Your Industry Superannuation Fund is about to lie to you

Most superannuation funds, and especially industry funds have significant balances in unlisted assets. Many are telling you that these assets haven’t lost money, or are only down a little despite sharemarkets being down close to 30%. This gives rise to perverse incentives for superannuants:

  • if you leave one of these funds now, you will get paid at the high prices for unlisted assets;
  • anyone left behind bears the brunt of the losses.

Rough numbers? I suspect right now that the median superannuation fund will pay you about 7% to leave.

Disclosure: Some of this is probably sour grapes! I run a superannuation fund that only buys liquid assets in separately managed accounts. So, an investor’s return is their return. We can’t rely on tax mingling, unlisted asset revaluations or other accounting tricks that master trusts use.

Background

Chant West gave us a quick preview of superannuation fund returns for March:

From Chant West:

“Growth funds, which is where most Australians have their superannuation invested, hold diversified portfolios that are spread across a wide range of growth and defensive asset sectors. This diversification works to cushion the blow during periods of share market weakness. So while Australian and international shares are down at least 27% since the end of January, the median growth fund’s loss has been limited to about 13%.”

Calculation

Some quick maths.

Chant West’s definition of a growth fund is one that has 60-80% of its assets in growth equities.

Let’s call it 70% exposure to shares, 5% cash and 25% to a composite bond fund.

If shares are down “at least” 27%, cash is unchanged, and a composite bond fund is down about 5%, then the implied return is a loss of -20%.

Chant West says the loss is only 13%.

There is 7% missing.

And that assumes that the 25% is in composite bonds, more likely it is higher risk unlisted assets.

So where is the missing money?

Now, individual funds will have different performance obviously. Our own growth fund is down less than 1% over the same time frame, but we took dramatic and aggressive measures at the end of January that I know others did not.

The superannuation market is $3 trillion. It is the market. If, somehow, almost every superannuation fund worked out the same thing we did and sold equities at the end of January, the market would have fallen in January. They didn’t.

The answer is superannuation funds have unlisted assets that they are not writing down. They are pretending that the prices are mostly unchanged from January.

A few industry funds have written down assets. For example, AustralianSuper has revalued its unlisted infrastructure and property holdings downwards by 7.5%.

But look at the rest of the market. The listed property sector is off more than 40%. Airports? Down 30%+.  Private Equity? Ha! You are telling me that illiquid shares are worth a few per cent less while listed shares are down 25%+ and illiquid bonds aren’t even trading?

The writedowns help, but are nowhere near the level the assets would sell for today.

Financial Crisis Comparison

A great example is unlisted property funds during the financial crisis. Unlisted property funds invest in effectively the same assets as listed property funds, the underlying properties are worth the same, the performance differs because of how it is reported:

In 2009, listed property was down 60%, unlisted property reported gains

The perverse superannuation incentive

The problem is that if you own a fund that reports like this, you can be diluted if other investors leave. And any contributions you make now are at inflated prices. To illustrate with an extreme example, let’s say:

  • you and I are the only investors in a super fund with $100 each invested;
  • the fund owns 50% an unlisted asset and 50% cash. So, the total value of the fund is $200 made up of $100 in the asset and $100 in cash;
  • the asset falls 60% ($60) in price, so our fund is now only worth $140 ($70 each, we both should take a 30% loss), but the fund doesn’t revalue the asset and so reports the fund still being worth $200;
  • I decide to redeem my holding in the fund’
  • the unlisted asset can’t be easily sold, and so the fund pays me $100 cash being half of the $200 that the fund is still being officially valued at. I’ve broken even!
  • this leaves you with $40 of unlisted assets – a 60% loss which is double the loss that you should have taken.

Adding insult to injury

The other problem with a typical superannuation fund (but not some of the newer ones that use a separately managed account structure) is your tax is mixed with other investors. Rodney Lay from IIR recently highlighted the issue:

…unit trust investors face another risk – being subject to the taxation implications of the trading activities of other investors. Net redemption requests may require the manager to sell underlying portfolio holdings which, in turn, may crystallise a capital gain… …During the GFC some investors had both (substantial) negative returns plus a tax bill on the fund’s crystallised gains. Good times!!!

Net effect

So, if you are a loyal soldier sticking with a superannuation fund that continues valuing unlisted assets at last year’s prices then:

  1. You are going to absorb the losses of anyone that leaves.
  2. You might even get an additional tax bill because the people that leave trigger a CGT event for you.

But at least your superannuation fund will be able to “report” higher returns.

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Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

Follow @DamienKlassen on Twitter or Linked In

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.

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Comments

  1. IFA has loads of road toll investments. IFA is Owned by numerous industry funds. How good would the tolls be going now? Valuations at purchase date v now? Lol 😂

    • Given how astute our governments are, there are probably clauses saying the government has to pay the difference if toll revenue falls below a certain point. Privatize the profits and socialize the losses and all that.

    • From equities to cash, yes. As many people, including many commenters on this site, have done over the last few weeks. They have crystallised losses. In panic and fear. This is the exact mechanism of how the wealthy, on the other side of the trade, benefit from these events.

      On the other hand, shifting from a super fund loaded with overvalued illiquid assets to cash, not so much. But what is considered overvalued in these crazy times? Also, if you’re concerned about a run on super, then get out now before some of these illiquid assets need to be liquidated by the fund at the worst possible time.

    • Damien KlassenMEMBER

      If an investor got to sell out of one super fund (with lots of assets still marked at January prices) and buy into a different fund (that actually does mark to market) at today’s prices then they would be in front.

      Whether the new fund makes money going forward is also an issue.

      • david collyerMEMBER

        Many thanks for these insights, Damien. While this practical reality impacts individuals differently and requires custom responses, broadly speaking, those with large super balances will subsidise those with small balances who withdraw and redeploy. Whether those withdrawing funds can or do redeploy wisely is a moot point.

    • If you move it now, you cash out at mark-to-fantasy prices before mark-to-market happens.

      It’s literally the best time to move.

      They will gap-down when they’re forced by withdrawals to do writedowns.

      • Nick1970MEMBER

        Plus 120 points at the moment – no-one knows what’s going to happen over such a short timeframe.

    • Giving further succor to the adage: he who panics first panics best!

      Those left behind will own assets that are grossly over-valued and a pension that is, in reality, a fraction of what they think it is. Good times!

  2. PlanetraderMEMBER

    Damien, completely agree with the article but where international share component is unhedged could possibly explain part of the 7% (but definitely not all)

    • I don’t know the details but any unhedged exposure would probably have accrued as profit given the Peso getting smoked.

  3. FUDINTHENUDMEMBER

    Will there be a liquid assets test for the Coronavirus Economic Response Package?

    ATO says:

    Be unemployed
    Be eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance
    On or after 1 January 2020, either:
    you were made redundant
    your working hours were reduced by 20% or more
    if you are a sole trader, your business was suspended or there was a reduction in your turnover of 20% or more.

    ie. If someone’s sitting on a 100k cash and investments, can they still withdraw if they meet the above requirements?

    Might be a good excuse to get at yer super..

  4. kannigetMEMBER

    for the last 30 years around 9% of wages for every wage earner has gone into the super system with an overwhelming focus on shares, has the market actually risen over that time at a rate higher than the 9% of wages injection would have caused? or was this injection actually masking the weakness of the market as a whole.

  5. Damien – in the past this is correct.

    Right now, I wouldn’t be surprised if some industry funds are rushing through some interim valuation adjustments because folks can actually cash out now. They usually do “independent” valuations at least once a year. Would be good to ask the question if there have been any adjustments to valuations ….

  6. This has been a well known feature of the big Industry Funds for years. The classic game was to move your money in just before the quarterly revaluation and get a free ride. Now the opposite is the case.

    On the other hand, the capital gains crystallisation point is not a big issue. Your account balance will have a provision for tax attached to it anyway.

  7. haimona12MEMBER

    One of my contacts has just done a suite of infrastructure valuations for the period to 31 March, I presume under IFRS, and these are required quarterly. Main issue is what data to use? Apparently everyone too busy to punch in new data so data this time may be unusually “old”.

  8. Would it also be an option to shift the investment option within the super fund? Say, out of Balanced and into Capital Guaranteed?

  9. Reminds me of the big discrepancy which opened up a few years ago between listed property trusts whose prices had been plummeting and the unlisted property trusts which were in a state of total denial. The outcome eventually was a freezing of unit redemptions from unlisted property trusts. Lessons seem to be soon forgotten!!!

  10. This website has been preaching the ghastliness of retail super funds with their performance supposedly being inferior to industry funds.
    Does this mean that no longer holds?

    • Damien KlassenMEMBER

      Not all Retail Funds have underperformed (we generally don’t bash our own super fund which has outperformed!) and not all Industry funds have the issue with unlisted assets.

  11. I applied to withdraw my $10k, which is half of what I have in there. Figure better used as a housing deposit. Thoughts?

    • The other 50% of your balance will be available in 90 days.

      I got made redundant today and as such I opted to do the smash and grab on one of my super funds, similarly this is to add to my house vulture deposit.

      Different to your situation in several respects:
      I moved a quarter mil to Nucleus about a year ago.
      I kept $100k in UniSuper (volatile as it was up to $125k a few weeks ago).
      I already have good cash savings.
      Have been earning big and making extra contributions.
      If I am able to find another role on similar pay (who knows though?) I plan to pay myself back the $20k under the concessional contributions cap over say 3 years. And for clarity that will go into Nucleus not Uni Super.
      For me this is a rational strategy. I believe that the ScoMo smash and grab on super is INTENDED to be recycled into housing. There’s potentially a first mover advantage. If you have the cash to be a vulture, if the right place comes up, if you still have a job and if the banks will lend. That’s a lot of ifs.

      Your mileage may vary.

    • Ukraine fnMEMBER

      @Dyllip Can you apply now? I thought the fact sheet from the gov said you could apply only from mid April?

      • If you log into my gov you are presented with two options.
        1. An intent to claim jobseeker allowance
        2. An intent to claim early release of superannuation.

  12. Jerry DhungleMEMBER

    If Nucleus could advise the superannuation dummies like myself about what it means if we switched over now, that would be great. So many questions that I’m not clear about,

  13. Mandated super was always based on a lie.

    It’s a pension tax. So the government of the day & the future could deny its social obligations.

    Based on the lie of inter generational aging (Australian age group demographics are about the middle range of most OECD countries)

    And today’s generation of Workers, increasingly unemployed or no tenure, eroded by millions of non citizen migrants in job theft, then add the migrant cash economy suppressed & destroying wages, then the migrant overshoot driving up cost of living & destroying housing affordability – all the genuine & now lower paid Australians having to pay for the current old age burden & also ‘pay forward’.
    Work to nearly 70 but no jobs for the mature age Australians as their jobs are stolen by the migrant influx.

    Overweight in Australian equity, cash & property that have been decimated in value..

    Distorted & corrupted into a vehicle for debt and the elites.

    Preyed on by lying greedy grasping or retail & industry fund managers, who do little more than collect the cash, track an index to send out envelope once a year with no real return.
    Parasites..
    Providing almost half the life industry income, another set of parasites, yet few members would know who to or what they are paying those fees for either.

    Corrupted top to bottom.

    Mandated super has failed in its efforts to ever provide an alternative to government pension outlays (less than 3 years income for most average members).

    The higher end DYI super participants are debt laden & most are or will be negative real equity.

    And the constant government tinkering and taxation transfer, all the time slicing away at the average member to reward the elite & rich at the expense of everyone.

    Hand it all back.

  14. Take AustralianSuper’s Balanced Fund for example. If people exit this fund then OzSuper has to sell the liquid assets, presumably equities, possibly bonds. But if too many people exit the fund then it will have a higher weighting towards illiquid unlisted assets and will no longer be “balanced”.

    A few years ago they changed the T’s & C’s to state that in certain circumstances AusSuper reserves the right to halt withdrawals. If we get to that point many thousands of people could be left with their money locked in a fund that has an unknown value.

    • That shouldn’t be allowed for Superfunds where portability is a key plank of the system.

      And trustee that suspends redemptions should resign at the same time for breaching their obligations.

      • When I read the email from AusSuper c2 years ago I withdrew my money from the Balanced Fund.
        The reasons then were
        1. I wanted minimal exposure to real estate in the first place
        2. Unlisted investments have no price discovery mechanisms regarding valuations
        3. The sort of projects they invested in are illiquid
        4. and then they said they want to lock customers in if things look bad.

        It was a NO from me on all 4 counts.