The coronavirus sell-off is prompting big Australian superannuation funds to mark down their allocations to real estate, infrastructure and private equity to ensure defined contribution participants taking out money now to pay bills and cover expenses don't disadvantage those staying put.
The move is the latest iteration of an ongoing fiduciary conundrum: Investing with a medium- to long-term investment horizon while participants retain the ability to move their money to competing funds on a short-term basis, said Nick Kelly, a Sydney-based senior investment consultant with Willis Towers Watson PLC.
The plunge in global equity markets since late February effectively forced super funds to grapple with the prospect of members switching out of funds at "stale valuations" for illiquid assets, benefiting them at the expense of those participants who keep their money parked in those options, agreed Padraig Brown, an Auckland-based principal with Mercer Investments' alternatives business and the consulting firm's head of real estate for the Pacific region.
To address that fiduciary challenge, super funds have sped up the adoption of lower valuations for those asset classes, with a view to treating all participants fairly and equally, Mr. Brown said.
Melbourne-based industry heavyweight AustralianSuper led the way on March 24, announcing an average 7.5% valuation cut for the quarter of its default option parked in unlisted assets. The move resulted in a 2.2% decline in participants' unit values. The country's biggest industry fund managed more than A$180 billion ($121 billion) as of Feb. 7, on behalf of 2.1 million members.
Hostplus, Melbourne, a A$50 billion fund focused on Australia's hospitality, tourism, recreation and sports industries, devalued its 13% allocation to real estate and its 12% allocation to infrastructure by 7.5% to 10%. Executives also lowered the value of the fund's 8% allocation to private equity by 15% on average. Allocations are as of June.
The A$85 billion UniSuper reduced valuations for its default option's modest 7% weighting to illiquid assets in March, a spokeswoman for the Melbourne-based fund said. It cut valuations on its unlisted real estate exposure by 10% and by 6% for infrastructure. The fund focuses on Australia's higher education and research communities.
The Retail Employees Superannuation Trust fund, a A$50 billion Sydney-based super fund, lowered the value of its real estate assets by 8.56%.
Meanwhile, a key element of the government's coronavirus response — an "early access" initiative allowing Australians hurt by lockdown measures to draw down A$20,000 of their super savings — is adding another layer of complexity to managing portfolio liquidity now.
No super fund executive modeling the appropriate level of illiquid assets for their portfolios saw that coming, noted David Bardsley, a Melbourne-based partner with KPMG Australia.
Some industry executives warned the timing of that option could prove problematic. AustralianSuper Chairman Don Russell, speaking at a conference March 30, predicted as many as 300,000 of his fund's members could choose "to take advantage of what has been put on offer," which in turn could constrain AustralianSuper's ability to act on investment opportunities thrown up by the crisis, a spokesman confirmed.
The government expects A$27 billion to be redeemed — a manageable 1% or so of the system's total assets — but funds in sectors facing particularly steep job losses like tourism, hospitality and retail could see their business models tested, Mr. Bardsley said.
In that regard, Hostplus is widely seen as Exhibit A, sources said.