Like all good conferences, last month’s CMSF 2008 conference raised some weighty issues, dissected them well, prompted debate and provided no real answers.

The theme, ‘Shaping the Nation for the Future’, is arguably the most important and ambitious of any superannuation conference in memory. What is now needed is open discussion which goes back to the basic questions, such as the role of super funds firstly, and their interaction with markets – both listed and unlisted.

In the important plenary session at the conference entitled ‘To Build a Nation’, Garry Weaven, the chair of Industry Funds Management, wondered out loud whether super funds would be prepared to go as far as he would like in investing in infrastructure and other long-term unlisted investments, particularly those of a sustainable nature. He said there was a chance that funds would baulk at this and stick to the broad style of asset allocation which they have used for the past 20 years, with a heavy reliance on listed markets.

If they did, this was notwithstanding the well-known success of some funds which have had a high exposure to unlisted investments. Warren Chant, principal of Chant West, took issue with this in a session the following day. He said that Weaven was probably referring to funds such as MTAA and Westscheme, which have had more than 40 per cent allocations to alternatives, mostly unlisted, and have enjoyed better returns than most other funds for several years.

Chant’s concern is liquidity, especially in uncertain times, such as now. He described that style of asset allocation as “foundation investing”, which is the style employed, also successfully for many years, by the big US foundations which pioneered the use of alternatives by institutional investors in the 1980s. Super funds used to have similar risk profiles to those of the foundations, that all changed with the introduction of Choice of Fund, he said.

Foundations are given money which can’t be taken away from them, which is about as long term as any strategy can be. But with Choice, it is now possible – although hopefully unlikely – that members could panic in various situations and cause a run on a fund. Chant pointed out that while this had never occurred with super, it had at various stages with certain financial institutions over the past 50 years.

Unlisted assets were not priced as regularly as listed assets, clearly, and it was difficult to work out the risk involved if a fund needed to liquidate assets quickly, which would normally be in a buyer’s market. In such a scenario, ‘fair value’ meant nothing, Chant said.

The Government was not particularly helpful to Weaven’s cause at the conference. Ramani Venkatramani, APRA’s general manager of specialised institutions (NSW) called for super funds to review their liquidity risk. He also mentioned the possibility of a run on a fund.And Nick Sherry, the Minister for Superannuation, said that he had spoken with APRA and ASIC about the issue and they would “keep a close eye on liquidity”.

So, where do we take an argument when the opposing sides are both correct? It has to be over to the researchers. What is needed is a new framework, supported by a strong body of academic literature, analysing the nature of risk and liquidity. A modern Portfolio Theory II, as it were. Weaven knows that super funds are only going to invest in ‘nation building’ projects if they get sufficient return for members. The new Trustee of the Year, HESTA chair Beth Mohle, said her co-directors focused on “members, members and members’. This is supported by legislation, in the form of the Sole Purpose Test within the SIS Act, as old as that now is.

Any research into the area would inevitably lead to questions about the role of the listed markets and their level of efficiency in providing capital for businesses or projects of any description. Listed markets, as they have functioned for more than 100 years through well-regulated exchanges which provide the mechanism for trading for the vast majority of investors, have come under competitive attack in recent years.

The so-called ‘dark pools’ of liquidity provided by large institutions such as index fund managers, transition managers and investment banks, make up an increasing proportion of institutional transactions around the world. In Europe, it is said, the dark pools account for a full 40 per cent of trades. If the ‘master manager’ concept takes off in Australia, which is being enthusiastically promoted by NAB Custody in particular, this would represent another dark pool, effectively being provided by Weaven’s constituents – not-for-profit super funds.

Another topic discussed at the conference which also goes to the role of super funds was the provision of products and services to members in their retirement. This is a big issue for funds because it is linked closely with the provision of advice. Most funds have recognised it is not in members’ interests to look after their money for 20 or more years, so far, and then at the crucial time of retirement simply say ‘goodbye and good luck’. So, they have developed their own allocated pensions as a start, although the take up by members has been miniscule from all accounts.

Guy McAliece, a partner at KPMG Superannuation, suggested that funds could go much further than provide retirement investment products. They could provide home care facilities, reverse mortgages, own retirement villages and generally provide retiring members with more of a cradle-to-the-grave offering.

Given that the family home remains the largest single asset for most people, a caring super fund is in a good position to help people either stay in their home (home care and reverse mortgages) or transition to residential facilities where more care is available.

Like Weaven, McAliece said that such ‘investment products’ could provide a good yield for the fund, as indeed they would need to.

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