Unlisted asset valuations fairer than listed, research firm says

Contrary to some speculation around super funds and their liquidity, super research house Chant West has argued that the valuations of unlisted assets in funds are fairer than their listed counterparts, as funds continued to fall in performance through March.

Industry commentary has pointed to unlisted asset values in super funds being artificially high during the market downturn, as they are valued less frequently than their listed counterparts. 

The concerns have risen as the super funds commence paying out their members’ early super release, with many speculating about funds’ liquidity and their unlisted investments. 

But Chant West has said that unlisted valuations are better representation of fair value than listed valuations, which are often swayed by investor sentiment. 

“In the current market crisis, many super funds invested in unlisted assets (both not-for-profit and retail) are acting responsibly by proactively conducting out-of-cycle revaluations – in other words bringing forward valuations for parts of their portfolios,” Chant West stated.

“These revaluations have typically resulted in write-downs of between 6 per cent and 10 per cent for property and infrastructure and up to 15 per cent for private equity. The reason those revaluations are not as dramatic as we’ve seen in listed markets is that the process is unemotional.

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“To arrive at a value for an unlisted property or infrastructure asset, for example, independent professional valuers apply well-proven methodologies based (among other things) on projected cash flows, demographic modelling, structural changes in industries and appropriate discount rates for future income flows. Unlike the share market, fear and greed play no part in setting prices.”

A number of funds and investment managers including AustralianSuper, Hostplus, REST, First State Super, IFM Investors and LGIAsuper have already taken to devaluing their unlisted assets. Some funds are still yet to take the plunge, but Chant West expects further revaluations in the coming months.

Large losses over February and March had a flow-on effect for the short-term performances of the super funds. 

New data from Chant West’s Multi-Manager Survey showed the median performance for a balanced option saw a decline in performance of 6.8 per cent during March, while the growth option copped a decrease of 9 per cent. High growth and all growth saw falls of 10.8 per cent and 12.9 per cent while the conservative option shrank by 4.6 per cent.

But Chant West noted despite all the losses, all of the risk categories have met their typical return objectives over seven and 10 years. 

Since the market meltdown first occurred in February, share markets have recouped some of their recent losses. Australian and international shares were down 27 per cent and 20 per cent respectively from the end of January to the end of March, while Chant West showed the median superannuation growth fund was shown to have an 11.7 per cent loss. 

Chant West senior investment research manager Mano Mohankumar noted in April, Australian and international shares are up 8.3 per cent and 8.9 per cent for the month to date. 

“Our estimated return for April to date for the median growth funds in currently 3.8 per cent,” Mr Mohankumar said. 

“That’s a positive sign, but we’re far from out of the woods. While markets invariably move ahead of economies, this rebound may well be a relief rally – that is, relief that the spread of the virus in developed countries is slowing so that, in health terms, the worst may be over. 

“In economic terms, the extent of the damage is still the great unknown and we may well see the pessimistic selling resume when more hard data is released over the coming months.”

He added with business and consumer confidence collapsed and a global recession being certain, the question is what pattern the downturn and recovery will take.

“One thing we do know from history is that markets bounce back much quicker than the economies,” Mr Mohankumar said.

“In other words they anticipate what will happen six or 12 months ahead. Whether this recovery turns out to be quick or slow, we should expect heightened volatility as investors react to good or bad news.”

Meanwhile the life cycle products, where members are allocated to an age-based option that is de-risked as they become older, were said to be behaving as expected.

The current setback has reversed the recent pattern of strong returns from growth assets, leading to options with higher allocations in growth to perform worse over the short-term. 

Chant West found over longer periods the higher-risk options, which cover younger cohorts born in the 1960s or later, have performed slightly better, although not as well as the MySuper Growth options provided by retail funds. 

Taking the previous 27 full years into account, including the current financial year to date, the annualised return for a median growth fund is 7.9 per cent, according to the researcher’s data. 

The annual CPI (consumer price index) increase over the same period is 2.4 per cent, giving a real return of 5.5 per cent per annum, well above the typical 3.5 per cent target. 

“Even looking at the past 20 years, super funds have returned 6.2 per cent per annum, which is in line with the typical return objective,” Chant West’s analysis stated. 

“Let’s not forget that the 20-year period now includes three share market downturns – the ‘tech wreck’ in 2001-2003, the GFC in 2007-2009 and now COVID-19.

“It seems probable, but not certain, that the current financial year will produce a negative return. If so, that would be the fourth negative year in 28, an average of one every seven years. The typical risk objective for growth funds is no more than one negative year in five, so even if this year is negative it will still be well within the expected risk parameters.”

Unlisted asset valuations fairer than listed, research firm says
Unlisted asset valuations fairer than listed
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