Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Crisis, what crisis? Industry funds cash at record levels
by Greg Bright
The cash holdings of big super funds outweigh any projected drawdowns because of the Government’s $20,000 early-release program for disadvantaged members by a big factor, according to figures compiled by Rainmaker Information. In fact, super funds have nearly $400 billion in ‘allocated’ cash and even more in ‘operational’ cash held mainly by the big not for-profits.
The Rainmaker figures (see separate report by Alex Dunnin this edition) show that there is about $946 billion in cash and liquid bonds in the super system. Josh Frydenberg, the Federal Treasurer, said that the Treasury, his department, projected $27 billion in drawdowns. He said that this was slightly less than one per cent of super assets. Others have predicted more, albeit without hard evidence. A lot of younger members, for instance, who are considered the most likely to take advantage of the $20,000 withdrawal proposal, don’t have that much in their super accounts. As of last Friday, April 17, 880,000 members had applied for the first tranche of $10,000 each, totalling $8.88 billion.
Of the total cash and liquids held by super funds, Rainmaker estimates that $397 billion is in cash and $549 billion is in liquid bonds. Not-for-profit super funds hold an estimated 51 per cent of that total in cash and liquid bonds. Those cash holdings of all major super funds likely to experience early drawdowns, because of the early-access program for unemployed and others whose income has been depleted, appear to be more than adequate before any quick sale of unlisted assets is likely to be necessary.
It should be pointed out that the big end of the listed market is not a lot different, in terms of liquidity, to the unlisted market. If you are an $80-100 billion-plus fund, for instance, try selling your 4-5 per cent of a bank or other listed financial services company in a hurry.
And, at least, the private markets have a developed secondaries industry segment to service just these moments, providing added liquidity. According to Scott Riedel, a partner at Allen Partners, which represents US-based secondaries buyer Melting Point Solutions, the current activity is likely to include a lot of investors looking to get liquidity from their alternative assets. (See recent article).
He believes it will deepen the secondaries market even further, which should further improve prices for sellers. “This is the perfect time for cashed-up investors and the secondaries market managers in the space to show their worth,” he said recently.
Patrick Liddy, the principal of consulting firm MSI Group, says that super funds have a lot more cash at their disposal, at any given time, than the public figures suggest. “The public see the strategic allocation to cash. They don’t see the short-term tactical allocations and they certainly don’t see what we call ‘operational cash’.”
He says that with a previous company, IE Group, he did 32 “diagnostics” of the cash positions of big super funds over an 18-month period. IE Group offered auction-style cash management services for big funds. “Because of their strong cashflows, the fact that they had multiple bank accounts, and the fact that contributions came in through different platforms and at different speeds, the level of cash was invariably a lot higher than anyone thought. Sometimes, even the CFO or COO didn’t have much of a handle on the amount of cash in the fund.”
He said: “The ‘operational cash’ is the cash that is waiting for settlements of equities, foreign exchange, fixed interest or other tradable commodities. This cash is the grease that allows the system’s engine to operate and it is considerable.”
Liddy is critical of the Government’s decision to grant access to super in this period as it represents an unintended consequence to the Australian economy. He says: “During the GFC, the institutional superannuation funds were a great buffer to the system. Their bulk provided much needed liquidity and stability during a period of economic uncertainty, much like today. To lessen leverage during this period is economically unsound… In the current environment, one wonders what impact this will have on the ‘franking credits fraternity’ who voted heavily for the Coalition in the last election.”
Let’s have a look at Andrew Bragg, the Melbourne-born NSW representative federal senator for the Liberal Party. He is a 36-year-old accountant who was first employed by Ernst & Young (now EY) in 2008. He was elected to the Senate last year. And he is clearly on the make.
Last September may well prove to be the highlight of his political career. He became chair of the Senate Select Committee for ‘Financial Technology and Regulatory Technology’. He has been the most vocal of Australian Government critics of profit-for-member funds since he became a senator. Before gaining senate pre-selection he was a policy manager at the Financial Services Council funds management and insurance lobby group, followed by short stints at the Menzies Research Centre and then as executive director of the Business Council of Australia.
To put his age in perspective, Senator Bragg was two years old when the birth of modern super was announced with the ‘Accord’ in 1986, which was the deal done by the Hawke-Keating Government and the ACTU to forgo a claim for a general wage rise in return for workers, via their employers, putting 3 per cent into super. That’s when the industry fund movement got started. Senator Bragg was 10 years old when the Superannuation Guarantee, providing for universal super, was implemented. He is unlikely to have much of an historical perspective on Australia’s super system.
He recently seized on one of the two main reasons that industry funds have outperformed their bank-owned rivals for a long period, which is that they have tended to have a higher proportion of unlisted assets in their portfolios. The other reason they have outperformed, which he has neglected to mention in his frequent press releases (he doesn’t actually get much airtime in the Senate itself) is: industry funds don’t aim to make profits for themselves. They may be criticised for being overweight in management numbers, or lethargic, or any number of other reasons, just as other member-owned bodies can be criticised. But they can never be criticised for being greedy, let alone corrupt as organisations. However you find to criticise them, you could not do so for having a dishonest culture. There are no current class actions against any profit-for-member super funds, unlike certain commercial institutions.
But, let’s try to deal with try-hards like the junior senator from NSW in a rational manner. Did I say Senator Bragg was on the make? I received this email from him, along with, no doubt, thousands of other people on the electoral roll, last Friday, April 17. My first thought was that I really do need to look at my data security. My second thought was: this is not Bragg’s portfolio. In fact, Bragg doesn’t have a portfolio. That’s why he’s called a junior senator. What is he trying to do?
According to Alex Dunnin, Rainmaker director and head of research, there is a lot more liquidity in the system than most people realise. “Whenever we’ve done an analysis like this, there is always more liquidity in the system than estimated. In this instance, he says, a member can’t withdraw $20,000 from his or her account unless there is at least $20,000 in that account.”
With respect to Senator Bragg, Dunnin, who lives on the outskirts of Canberra, said: “I thought during the bushfires [over summer] that he was great, but on this issue he is just mischief making… To suddenly say that funds should have been prepared for this is disingenuous.”
Among Bragg’s criticisms of industry funds (but not government or big corporate funds for whatever reason) is a question mark over the valuation principles and techniques used with their infrastructure assets. As we know, those investments, unlike listed stocks, are not valued on a daily basis – usually every six months, sometimes quarterly – which is a factor in the premium they offer investors. That’s why it’s called ‘the liquidity premium’. But to question the valuations themselves has drawn the ire of super fund executives.
As a counter to this, Graeme Russell, who is scheduled to retire as chief executive of Media Super on July 1(see separate report this edition), offers up the example of the infrastructure investors in Melbourne Airport. They are: AMP (27.32 per cent), IFM Investors (25.17 per cent), the Future Fund (20.34 per cent) SAS Trustee (NSW Government’s State Super invested via TCorp – 18.47 per cent) and Utilities of Australia (8.70 per cent). The 33.87 per cent controlled by non-government not-for-profit funds and the 66.13 per cent controlled by either the Federal Government, NSW Government or commercial funds, use the same calculations.
“So, if government members criticise industry funds’ valuation of unlisted assets like this, they’re criticising their own Future Fund, the NSW Government funds and AMP in the same breath,” Russell says.
