While the outbreak of the coronavirus and policy measures around early access to superannuation have revealed cracks in the management of industry funds, it has also raised questions about the research process behind approved product lists (APL) that recommend them.
As the issues for industry funds play out, retail clients are expected to start questioning their financial adviser on why they didn’t see the red flags. This is also expected to trigger a review of how the entire advice ecosystem, which includes licensees, investment committees and research teams, assess funds.
“Every investment committee and external investment firm would reconsider their research process in light of what’s happening with industry funds,” said Nathan Jacobsen, chief of mid-sized licensee firm, Paragem.
Industry funds have outperformed retail funds for years, largely due to their dependence on the ‘illiquidity premium’; that is, the reward for investing in lumpy unlisted assets like property, infrastructure and private equity. But what seemed like savvy long-term investing had a small, but critical element of risk.
Government measures that allow some Australians to tap part of their super early has ignited concern among the retail community that the funds won’t have enough cash to meet redemptions or will need to sell assets at distressed prices to do so. Industry funds have added to concern by only marking down a fraction of the value of the unlisted assets, according to some fund researchers, which has brought into play the risk that fund unit pricing is not equitable.
Miriam Herold, head of research at Centrepoint – one of the ten largest dealer group owners in the country – said they put industry funds onto their APL last year, on the advice of Lonsec and its sister research company, SuperRatings.
Like many licensees, Herold said Centrepoint will be guided by their researcher in terms of future adjustments after recent policy changes that “no one predicted”. She pointed out that the risks among industry funds had not yet materialised, so it was premature to make sweeping changes to Centrepoint’s APLs right now.
Challenge for researchers
“It’s difficult to have a view on how to treat these funds at the moment,” Herold said.
She added that while the crisis would provide the Australian Prudential Regulatory Authority with an opportunity to consider its fund guidance, it would also be hampered in the same way that researchers are. “There has been no standard for comparison and classification of assets,” she added.
Haphazard and misleading labelling of assets is said to be a core issue for the industry, with researchers constantly hampered by labels used by both industry and retail funds to manipulate performance. Veronika Klaus, head of investment consulting at Lonsec, said “classification” of assets was one of the “biggest issues”.
“All we can do is make the clients aware of the differences,” Klaus said. “Or at least try to show them the real underlying asset allocation.”
Klaus said Lonsec – whose research is used by a large slice of the licensee community to formulate APLs – had not been blind to the illiquidity issue. “It’s not anything that gets ignored,” she added.
Libby Newman, who heads up the active manager research at Lonsec, said the researcher conducted an “annual cycle of visitation” to review their processes. This year’s review will now include an autopsy of the risks to industry funds that have presented themselves since the outbreak of the virus.
“It’s been an interesting litmus test,” she said. “We’re always looking to evolve the process, especially after the experience we had in the global financial crisis.”
Dan Miles, the founder of asset manager and research house Innova, said any changes that researchers, licensees and advisers make to improve the process around fund selection should be matched by a willingness of industry funds to pick up their own game by providing clarity and standardisation.
He said he takes particular umbrage with the way funds have warped unit pricing, by skewing the values of their illiquid unlisted assets.
“I wouldn’t be surprised if funds were going out to valuers and shopping around to get the best valuation they can,” he said, before adding that some of the writedowns to unlisted assets looked “a bit generous”.
Transparency is a key issue with funds, according to Miles. He added that when Innova researches funds, the level of detail that they get was “very, very different” across the board.
“Some are very open and some are not,” he said. “You have to read the results and interpolate and decide what’s more accurate.”