Sovereign’s Ray King says there has never evidence of a ‘run’ on any Australian super fund, and that CIOs should not allow over-cautiousness to cost their funds the illiquidity premium, which depending on the asset class he calculates can be worth between 0.5 and 3 per cent a year. However, he acknowledges liquidity would come into focus under a number of more likely scenarios, such as the need to rebalance strategic asset allocation (SAA) if listed equities severely underperformed, or adjust for members retreating to investment choices with lower allocations to alternatives.

In the unlikely event of a quick and sharp decline in fund assets, King recommends that funds, among other things, allow the alternatives allocation to increase to the upper band of the SAA range. “If the SAA to alternatives is 15 per cent, then a reduction of 25 per cent in total fund size would increase the alternatives allocation to 20 per cent. This is a conservative level for the upper band of the allocation,” King believes.

Depending on the severity of the run, or shift away from riskier investment choices, King says funds could redeem assets where permitted, take periodic distributions from their alternatives managers rather than reinvest, impose a freeze on any new commitments to alternatives, sell on the secondaries markets where viable and sensibly priced, and even purchase options to put securities to various counterparties at pre-specified valuations (King warns this could be expensive).

Access’ David Chessell, whose clients are well known for their 50 per cent exposures to illiquid assets, does not think a run on a super fund is likely either. “I don’t think the world changed when choice of fund came in. After three years, the experience that I’m seeing is that members don’t change funds at the drop of a hat. COF isn’t a watershed for the industry,” he says. Chessell also points out that alternative assets create their own liquidity. “Our clients get cash back at an average of 14 per cent per year on their unlisted asset portfolios, yield and return of capital,” he says.

The ideal allocation to alternatives for the end-investor will of course change according to their age and circumstances, but ipac’s Jeff Rogers says a reasonable spread for the average 30 year old would be 80 per cent in the core diversified portfolio, 15 per cent in ‘alternative markets’ and 5 per cent in ‘alternative alpha’.