Australia’s major super funds are stepping up their processes for valuing their unlisted assets, setting up separate valuations teams as they come under more scrutiny from APRA to improve industry standards on valuations.
The funds are also seeking more details from prudential regulator APRA on how the regulator intends to approach valuations depending on the size of the fund.
Super funds have until March 17 to make their submissions to APRA on the draft prudential guidelines for the new standard, SPG 530, which has been in effect from January this year.
The new standard, which uses a more principles-based approach to valuations, putting the onus on trustees to ensure that their valuations are up to date and responsive to any market shocks, rather than a “tick the box” approach.
KPMG partner specialising in superannuation Platon Chris says the move to improve reporting around the valuation of unlisted assets was “a good thing for the industry and is in line with some of the standards we are seeing globally”.
“The standard is quite clear about what APRA’s expectations are, but the practice guide is giving them more of an idea how they can implement it. There are still elements open to interpretation.”
The size of super funds’ investment in unlisted assets warrants the additional attention says David Haynes, senior policy manager at Australian Institute of Superannuation Trustees.
“The amount of unlisted assets being held by superannuation funds these days, from office buildings to toll roads, airports and ports, and their complexities, it is inevitable that there should be more scrutiny around reporting and valuations.”
Frequency of valuation
The regulator suggests assets should be revalued as often as quarterly if appropriate, but funds are keen to get more examples or feedback on how the new approach could operate and whether its approach may change depending on the size of the fund.
KPMG partner – valuations Joanne Lupton says the new APRA standard was generating a new consideration around the frequency of valuation of assets.
She says most funds did semi-annual valuations of their unlisted assets, usually in June and December “but there have been some recent discussions for some funds to look at quarterly valuations.”
In compliance
Cbus CIO Kristian Fok says the $75 billion fund’s valuation governance and practices are in compliant with APRA requirements
He says the fund has a valuation committee which is run separately from people managing assets and also had “frequent revaluation cycles that are typically at least quarterly, and independent valuers are used and periodically rotated”.
“With equity front of mind, Cbus ran out of cycle valuation reviews early on in the Covid-19 period and we promptly wrote down our very small exposure to Russian assets as the Ukraine conflict was taking shape for example.”
The fund moved last year to sell off its art collection – a collection of 310 works, including those from major Australian artists such as Arthur Streeton, Sidney Nolan, Russell Drysdale, Margaret Preston, Jeffrey Smart and Fred Williams.
“Art is a complex asset class to value,” Fok says. “The recent sale of our collection for above valuation demonstrates the diligent approach we take to this issue.”
Australian Retirement Trust has around a third of its $240 billion asset book invested in unlisted assets according to CIO Ian Patrick. “Our approach to dealing with valuation of unlisted assets is rigorous and robust. If the market moves significantly, it triggers us to review valuations for any updates out of cycle to ensure accuracy,” he says.
He cites an example of revaluing its private equity portfolio in June last year, three months after completing a regular valuation as the market moved.
The $94 billion hospitality industry fund Hostplus, which has some 40 per cent of the assets in its default MySuper balanced option, its most popular product, says its private market and unlisted asset investments were externally valued by independent expert valuers, “according to long-established processes and protocols”.
In a recent interview with Investment Magazine, Hostplus chief investment officer Sam Sicilia said the fund’s young demographic was a factor in its investment decision making, making it easier to have a greater exposure to unlisted assets than other funds which had a demographic closer to retirement.
Too much information
KPMG’s Platon warns however there could be dangers in requiring too much detail around valuations.
“Stricter processes will require increased cost. You don’t want to make it so complicated and so expensive that super funds think twice about investing in these assets.”
But unlisted assets are still very much an attractive asset class for super funds to invest in, he says.
Canadian pension funds, which are larger than the Australian funds, had moved to set up separate teams which oversaw valuation of assets and compliance to their investment teams.
This was now starting to occur amongst the larger Australian super funds.
“The Canadian funds have quite separate teams managing valuation and compliance from their invest teams. We are seeing Australian funds putting some of those procedures in place,” he says.
Regarding valuations of unlisted assets for superannuation funds it is interesting that there is very little dispute about the valuations of publicly traded assets.
The closing price of a security on a stock exchange is accepted as a “fair valuation” of an asset to then be used for unit transactions on the following day. This is despite:
• there being no expectation that all the publicly traded assets in a fund could actually be traded at the specified closing prices or that new assets could be bought at those prices; and
• the fact that prices will almost certainly have moved again by the time the relevant unit transactions take place.
In addition, the closing price itself is an end-of-day calculation after a trading day that can see wild fluctuations in prices. During the GFC period, for example, I recall the value of the US S&P500 changing by around 10% in a 20 minute period. What would make, for example, a 4 pm valuation any fairer than a 3:40 pm valuation for transactions to be completed no sooner than close of business on the following day? The closing price could also be significantly different to the volume weighted price at which securities have traded during the day. What makes the closing price a better estimate of a “fair value” than other metrics such as a volume-weighted average?
Closing valuations of listed assets are reasonably taken as fair valuations. However, they almost certainly do not represent the value at which the entire holding of an asset could be traded at the relevant close of business, let alone at the time when unit transactions based on those valuations are being implemented.
In contrast, valuers of unlisted assets need to consider the price at which an entire asset could be traded. To derive a fair valuation on an unlisted asset, the valuer has access to a mass of inside data on revenue and expenses that would not be available to analysts of listed assets. They can also look at trades of comparable assets. Why would such a valuation be seen as an inferior estimate of “fair value” to a relatively random number that is calculated at the end of a trading day?
Based on my experience the main criticism of valuers of unlisted assets is that they tend to be too conservative, so that realisations of assets are typically completed at premiums to valuations. However, in the context of deriving a fair valuation this conservatism appears reasonable.