Super fund performance and unlisted assets

Super fund returns are always in the spotlight around the end of the financial year. This is when funds publish their annual performance results and send statements to members, and when researchers publish tables comparing fund returns. 

Going forward, fund members may notice a wider-than-usual gap between the performances of various super funds.  

A large part of the difference in returns this year comes down to whether – and how much – super funds have invested in unlisted assets. 

In recent years, super funds have been under pressure due to their practices around “lumpy” revaluations for unlisted assets concerning the quality, accuracy and frequency of revaluing unlisted assets.

Millions of super members are in the dark about these practices – and therefore about how much their investment is really worth. 

In July 2022, the Australian Prudential Regulation Authority (APRA) released final revisions on Prudential Standard SPS 530 Investment Governance to ensure better member outcomes through updated requirements that increase stress-testing, valuation, and liquidity management practices.  

The enhancements to strengthening investment governance have been in effect from January this year. 

What are unlisted assets?

Unlisted assets are investments that are not traded through a public exchange or market, such as the Australian Securities Exchange (ASX) or the New York Stock Exchange (NYSE).  

Investors in unlisted assets can either directly own the asset or invest with others through an unlisted trust.  

The most common types of unlisted assets are:  

• Unlisted property – from small property syndicates with assets such as neighbourhood shopping centres to multi-billion-dollar unlisted property trusts which own major CBD office buildings, large shopping centres or hotels. 
• Unlisted infrastructure – development or ownership of roads, rail, ports, airports and utilities. 
• Private equity – invest in or own private companies, including early-stage investments in technology companies. 
• Private credit – involves lending to privately owned businesses.   

What are listed assets?

Listed assets are those that are traded on a stock exchange or share market, such as the ASX or NYSE.

The most common type of listed asset is shares, also known as equities.   

Other listed assets include:

• Listed property – offers the ability to invest in a diverse portfolio of large properties through an Australian real estate investment trust or real estate investment trust on an international share market. 
• Listed infrastructure trusts – trusts that invest in major infrastructure e.g., roads, rail and airports.  
• Bonds – issued by a company or government to raise money which constitute a loan from an investor. 
• Exchange traded funds (ETFs) – collection of assets that track the performance of a major investment index e.g., the S&P 500 Index.  
• Managed funds – money from a number of investors which is pooled to buy investments.  

How are unlisted and listed assets valued? 

The difference in how unlisted and listed assets are valued is what affects super fund returns at any given time.  

Timing of valuation

• Unlisted assets - are typically valued at set intervals. For example, quarterly or annually. 
• Listed assets - are valued every day. Investors decide daily how much they are willing to pay for shares in the company or trust.  

Method of valuation

• Valuations of unlisted assets are often made using historical or point-in-time factors. For example, unlisted property valuations are partly based on past sales of similar properties, which may have been completed when market conditions were different. As a result, values for unlisted assets are often different for the same asset in a listed market. 
• Listed assets are valued by investors in an organised, open, and transparent market. Valuations are an accurate, up-to-the-minute reflection of what willing buyers and sellers in a market will pay. 

Continued criticism is that valuations arranged by asset owners could lead to biased results if asset owners judge the value of their own investments too generously.   

How does valuation timing impact your super’s performance? 

The difference in valuation timing means changes in economic, competitive and market conditions are reflected in the value of listed assets more rapidly than unlisted assets. Therefore, listed asset values are affected more in the short-term by market ups-and-downs versus unlisted assets.  

Over the past months, central banks globally have sharply increased their interest rates in response to inflation. Rises in global and Australian interest rates have been quickly factored into prices for assets listed on stock exchanges. The result was an immediate fall in prices and losses for investors.  

However, these significant changes may not yet be reflected in the valuations of unlisted assets.  

Add to this the fluctuations in unlisted infrastructure and unlisted property funds, which many super funds are directly invested in, and the valuation of unlisted assets becomes a bigger issue.  

Essentially, the difference in performance lowers returns in super funds, especially those holding mainly listed property, while funds holding mainly unlisted property have not yet been affected.  

However, as unlisted property trusts go through their valuation cycles, downward returns are expected to be reported in those trusts, due to the significant devaluation risks in the higher interest rate environment.  

Why is liquidity in super funds important? 

Super is a long-term investment and while you are accumulating your retirement savings, you may not need regular access to your money. However, super funds do need the flexibility to buy and sell investments to manage risk, respond to market conditions, and take advantage of opportunities that arise.  

Super funds also need to maintain liquidity to meet the redemptions of retiring investors, so the liquidity of investments is crucial at a fund level.