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.
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.
In a draft bill published this week, Treasury said that international and Australian unlisted infrastructure will both be separately benchmarked against the MSCI Australia Quarterly Private Infrastructure Index (Unfrozen).
The index contains seven domestic Australian infrastructure funds and five international funds, which together held 137 investments worth A$34 billion ($26.5 billion; €21.8 billion) as of 30 December 2020.
The index comprises, among other undisclosed funds: AMP Capital’s Community Infrastructure Fund and Diversified Infrastructure Trust; IFM Investors’ Australian Infrastructure Fund and Global Infrastructure Fund; Infrastructure Capital Group’s Energy Infrastructure Trust; Palisade Investment Partners’ Australian Social Infrastructure Fund and Diversified Infrastructure Fund; and the Morrison & Co-managed Utilities Trust of Australia.
Unlisted real estate will be benchmarked against the MSCI/IPD Mercer IPD Australian Monthly Wholesale Property Fund Index, which includes funds managed by AMP Capital, Charter Hall, Dexus, Industry Super Property Trust, Investa, Lendlease and QIC, among others.
Private equity, however, has not been separated and will be included alongside listed equities. A Treasury spokeswoman said: “Equity is not separated by listing status, only domicile status. In practice, this means private equity based in Australia is picked up as Australian Equity, and private equity based internationally is picked up as International Equity (either hedged or unhedged).”
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.
“An array of benchmarks have 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 use.
McCallum said 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 said.
“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.”
McCallum said MSCI has been tracking unlisted infrastructure for slightly less time than unlisted real estate, but that 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.”
Treasurer Josh Frydenberg and superannuation minister Jane Hume said 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, 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.”
Consultation on the amended reforms will last for four weeks and close on 25 May.