Since the outbreak of the coronavirus first roiled financial markets, superannuation funds have reduced the value of infrastructure and property assets by an average 5 to 10 per cent, prompting criticism that the markdowns are not nearly enough.

Consultants including KPMG and Willis Towers Watson say those initial write-downs are just the start as the full impact from global government restrictions to contain the pandemic become known. Some assets such as toll roads and airports could potentially take an even bigger hit than during the global financial crisis.

“At no point during the GFC did we have toll road traffic volumes down 40 to 50 per cent like we’ve seen this time around,” said Sean Collins, head of valuations at KPMG in an interview with Investment Magazine from Sydney. “I think the spread of the problem is much greater and has a much broader impact to what we have seen previously.”

Just as billions of dollars were erased from equity markets in March, sending benchmarks tumbling more than 30 per cent from their peak, the financial impact on unlisted assets started to trickle out from the superannuation industry.

AustralianSuper disclosed on March 24 that the value of its unlisted assets had taken an average 7.5 per cent hit, while UniSuper said that it had reduced the value of its infrastructure assets 6 per cent and 10 per cent for property. Hostplus, which had more than 40 per cent of its portfolio allocated to illiquid assets before the crisis hit, has devalued their real assets between 7.5 and 10 per cent.

All eyes on June

Collins, who has worked at KPMG for more than 20 years, said the 5 to 10 per cent range “felt about right” at the time when the valuations were conducted in March, given people were still talking about a V-shaped economic recovery.

He said the most important valuation cycle for the super industry and its members will be the three-month period to June 30, by which time valuers will have more information and a “better sense of the recovery profile and the timing of some sort of return to normality.”

“I don’t disagree with the premise that there is potential for further writedowns to asset values as we get more clarity of what the impact from COVID19 and on businesses will be,” Collins said. “The initial writedowns were a first step.”

KPMG wrote in a separate report that the overall shape of the recovery, whether it be an “optimistic ‘V’ shape, a more realistic ‘U’ shape or a more concerning ‘L’ shape” would be key to determining the overall value impact on investments.

Even the Reserve bank of Australia’s governor Philip Lowe said earlier this week that the numbers now being forecast for the economy, at least in the short term, were “inconceivable just a month or two ago.” The central bank now expects gross domestic product to drop 10 per cent in the June quarter.

Nick Kelly, senior investment consultant at Willis Towers Watson, said the challenge for asset owners was trying to appraise a particular asset when transaction volumes had fallen significantly. He also said the hurdle was even bigger for the smaller to medium-sized super funds who don’t own the assets directly, placing the onus on the asset managers they invest with to provide the right valuation.

“It’s fair to say that we will see writedowns on further assets in the months to come,” Kelly said in an interview. “Asset owners are pushing their managers to get more frequent valuations. There is a balance in that every week the cost of that has to be borne by the end members.”

More pain

Kelly said up until now, the big industry funds had taken the view to not devalue the illiquid part of the portfolio to the same degree as their listed market which had seen some companies such as Sydney Airport sink more than 30 per cent since February 1.

“There is likely to be more pain to come for some unlisted assets, “ he added. “Airports and toll roads are going to struggle a lot along with retail. That sector was already facing significant structural challenges and then you add the cyclical challenge with the pandemic.”

Garry Mulcahy, group executive and head of asset management for MLC Wealth, said the conundrum for the entire superannuation industry was deciding when to value an asset during heightened periods of volatility to ensure the principle of member equity is maintained.

“When you are in volatile times, and potentially your clients are transacting more, member equity issues which are in front of you every day suddenly become more sensitive and in focus,” he said in an interview.

Valuations aside, the MLC executive also said that a “far trickier” issue for trustees was to figure out how to satisfy any liquidity requirement, while at the same time keep the asset allocation the same for its members.

Sarah Jones is the deputy editor of Investment Magazine. She previously worked for Bloomberg News in London for more than 12 years covering equity markets and global asset management. Prior to moving to the UK, she worked for Australian Associated Press in Sydney covering economics and monetary policy.
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