28/01/2020
In our E-News article of November 2018 entitled ‘Do Industry super fund investors know what they’re investing in?’, we highlighted the dubious practice by many Industry Super funds of mis-characterising the ‘Defensive’ and ‘Growth’ characteristics of the assets held within their portfolios.
The widespread practice of calling a Growth asset Defensive seeks to lower the perceived risk associated with a portfolio while enhancing the overall return. This allows funds that do this to ‘game’ the league tables of returns for use as a slick marketing tool.
In our article we highlighted the Hostplus Balanced fund (among others) as being the most impacted by such a practice. Whilst Hostplus market this fund as ‘Balanced’ it is in fact a ‘High Growth’ fund.
The banking and superannuation regulator APRA (Australian Prudential Regulatory Authority) recently (though quite belatedly in APC’s opinion) exposed Industry Super for exactly this practice and held out Hostplus as the most egregious.
APRA’s ‘Heatmap’ assessed Hotplus’ flagship Balanced MySuper product as having a staggering 93% allocation to Growth assets! As our article in November 2018 suggested it is very doubtful indeed that many of the investors in such a product would have truly understood the risk profile of the investment.
It is clear that for anybody to assess superannuation (or any investment for that matter) they cannot just look at returns in isolation. Given APRA still have not provided a strict guideline on what a Defensive and Growth asset actually is, funds will continue to apply inconsistent and often misleading characterisations of their own.
In our E-News article of February 2019 entitled “Industry Super Funds – illiquid asset valuations called into question”, we highlighted the conflicted arrangement of how Industry Super funds value their own unlisted assets. APRA has now also called into question how these assets are characterised by Industry Super. These assets are almost always Direct Property.
Industry Super’s argument seems to be that if a property is owned by a listed entity (for example a Real Estate Investment Trust – REIT- listed on a stock exchange) then it should be characterised largely as ‘Growth’ whereas if it is owned by an unlisted entity (for example the ISPT – Industry Super Fund Property Trust) then it should be largely considered a Defensive asset. However the asset itself, in both cases a direct property, would be identical.
It simply does not make sense for the characteristic of an asset to be determined by how it is owned and not by the asset itself. Yet this is the central defence by Industry Super of how it makes these asset characterisation decisions.
As we demonstrated in our E-News article of November 2018 entitled ‘Do Industry super fund investors know what they’re investing in?’, when correctly characterised, the Hostplus fund does not outperform. APRA’s ‘Heatmap’ showed infact that the Hostplus MySuper product underperformed APRA’s own ‘simple reference portfolio’. APC continues to be of the view that until such time that APRA and ASIC (Australian Securities and Investment Commission) publish a set of guidelines that all industry participants MUST adhere to, the issue of asset mis-characterisation and therefore a lack of consumer protection will continue to be a problem.