Industry Super Funds Vs the Equity Markets
We often get questions in a down market relating to industry super funds boasting positive performances and if this is all smoke and mirrors. Where should you be, an industry fund or in listed equities? This is a complex answer but in short: it shouldn’t matter.
At the time of writing this article the 12month performances in some of our major world indexes are as follows:
• ASX200 – (6,91%)
• Nasdaq – (12.94%)
• Hang Seng (24.82%)
• SPDR/Australian Bonds – (12.48%)
It would make sense then that a Growth/Balanced industry fund would be showing negative returns of approximately -10%. If they in fact reported a positive performance you would have to be scratching your head. The reason has been alluded to in some recently published articles from various sources including the Australian Financial Review and Michael West Media.
The main points of these articles are:
• Industry super holds hold a large portion of their assets in unlisted investments. These might be private equity or large single assets such as airports.
• These assets are not valued daily, monthly or even quarterly in some cases.
• Valuations of assets from valuers can be overwritten by the trustee of the fund. “It’s like marking your own homework and bragging you came top of the class”.
• The unit prices in these funds are wildly overvalued, meaning that:
anyone investing in these funds at this point are buying at an overinflated price and likely to suffer with low returns when the market recovers
if you sold out of these funds at this point you are benefiting but potentially leaving those behind at a disadvantage
The above points may make this fund performance reporting seem like smoke and mirrors but perhaps the unlisted asset values have not gone done. In the instance of Canva, the company featured in both of the references articles, it does seem like there is a big variance in the true and reflected valuation. However, judging by the below graph S&P500 company profit estimates are still very strong and this suggests that company valuations should not have been reduced and the flaw is in the market.
So where would you rather be right now? This article has perhaps added more complexity to your existing thoughts, but our view is that it doesn’t matter. Investments should always be held with a medium to long term view and over this period market valuations and industry fund valuations will more closely align. Just be careful that you are comparing apples with apples when looking at either a short term high or low. The key is appropriate asset allocation and quality within your portfolios.
