The Australian Prudential Regulation Authority (APRA) has issued a strong warning to superannuation fund trustees against becoming too focused on alternative investments such as private equity and hedge funds.
In a warning reminiscent of the regulator’s cautionary words on hedge funds issued in 2003, APRA’s general manager, specialised institutions division, central region, Sydney, used an address to a workshop to warn that competition between funds for members and money risked placing pressure on trustees to not only out-perform their competitors, but also the benchmark.
“Trustees that feel this pressure may consider taking on additional risk in investing their funds’ assets,” he said. “Trustees seeking high returns may be willing to accept higher risk by investing more of their funds’ assets in alternative asset classes such as private equity and hedge funds, or by investing in new industries, countries or products.
“Further, there is a risk that there is a ‘race to the bottom’ amongst super funds in terms of asset quality due to the increased competition for the relatively fewer alternative asset investment opportunities, where these assts offer an inappropriate level of reward for the risk taken,” Venkatramani said.
He said trustees should only invest in new types of investment for which they have the appropriate skills, systems and procedures to manage.
Venkatramani said while investment in non-traditional asset classes had not been high so far, APRA was conscious of the high risk, high return options offered by some of the assets and the relative lack of transparency and liquidity.
“Trustees that take on higher risk in their investments should do so consciously and with regard to the appropriateness of the investment for their fund members,” he said.
“Determining asset valuation is essential in the allocation of investment earnings,” he said.
“Diversification into alternative assets may require the adjustment of the fund’s valuation policy.”
Venkatramani said APRA expected trustees to ensure their decision-making was always done prudently following proper due diligence.
