APRA releases research on illiquid investments of super funds

The Australian Prudential Regulation Authority (APRA) today released the results of research into investment in illiquid assets by large APRA-regulated superannuation funds.

The research, released in the APRA Working Paper Risk and return of illiquid investments: A trade-off for superannuation funds offering transferable accounts, examines investments in illiquid assets and the subsequent impact on portfolio performance. Illiquid assets include directly held property, unlisted property trusts, infrastructure investments, private equity and hedge funds.

In recent years, many funds have increased their allocations in illiquid assets in the expectation that these assets would yield sufficiently large returns to compensate for their illiquidity. Illiquid assets may provide diversification benefits and an opportunity to leverage existing investment expertise, but are less suitable in meeting the liquidity demands placed on superannuation funds, including those relating to members’ right to transfer their balances to other funds.

The key findings of the research are that:

• not-for-profit funds (corporate, industry and public sector funds) have a higher illiquid asset allocation on average, although there is a wide range in allocations among both retail and not-for-profit funds;
• not-for-profit funds that allocate a greater proportion of their portfolios to illiquid assets are generally larger, have higher net cash inflows and have younger members — all factors which tend to reduce liquidity needs; and
• from September 2004 to June 2010, not-for-profit funds with more illiquid investments experienced higher risk-adjusted returns, which suggests they captured a return premium for investing in these assets.

The research focuses on 146 large superannuation funds with total assets of at least $200 million. These funds represent about three-quarters of the assets in APRA-regulated superannuation funds.

The research is available via historical snapshots of APRA's website on the Australian Government web archive.