The regulatory focus has once again returned to the industry or union superannuation fund sector in recent weeks. The Australian Securities and Investment Commission disclosed that they had been investigating the investment decisions of super fund executives at as many of 23 funds amid the pandemic.
The incredibly uncertain times that occurred in March 2020 as lockdowns expanded across the world and the true impact of the pandemic was far from known, resulted in thousands of industry fund members making the decision to ‘protect their capital’ and move their investment option back to cash.
The issue of course was that with some industry funds holding as much as 30 to 40 per cent of their balanced portfolios in unlisted and therefore less regularly priced assets, members weren’t necessarily receiving the full value of their share of the underlying assets at the time. As highlighted at the time, the issue and potential inequity reflected the unique nature of industry super funds in that they provide daily liquidity and unit pricing on a portfolio that includes a significant amount of illiquid and difficult to value assets.
That isn’t to say it isn’t a positive for investors in their strategy, rather it is just unique and must be understood. The issue of inequity of course, is that whilst listed infrastructure, property and other growth assets fell as much as 30 per cent in a few short weeks, unlisted asset valuations barely moved; that is until they were revalued as at 30 June as usual. That means those who redeemed early may well have received higher valuations that those who did not.
In the daily course of business, the pricing of unlisted assets typically relies upon a basic discount rate, decided by the board, investment committee and likely external experts to determine its appropriateness. ASICs investigation sought to understand whether executive’s privy to these types of decisions had used their access to price-sensitive information “for personal gain” by making the decision to switch ahead of the revaluation process.
Given the unlisted nature of these assets and the non-traded structure of superannuation interests, they have generally not caught the eye as much as the high profile ‘insider trading’ or ‘pump and dump’ schemes that occur on the ASX. According to the commissioner, there is some concern that these types of transfers werent even seen as a risk of conflict, with Danielle Press stating “what we found instead was often a clear failure to identify investment switching as a source of potential conflict, resulting in a lack of restrictive measures and oversight to adequately counter this risk.”