An edited version of this article appeared in The West Australian, Your Money, on Monday 17th June 2024.
With the end of the financial year approaching, trustee boards will soon be signing off on annual performance numbers for your superannuation fund.
Good numbers are obviously important for our superannuation savings, but they also have important implications for the health of your chosen fund as it competes in a crowded market.
Calculating the performance of a fund should be straightforward, shouldn’t it? Just add up the value of all the investments in the fund and compare it to where they were last year, right? The central concept of “value”, however, is where things get tricky, particularly as most funds — and in Australia, largely the big industry funds — continue to pour money into so called “unlisted” assets such as direct property, infrastructure and private equity which are typically harder to value versus listed assets.
Some background to my jargon is required here.
Listed assets such as shares, exchange traded funds and listed investment companies reside in places where the stock market assigns a value every minute of the trading day. If we believe in the efficiency of markets, it means we are always getting real time, accurate valuations of our investments. This also means valuations can fluctuate and be quite volatile, but are up-to-date.
Unlisted assets such as office buildings, airports and other infrastructure assets are not part of any liquid market, are not traded openly and do not have daily valuations available. Instead, they are manually valued and on a much less regular basis. Years can sometime pass before a revaluation takes place.
What does this all mean for you?
Let’s start with some examples of valuation discrepancies in listed versus unlisted to life.
In April last year, Invesco reported that in Australia, listed property trusts could be bought on the market at an approximate discount to their net tangible assets of 11 per cent. This means that the trading value of units in these big real estate funds was less than what they would be worth using traditional valuation methods. So while those buying in would do so at less than the asset values, it also means those selling would be exiting the assets at the same discount.
By comparison it would be unusual for a large super fund — in most cases in Australia the large industry super funds — to be carrying the value of the property at a similar discount in their unit pricing. This is because the assets are not valued daily, so they can maintain the higher pricing until such time that they choose to revalue. As an investor, it’s hard to know when they will revalue, and with what methodology when they do.
Things get even murkier in the world of private equity, where it is much more difficult and subjective to value a company, and value discrepancies can be more extreme.
Let’s take Canva for example — a well known multibillion-dollar success story started in a suburban Perth home office. Because the company is not listed on the stock exchange, valuations are manually completed by the fund managers that hold the shares, based on their own individual metrics.
In June 2022, following a period of stress for technology firms, global asset manager Franklin Templeton slashed its carrying value of Canva by 58 per cent.
But other investment managers were less negative, with T Rowe Price reducing its value by 20 per cent and Capital Group by 10 per cent. Other investors made no change to their carrying value.
All for shares in the same company.
These wide discrepancies in investment pricing at which new fund members can buy these assets also flow through to performance reporting.
Superannuation portfolio managers understand that there are benefits to unlisted investments, as they can smooth the volatility inherent in listed assets. They can also provide access to a much larger set of diversifying investments — both of which can aid “performance” of your fund.
But a stark question comes to mind. How exactly have your fund trustees come to decide the value of unlisted assets to determine performance of your fund, particularly when there are very strong drivers, such as attracting new members, to ensure strong performance is reported? How do we know carrying values are being fairly represented to both new members and old? How do investors have confidence these potential conflicts are being managed?
And how do you know where in that revaluation cycle you are buying?
The good news is that the superannuation policeman, the Australian Prudential Regulation Authority, is on the job. Post a wide-ranging view in 2021-23, APRA has put big super on notice with new requirements designed to address shortcomings it saw in valuation practices.
These valuation shortcomings included: a lack of strong revaluation frameworks that increased the risk of suboptimal decisions during crises such as pandemics; limited engagement from boards in valuation decisions and a reliance on management discretion; dependency on external parties for valuations that could compromise governance and delay necessary adjustments; and few funds having independent valuation committees, raising concerns about conflicts of interest.
While it is comforting to know APRA is making noise on this issue, it also highlights the benefit of having a professional, financial advice relationship, where you have an expert that understands the nuances of unlisted asset valuation, unit prices and impacts on reported performance.
With your 2024 financial year performance reports making their way to your mail box soon, given the nuances we’ve reflected on, it may well pay to obtain advice before making any big buying or selling decisions based on your reported performance.
Raymond Pecotic is the Managing Director of Empire Financial Group
