Australia to introduce unlisted superfund benchmarks for infra

After being heavily criticised for proposing to use listed benchmarks for unlisted assets, the government has chosen MSCI’s unlisted index as a measuring stick, leading to a new round of criticism

The Australian government has backtracked on plans to compare superannuation funds’ unlisted investment performance with listed benchmarks, instead carving out infrastructure and real estate to compare them with unlisted benchmarks.

Unlisted infrastructure and unlisted property will now be included as separate asset classes in the performance tests that will be introduced under the Your Future, Your Super reforms, alongside their listed counterparts.

But this is not necessarily the end of the story, with multiple superfund infrastructure portfolio managers expressing concerns and uncertainty about the unlisted index that has been chosen: the MSCI Australia Quarterly Private Infrastructure Index (Unfrozen).

The superannuation industry had previously expressed concern that comparing unlisted assets to a listed benchmark would disincentivise them from investing in unlisted assets, and could even lead some to exit the asset classes altogether.

The MSCI index contains seven domestic Australian infrastructure funds and five international funds, which together held 137 investments worth A$34.5 billion ($26.5 billion; €21.8 billion) as of 31 March 2021.

The index comprises, among other undisclosed funds: AMP Capital’s Community Infrastructure Fund and Diversified Infrastructure Trust; IFM InvestorsAustralian Infrastructure Fund and Global Infrastructure Fund; Infrastructure Capital Group’s Energy Infrastructure Trust; Palisade Investment PartnersAustralian Social Infrastructure Fund and Diversified Infrastructure Fund; and the Morrison & Co-managed Utilities Trust of

The government’s Your Future, Your Super reforms are designed to weed out underperforming funds in Australia’s superannuation industry, resulting in lower fees and better returns for members.

The reforms will see an annual performance test carried out by the Australian Prudential Regulation Authority. A superfund product will pass its performance test if its actual return (the return after fees and expenses) beats the benchmark return (which includes a benchmark administration fee).

The performance test will be conducted over a rolling eight-year ‘lookback’ period. Any superfund that underperforms against its benchmark by more than 50 basis points for more than two years after the test commences will no longer be able to accept new members.

Industry watchers expect this to further accelerate the rate of consolidation among superfunds, as underperforming funds merge with larger, better-performing funds.

‘More accountability’…

“An array of benchmarks has been selected across investment classes, sometimes comprised of multiple indexes, but they all have the same aim: to understand and identify a benchmark of performance that you’d expect [to see] when you invest in that asset class,” explains Mitchell McCallum, executive director, real estate client coverage ANZ at MSCI, the firm behind the unlisted indices that the Australian government has opted to

McCallum says he was pleased that the government had listened to the industry and altered the benchmarks. “This could have had a disastrous impact on unlisted infrastructure and real estate, because superfunds might simply have taken their money out if there was a chance they would lose members due to underperformance against a non-comparable benchmark,” he says.

“One of the main reasons superannuation funds invest in unlisted [assets] is to offset the volatility of listed markets. Take away the return aspect – it provides a positive contribution to your risk when you’re looking at correlation across your whole portfolio.”

… And more criticism

But concerns about the appropriateness of the MSCI index for benchmarking infrastructure returns have been expressed to Infrastructure Investor in the weeks since the draft reform bill was published in late April.

In particular, concerns have fallen into a three main areas: that the index is unfrozen, meaning that returns can change retrospectively if new funds decide to contribute historical data; that it is not representative of most Australian superfunds’ infrastructure portfolios, as it is too heavily weighted to transport and does not give enough coverage to asset types such as renewables; and that it could exhibit strong survivorship bias, with the index only including funds that choose to work with MSCI and submit their data.

The latter point was raised by one infrastructure portfolio manager at a top 20 industry superfund, who tells Infrastructure Investor: “The index does not include any funds managed by Macquarie Infrastructure and Real Assets, Brookfield Asset Management or Global Infrastructure Partners. The information going into the index depends on the fund managers, and those big three global managers are not in it.”

In addition, they say, infrastructure investing is a relatively “small universe” when compared to some other asset classes – so if, say, IFM Investors decided to stop contributing to the MSCI index, it could “blow it up”, because of the size of its Global and Australian funds combined.

“This will help the infrastructure industry take that next step in transparency [through the] adoption of peer-related performance”

Mitchell McCallum

Another infrastructure portfolio manager at a different top-20 industry fund says: “There are definitely some questions that need to be answered, including around significant survivorship bias, compositional differences [between the index and the average portfolio] and the index’s narrowness.

“There is more than one investment manager with multiple products in there, which could leave investors captive to those managers if they want to hug the index. And there is some very, very strong performance early on [in the lookback period] as well.”

In response to concerns about its representativeness, a spokeswoman for
MSCI said: “By nature, private asset indexes are unlikely to measure the complete investment universe. As with all our private asset indexes, MSCI is continually engaging with investors and managers to improve the transparency of our indexes. We also always ensure that we transparently report on the composition of our indexes.

“This index represents a similar investment benchmark comparable to property – it is unfrozen as it continues to evolve. This latest move by the government will re-enforce transparency and help broaden the index, as we have additional contributors coming on board.”


One of the main alternative benchmarks is EDHEC’s Infra300 equity index, which represents the quarterly performance of 300 unlisted infrastructure companies. The EDHECinfra index has a much broader geographic spread (only 14 percent allocated to Australia) and a wider sectoral spread.

EDHEC itself has skin in this game, lobbying Australian Treasury to be named as the benchmark for unlisted infrastructure.

In a submission to Treasury’s consultation on the reforms, it said: “The proposed [MSCI] benchmark is biased towards high returns because a changing cast of fund managers choose to report performance data. The 2018 Productivity Commission report already included concerns about the representativity of this index for superannuation funds with several contributors stating that ‘(t)he MSCI/IPD unlisted infrastructure benchmark is too high or not representative of investments in the system’.”

EDHEC also pointed out that the composition of the index has changed multiple times in recent years as funds either begin or stop contributing data. It said: “As per the index methodology, the historical data for funds that stopped reporting remains in the index history as per data provision. These constant changes in the composition and granularity of the underlying data create to the reporting, selection and survivorship biases already reported by the Productivity Commission in 2018.”

MSCI says the unfrozen nature of its index is “typical” as it comes to maturity. “We would look to freeze [the index] once critical mass is reached. We expect the shift [to the MSCI benchmark] to support a rapid adoption and take-up, benefitting all infrastructure players and investors,” per a spokeswoman.

“MSCI reviews each unfrozen index regularly to decide whether they should also be frozen. However, the question of the potential freezing of any MSCI index will become the subject of a public consultation with local market participants.”

EDHEC has conducted a survey of 20 superfund chief investment officers, portfolio managers and their consultants, representing approximately A$380 billion in assets under management, since it was announced the MSCI index was to be used.

It found that 95 percent of respondents felt the MSCI index was not representative enough, 90 percent felt its unfrozen nature was unacceptable and 90 percent felt that its survivorship bias made it an unfair benchmark (the percentages combine those who ‘probably’ or ‘definitely’ agreed with each statement).

On survivorship bias specifically, MSCI says: “We do not remove contributions to the index. We also backdate the information as far as possible for new contributors and those contributors that are re-admitted to the index with history. This methodology is utilised across our suite of private real asset indexes to alleviate survivorship bias.”

It added that it was correct that “from time to time” individual funds or fund managers will close or cease contributing to the index but says that their data would be retained “as part of the index history”.

On the EDHEC alternative benchmark, one of the portfolio managers tells us that it was also “not without issues”, with its geographic spread of assets not necessarily perfectly representative, but they did argue the sectoral spread was closer to the average portfolio.

“It’s difficult because there’s generally not good benchmarking in infrastructure. Is the MSCI benchmark better than the listed market version of the benchmark? It’s hard to say.”

McCallum says MSCI has been tracking unlisted infrastructure for slightly less time than unlisted real estate, but the more widespread adoption of benchmarks such as the one it produces would help the asset class mature further.

“This will help the infrastructure industry take that next step in transparency [through the] adoption of peer-related performance, which in the past just hasn’t been widespread. A lot of industry supers use an absolute benchmark – often something like CPI plus three, or plus eight, or whatever it looks like – so this is a good step to help move infrastructure into alignment with other asset classes.

“There is a lot more accountability around the investments superannuation funds are making into these unlisted sectors, and the associated benchmarking gives an opportunity to show how strong some of these investments have been, not just to hold underperformance to account.”

One of the portfolio managers tells us that they failed to see how an alternative to the MSCI index would have substantially better data and argues that many funds have bigger fish to fry than getting overly concerned with a single asset class benchmark.

Choosing their battles

“The big industry superfunds aren’t thrilled about the MSCI index, but they also aren’t going to complain too much either,” the portfolio manager says. “To be really frank, we’ve got bigger things to worry about in the reform package. We’re comfortable about this from a whole-of-fund perspective and missing the MSCI benchmark by a small amount won’t lead to us changing our infrastructure allocation.”

Infrastructure Investor understands that some funds are not shaping up to make a fuss about the MSCI index in the next consultations, with a desire to focus on securing concessions elsewhere instead.

One final bone of contention, important to fee-conscious superannuation funds is cost. The MSCI index is set to cost A$15,000 per year if they wish to subscribe to it (as many will feel forced to). The EDHEC infra300 index is free.

MSCI says that “a number of factors come into play” when determining pricing and that it declined to comment for this reason.

For the government’s part, Treasurer Josh Frydenberg and superannuation minister Jane Hume say the government had made the decision to add unlisted infrastructure and unlisted property as separate asset classes from their listed counterparts after consultation with industry.

In a joint statement unveiling the draft bill in April, the ministers said: “This will improve the accuracy of the performance test; strengthen the focus of the test on investment outcomes delivered to members; and ensure that Australian superannuation funds can invest with confidence in these domestic assets.”