Nick Bruining: Industry super funds favouring unlisted assets face pressure to check values more frequently

The days of industry superannuation funds topping the performance league tables could be coming to an end. A crackdown on the valuations used to support the returns reported to members could mean some funds are forced to re-calculate their unit prices, causing an immediate decline in the value of member accounts or stifling annual returns. The Australian Prudential Regulation Authority wrote to super funds last year, identifying valuation practices of unlisted assets as a key policy focus for 2023. Unlisted assets are used heavily by Industry Super, which has previously said that the use of unlisted investments could mean members have an extra $130,000 in their retirement account. “Industry super fund investments in local unlisted assets don’t just deliver a more financially secure life in retirement for members, they are increasingly linked to the future health of our economy,” Industry Super said. Chris Brycki, founder and chief executive of Sydney-based Stockspot, said some funds had a significant proportion of members’ money tied-up in unlisted assets. “There are some large super funds with up to 40 per cent of their fund invested into unlisted assets like property, infrastructure, private equity and venture capital,” Mr Brycki said. The valuations of these assets cannot be immediately determined by real-time market pricing. Unlisted assets are valued much less frequently, sometimes on an annual basis. This means that the valuations used to prop up a super fund’s unit price could be out of date. “This may indicate that the unlisted asset is valued at a level that could not be realistically achieved if it were to be sold,” Mr Brycki said. Investments in listed investments like shares, listed property trusts and fixed interest securities, on the other hand, are traded through open markets. That means the actual valuations can be determined on a day-to-day basis and the super fund’s associated unit prices more accurately reflect the real values. “New members joining a super fund could be overpaying for unlisted assets if they are not being valued in line with public markets and in a timely way,” Mr Brycki said. The concern is that if a number of members elect to leave that fund or change investment options, they benefit from the higher, possibly inflated prices. Potentially, the members remaining in the fund would weather the storm if the assets are re-valued downwards. A new governance guideline came into effect in January suggesting that funds should consider having unlisted assets revalued quarterly. Mr Brycki said valuations are conducted by professional valuers who are paid by the funds. “There is a problem that the fund pays the valuer to perform the valuation,” he said. “That could put the valuer under implicit pressure to come up with a value that is favourable to the fund. “Investors should pick a super fund that has a clear and transparent process of valuing unlisted assets. If funds can outperform by investing in unlisted assets, that’s fantastic.”