What are unlisted assets and how do they affect your super?


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Superannuation fund returns are front of mind for many Australians at the end of the financial year as funds publish their annual performance results and send statements to members.

With statements hitting mailboxes for the 2022 financial year, members may have noticed their returns were impacted by volatile investment markets.

Rising inflation and interest rates, the war in Ukraine and ongoing supply chain disruptions have all contributed to sharp falls in global markets in the first half of the calendar year. Locally, we saw the Australian share market lose about 10% of its value during this period.

listed v unlisted assets

Interestingly, what has also emerged during the 2022 super reporting season is the wider-than-usual gap between returns of different funds.

This gap is a result of a couple of factors, primarily shaped by the different investment strategies among funds and how exposed they are to different asset classes. However, the primary factor driving the gap in returns is how significantly a fund invested in unlisted assets, and how and when they valued those assets.

What are unlisted assets?

Unlisted assets are investments that are not traded through a public exchange or market, such as the Australian Securities Exchange (ASX).

The most common types of unlisted assets are unlisted property, unlisted infrastructure (such as roads, rail, ports and utilities), private equity and private credit - which involves investing in or lending to privately owned businesses.

Investors in unlisted assets can either directly own the asset or invest with others through an unlisted trust.

Unlisted trusts range in size from small property syndicates, which may invest in a single property such as a small neighbourhood shopping centre, to multi-billion-dollar unlisted property trusts, which own major CBD office buildings, large shopping malls or hotels; and large unlisted infrastructure trusts which own major airports.

What are not unlisted assets?

Investments in equities are classed as listed investments. This includes assets such as shares in companies listed on the ASX and other stock exchanges.

Australia was a pioneer in developing a listed market for property, which offers the ability to invest in a diverse portfolio of large properties through investment vehicles known as Australian real estate investment trusts (AREITs). AREITs are listed on the ASX, and investors can buy and sell shares in those trusts just like any other shares. Australia also has a well-developed and sophisticated listed market of stocks which invest in infrastructure such as toll roads and pipelines.

Real estate investment trusts (REITs) are also available on international share markets, as are listed infrastructure trusts that contain a range of infrastructure assets. Shares in these investments can also be traded like other types of shares.

Bonds, cash, term deposits, exchange traded funds (ETFs) and managed funds and trusts that invest in those types of assets or listed investments are also not classed as unlisted assets.

How are assets valued?

Trusts and superannuation funds that own unlisted assets are required to calculate the value of those assets periodically. Standard practice is for unlisted assets to be independently valued on a rolling annual basis - for example, if a fund owns multiple unlisted assets, it might complete valuations on 25% of those assets each quarter. It is important to note that valuations are not consistent across the industry, and can be opaque and subjective.

In listed markets, assets are valued every day as investors decide how much they are willing to pay for shares in the company or trust that owns the asset based on their assessment of how much profit it will generate in future.

This difference in timing means changes in economic, competitive and market conditions are reflected in the price of listed assets much more quickly than they are in unlisted assets and the value of listed assets changes much more rapidly than unlisted assets.

For example, some funds used March quarter valuations for their unlisted assets when reporting returns for the 12 months to 30 June. These valuations would have missed significant volatility in private equity markets during the final months of the financial year.

Potential for bias

There are other differences in the way that unlisted assets are valued compared with assets priced by listed markets.

Listed assets are valued based on what profit maximizing investors are prepared to buy and sell in an organized, open and transparent exchange. In unlisted markets, until as asset is sold, its price on the book is based on valuation by a third party appointed by the asset owners.

Recent criticisms reported by media have suggested this approach could lead to biased results if asset owners judge the value of their own investments too generously. Two superannuation funds recently revealed different approaches to valuing the country's most successful, privately owned technology company, Canva.

Even when assets are independently valued, values are often higher than would be expected of the same asset in a listed market. This is because valuations of unlisted assets are partly based on comparable sales, which may have been completed when market conditions were different.

Unlisted asset valuations also look at the metrics of the asset at the point in time when the valuation is completed. For example, if a shopping centre has a vacancy rate of 5% at the time of valuation, the valuation will likely incorporate that figure, even if the outlook for retail is expected to deteriorate and more tenants would be expected to vacate the shopping mall in the coming months.

Listed markets are more forward-looking. In the example above, investors would more likely consider the outlook for the retail market when making decisions on how much to pay for shares in an AREIT incorporating retail property.

Looking to the future

The key to creating the lifestyle you want in retirement is to maintain a diversified portfolio that will capture growth over time so you can stay ahead of tax and inflation in the long-term.

If you have a financial adviser, they can be invaluable in this process as they can review your situation and provide further guidance.

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Jonathan Armitage is chief investment officer at Colonial First State. He is a highly regarded investment executive with nearly 30 years of global experience in Australia, the United Kingdom and the United States.