitute advise? I mean if a financial adviser said something like that to the general public wouldn't he get smashed by asic?

 

Come on, his opinions and rants are way more informed than the majority of media pundits out there...



I remember speaking with my mother a week or two ago about this very issue, and to check her super setup. I hope she has acted on the conversation we had.

I think the collapse of some super funds will bring back into focus the brutally honest fact that you can't have a massive percentage of your population stop working/contributing to society unless they are going to be self sufficient through "adequate" savings for retirement. I also think that what most people perceive to be "adequate" is probably half of what they really need, and the rate of growth expected on savings through working life needs to be revised down drastically.

 

Hi BigBuddha,

One would think so, though, a super fund telling a member to roll over superannuation funds is considered (in ASICs view) different to a financial planner/adviser advising client's to roll over superannuation funds.

The main reason being is that the planner/adviser is expected to have investigated the client's existing funds (loss of benefits, investment options, current costs, existing insurances and exit fees, etc) and also the client's needs.

This is the same if a superannuation fund mails out a rollover form and if a planner/adviser mails out a rollover form. From a superannuation it is seen as administration/paperwork, from an adviser's office it is seen as advice.

It will be interesting to see if Bernie and other super funds are held accountable for rollovers which are they are encouraging members to do due to the declines in the last year and a half, especially for members who were in Retirement Savings Accounts (RSA) or Eligible Rollover Funds (ERF) which paid deeming rates and were guaranteed.

Cheers,

Dan

 

It was a huge generalisation by Alan Kohler that really failed to take into account the fact that unlisted assets did not increase in value anywhere near as much as listed assets in the run up to November 2007 and obviously would not fall as far as valuations fell.

Working in the industry, I know that a large number of managers have independent valuations performed regularly (many now on a quarterly basis), with the majority of the valuations in the fund I deal with, already up to 31 December 2009.

Obviously having unlisted assets reduce volatility with fewer valuations, the liquidity issue will be one funds have to manage carefully. That is where I believe a fund like MTAA could get into strife. APRA do have a focus on liquidity and are encouraging funds to undertake stress testing of their investment portfolios.

Bernie's reference to the industry fund logo is about fees, not performance, but fees are at least controllable.

I would like to know Dixon Advisory have got away with their blanket recommendation to get out of industry funds....

 

Hello Realist,

You said your fund has valuations upto 31 Dec 2009?

do you mean 31 Dec 2008?

If they are upto 2009, i'd like to see how they come up with the figures. Crystal balls anyone.

 

Yeah, thanks for picking up my typo

 

End of the day, Allan's point is

Unlisted asset's valuation (DCF models or other methods regardless how independent they were) is not equal to market price…, substantially lower in this environment.