Sam Sicilia justified his call for a super fund “liquidity window” by arguing that routine, short-term liquidity demands should not stand in the way of large investments in unlisted assets – particularly since members’ money is held captive by the system. Sicilia, CIO at the $7.9 billion HOSTPLUS, floated the idea at the 2010 AIST Australian Super Investment conference last month. While member contributions and investment income should more than adequately cover funds’ near-term liabilities, a liquidity window – functioning like the cash window operated by the Reserve Bank of Australia – would ensure funds could more fully exploit the illiquidity premium in their investment programs.
He says funds’ need to reserve a high level of liquidity – chiefly to pay benefits, but also fund capital calls from unlisted managers, maintain currency hedges and enable member switching –should not be onerous as members’ money is locked in the system for 40-plus years. The cost of keeping this liquidity at hand can be forgone opportunities. And although super funds have clubbed together to coinvest in unlisted assets, reducing the cost and illiquidity burden while increasing their control over unlisted assets, “like-minded is not like-liquid”. “Super funds are unnecessarily hamstrung to take advantage of illiquidity given that members’ money is locked in the system,” he says. “I can see no reason why we have to hold liquid cash for member investment choice [MIC] options.
We need to develop mechanisms to transfer liquidity between funds or within funds.” The liquidity window would act as a safety net and embolden funds to make further investments in unlisted assets and, if the opportunities fit, take part in nation-building infrastructure projects. “Can we participate as super funds or are we going to be spineless and hide behind MIC arrangements?” Sicilia asks. So far, the liquidity demands experienced by HOSTPLUS – even during the financial crisis – have not been severe. Its membership has an average age of 27, and fewer than 3 per cent of members moved their balance to cash during the crisis. While the fund defines an illiquid asset as one that can’t be redeemed at a fair price within 90 days, Sicilia says, ratings agencies take a more selective view, classifying only the obvious contenders of direct property, infrastructure and private equity as being illiquid.