The investment heads and executives of Australia’s largest superannuation funds including Sunsuper, First State Super and Cbus Super have moved to assure members that they have enough liquidity to meet any redemption needs. At least for now.
Sunsuper chief investment officer, Ian Patrick, said regular “fire drills” on the $75 billion fund had enabled his team to manage current market conditions, while the head of investment strategy at First State, Michael Winchester, said liquidity remained strong despite the fund’s buffers being tested. Cbus CIO, Kristian Fok, said his $56 billion fund was also “well placed” despite seeing higher levels of member switching than during the global financial crisis.
“We have plenty of liquidity,” said Patrick in an interview with Investment Magazine. “We have large portfolios of public equities, government bonds and we have cash itself. Then we own a variety of assets that we can probably liquidate in two to three days so all of that liquidity can meet the fund’s needs.”
The superannuation industry’s ability to meet redemptions has come into question after the outbreak of the coronavirus erased trillions of dollars from the value of equities alone, sending benchmarks down more than 35 per cent from the peak in February. The Australian dollar has also weakened, making currency hedging programs more costly as FX forward contracts start to settle.
Blindsided
On top of members opting to switch billions of dollars of their retirement savings into cash, the federal government’s recent decision to allow struggling Australians to tap up to $20,000 of their super has blindsided the industry and added further pressure on already stretched liquidity buffers.
A spokesman at the prudential regulator said they were closely monitoring liquidity at both an industry and individual fund level as well as the impacts of COVID-19 more broadly. Even so, superannuation has not been bound by a regulated and standardised approach to liquidity provisions, leaving the rigor of stress testing up to the discretion of individual funds.
David Bell, executive director at retirement think tank Conexus Institute and a former CIO at Mine Super, said liquidity was all about finding the “weakest link in the chain.”
“It’s about which fund has the worst combination of member inflows, lots of unlisted assets, a hyper propensity to member switching and lots of offshore hedging,” he said. “Those combined could drive a liquidity event. Some funds may get found out, but I don’t think we are there yet.”
At Sunsuper, which is in the midst of a potential merger with QSuper to become Australia’s largest superannuation fund, Patrick said his team regularly stress test the portfolio under various market conditions including a 60 per cent slump in equities and a 35 per cent exodus from members.
“That would be our ultimate stress test,” he said. “Providing we can survive that, we think we can survive (this pandemic) really well. We are very comfortable with our liquidity position today, but it’s certainly tighter than it was.” The balanced fund had 4 per cent strategic asset allocation to cash.
QSuper’s investment chief Charles Woodhouse said that they had about 20 per cent of the fund in cash and or equivalents over the entire fund – “We have been cash positive through the current market volatility.”
At First State Super, which is in the final stages of its merger with VicSuper to create a $129 billion fund, Michael Winchester said the portfolio was stress tested every six months which also includes members switching into cash. The results, he said, determined the level of their illiquid assets so as to avoid becoming a forced seller during times of stress.
“We have of course seen a draw on our liquidity buffers due to the fall in the Australian dollar and higher than usual levels of member switching,” he said in an email. “But at this stage, the level of illiquid assets in the portfolio remains within our normal range and the liquidity profile of the fund remains strong.”
First State’s balanced portfolio had about 13 per cent in cash, 35 per cent in equities and about 17 per cent in illiquid assets in February. Winchester said that while they monitored liquidity daily, they had a plan in place if the situation changed, without elaborating.
Writedowns
Cbus’s Fok said the fund was “pretty well placed from a liquidity point of view” because they went into the current crisis with a much lower allocation to unlisted investments compared to other strategic assets. He said the growth portfolio had 28 per cent invested in illiquid assets, including property, infrastructure, private equity and credit.
Like many funds including AustralianSuper, they’ve revalued their illiquid holdings which has led to double-digit write-downs on parts of the portfolio including airports, private equity and retail property.
Fok said Cbus had been selling equities during the recent rebound in the market to raise what he referred to as “11 am cash”, or same day liquidity, should members start to access their super early under the new policy measures. The investment chief expects the number of assets that will be withdrawn across the entire industry will be more than the 1 per cent of total assets that the government has predicted.
“A lot of this is more operational readiness for members wanting to access their super under the new arrangements,” Fok said in an interview. “Clearly if we underestimated how many people will draw on their super it could be dangerous for us. While we don’t expect this to occur, if every member took money under the federal scheme this financial year, we are in a position today to pay them all out.”
UniSuper’s CIO John Pearce said liquidity in his fund was stable even after $2 billion worth of members’ assets were switched into mainly cash. He said in an update to members that their balanced portfolio had about 7 per cent allocated to unlisted assets. The $85 billion fund has been using cash reserves to buy the shares that members are selling and plans to continue the strategy at least for the “foreseeable future.”
“When we conduct our stress testing, we assume a scenario where the worst three months of the global financial crisis happens in a single day,” Pearce said.
UniSuper’s balanced fund has among the highest allocation to listed equities among its peers. As of October, they had 60 percent invested in stocks and 10 per cent in property, infrastructure and private equity.
AustralianSuper
In contrast, AustralianSuper had about 22 per cent of the balanced portfolio allocated to unlisted assets prior to the selloff in markets. They have reduced the value of their unlisted assets by 7.5 per cent on average, which cut the value of the balanced portfolio by 2.2 per cent.
Chairman Don Russell said the country’s largest superannuation fund had so far seen between 2 to 3 per cent of members opting to switch into cash and or equivalents since the crisis began.
“This is well within the stress testing levels on the liquidity of the fund,” he said in an emailed response. “AustralianSuper is well-positioned and can handle the liquidity demands of the government payments scheme and member switches.”
The overall fund had about 11 per cent sitting in cash, 52 per cent in equities and around 20 percent in illiquid assets at the end of February. Russell added that the more super funds had to manage liquidity to deal with the government policy and member switching, the less the industry would be in a position to help corporates recapitalise.
Elsewhere, REST chief executive Vicki Doyle said her fund had “extensive fund assets” in cash and other liquid holdings and they were “comfortable” managing the illiquid part of the portfolio. The $57 billion fund has more than 2 million members, many of them with low-cash balances and are employed on a part-time or casual basis in the retail industry. The fund’s default core strategy has 38 per cent allocated to equities and 12 per cent in cash, according to a recent update.
HostPlus chief executive David Elia also said that liquidity was “not an issue” for the $53 billion fund, whose members working in the hospitality industry and have been among the hardest hit from government shutdowns to pubs and restaurants.
“We have $30 billion invested in listed assets,” he said in an interview. “We also have billions of dollars of cash just sitting in the bank. Liquidity is not a problem but if we have to sell shares we will.”
Around 570,000 members have account balances with less than $10,000, making up $1.2 billion of total funds. Elia added that the fund had not sold one single share since the crisis began.
Among the smaller funds, Statewide Super’s investment chief Con Michalakis said in a statement that his $10 billion fund had “downside risk scorecards” and stress testing, which included rebalancing and member switching reports.
“At this point in time, this is all within our stress-test scenarios,” he said, before noting that things could change very quickly in the current environment. The balanced fund had 7.1 per cent allocation to cash, according to the latest publicly available information.
Hesta, the $57 billion industry fund for workers in the health sector, declined to comment on liquidity for this story.
