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Financial advisers question Hostplus returns

Critics question why Hostplus was crowned Australia’s best balanced superannuation fund over one and 10 years, saying the rankings rely on unpublished valuations of unlisted assets akin to “marking your own homework.”

Only three of more than 70 MySuper funds – the balanced options defaulted into by about 14 million workers – made money for members in the year ended June 30, says a SuperRatings report published by The Australian Financial Review on Friday.

Members may never know the true value of unlisted assets invested in by super funds, says Stockspot founder Chris Brycki. Kim Irving

Hostplus, the $82 billion hospitality industry super fund, topped the ranking with a return in its balanced option of 1.6 per cent. It also retained its spot as market leader over a 10-year outlook, with an average return of 9.7 per cent a year over the period.

Sam Sicilia, the fund’s chief investment officer, attributed the result in part to investments in unlisted assets, especially infrastructure projects such as airports, bridges and seaports that he said have “monopolistic” and “inflation beating” characteristics that protected the portfolio against the global sell-off in bond and equity markets.

But some financial advisers, who under law are the only individuals who can recommend a consumer invest in a particular super fund, have questioned the role played by the valuations of these unlisted assets, which go on behind closed doors and are not released to members or the public.

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Chris Brycki, founder of online investment adviser Stockspot and a funds management market analyst, said members were “completely in the dark” about funds’ unlisted asset valuations.

“Many funds never reveal either the frequency or methodology of the so-called independent valuations,” said Mr Brycki.

“The problem here is that it’s highly questionable whether Hostplus have revalued all of their overweight unlisted assets ... to reflect current public market valuations as of 30 June 2022.

“It’s the same as someone marking their own homework and then bragging about being top of the class.”

If Hostplus is overvaluing its private equity investments, which make up 8 per cent of the fund, then it could have an “overstated” impact on balanced returns, he added.

“Hostplus private equity and other unlisted investments should have dropped by at least the same quantum as similar assets listed on public markets. How much have Hostplus written their values down by this year? Unfortunately, members and the general public will likely never know.”

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Expert opinion

In May 2020, research house Lonsec (which owns SuperRatings) downgraded Hostplus’ balanced option from “recommended” to “investment grade”. The Lonsec review found the fund suffered from “high, structural allocation to illiquid assets”, “greater liquidity risks” and “management costs at the higher end”.

It also claimed Hostplus had redefined its definition of “illiquid assets”, allowing it to increase its exposure to unlisted investments and leading to some critics questioning whether the fund was “gaming” the league tables.

Mr Sicilia said he was familiar with the criticism, and had occasionally been “attacked” by some on Twitter, claiming the fund had too much exposure to unlisted and illiquid assets (meaning they are difficult or time-consuming to sell).

But he was adamant that unlisted investments were critical in defending member savings against the volatility in public sharemarkets. “I don’t care about liquidity,” he told the Financial Review, adding that he did care about “liquidity management”.

“I don’t want the listed version,” he said. “I want the unlisted version, with the expert valuation.”

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Mr Sicilia said experts were better at valuing assets than the market and that the fund accepted their expert opinion. He defended the decision not to make those expert opinions public, saying they were commercially confidential.

“Who does it benefit to release that information? Certainly not members – only prospective buyers of that asset.”

He said most members did not expect “that level of transparency” and are pleased to see their fund consistently at the top of the leaderboard.

Alternative alpha

As the superannuation system matures, funds need to remain focused on how they are valuing their assets, said SuperRatings executive director Kirby Rappell.

The ratings firm receives returns from funds and monitors fund websites, and reviews information against public disclosures and its own data.

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“As part of our ratings review process, we seek to build an appropriate understanding of funds valuation processes and oversight,” said Mr Rappell.

He said the superannuation sector has adapted “materially” to changing market conditions in the last 30 years, and exposure to alternative assets has provided benefit to members’ accounts.

“No doubt as the system continues to evolve, making sure the oversight around listed assets valuations is always appropriate will no doubt be a focal point as funds grow,” he said. “It’s always going to be a challenge finding the right balance but on a return basis, over the short and the long term ... those assets have been a significant contributor to people’s savings.”

Wealth adviser Steve Blizard of Roxburgh Securities in Perth said he did not “trust industry funds” when it came to closed-door valuations. Mr Blizard, chairman of the superannuation policy committee of the WA Liberal Party, said league tables can be misleading as they rely on internal metrics and data.

He said some consumers would be better off investing in a range of managed funds via a self-managed super fund or customisable portfolio via a wealth platform like Hub24 or Netwealth.

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A portfolio split across Vanguard’s international shares fund, Ausbil’s micro-cap shares fund, Macquarie’s Australian shares fund, Charter Hall’s Direct Office wholesale fund, a La Trobe 12-month term account and the Trilogy Monthly Income Trust would have returned 14.5 per cent over the 10 years to June 2022, beating the top MySuper funds, he said.

But Mr Sicilia said this kind of analysis mischaracterised the demographics of Hostplus’ member base, which has an average age of 37.

“Their clients might need access to cash to fund private school fees or a hip replacement,” he said of financial adviser criticisms about liquidity. “But what our members need is as much money as possible when they retire.”

Aleks Vickovich is the wealth editor. He writes about financial advice, funds management, superannuation and banking, with a special interest in the next generation of investors. Connect with Aleks on Twitter. Email Aleks at aleks.vickovich@afr.com
Lucy Dean writes about wealth management and personal finance, based in The Australian Financial Review's Sydney newsroom. Connect with Lucy on Twitter. Email Lucy at l.dean@afr.com

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