As superannuation funds and master trusts seek to achieve better returns for members, many are looking to what could broadly be described as non-traditional asset classes.
Of course, with conventional investments such as domestic equities continuing to drive double digit returns into most superannuation funds, there is little reason for superannuation fund trustees to become unduly interested in taking on higher levels of risk. Nonetheless, the pursuit of alpha continues.
And it is in this context that it is worth reviewing the attitude of the Australian Prudential Regulation Authority (APRA) and the degree to which any regulator should seek to impose its views with respect to asset allocation strategies.
It is in the nature of financial services that today’s alternative or ‘non-traditional’ investment is likely to be somewhat mainstream in two or three years time. Thus, while hedge funds may still demand less than a 10 per cent allocation on the part of most superannuation funds, they are no longer regarded as either ‘alternative’ or ‘non-traditional’.
And herein lies a message for APRA. Because around four years ago the regulator was heard to fulminate against superannuation funds investing in hedge funds and, indeed, as recently as late February the regulator’s general manager, specialised institutions division, S.G. Venkatramani, was still issuing warnings.
In an address to a Sydney workshop, Venkatramani referred to the surge in superannuation fund inflows generated by the Government’s Simpler Super changes and warned that in a more competitive environment trustees might feel inclined to take higher risks.
“Trustees that feel this pressure may consider taking on additional risk to investing their fund’s assets,” he said.
“Trustees seeking high returns may be willing to accept higher risk by investing more of their fund’s assets in alternative asset classes, such as private equity and hedge funds, or by investing in new industries.”
In mid-April, in an address to the Investment and FinancialServices Association, Venkatramani’s boss, APRA deputy chairman Ross Jones, also felt the need to discuss superannuation funds and institutional investors investing in non-traditional areas.
He repeated Venkatramani’s line that “trustees seeking high returns may be willing to accept higher risk by investing more of their fund’s assets in alternative asset classes such as private equity and hedge funds or by investing in different countries and products, perhaps without a full understanding of these assets”.
Unlike Venkatramani, Jones at least added that it was not up to APRA to determine whether such assets were appropriate investments, but he added, “APRA would be concerned if our views show inadequate understanding on the part of trustees of the risks they assume and to which they expose members”.
Neither Jones nor Venkatramani would probably admit it, but they must undoubtedly have known their speeches would have set off warning bells in the heads of superannuation fund trustees around the country.
Perhaps more to the point, those people running hedge funds or private equity investments must equally know that the chances of picking up institutional investors has just become that much harder.
But is it the job of the regulator to provide such guidance? Is it appropriate for public servants, no matter how experienced, to take it upon themselves to infer that particular types of investment are inappropriate?
Just as importantly, where will Jones and Venkatramani stand in circumstances where superannuation fund trustees find themselves confronted with a member backlash because (on the basis of concerns about the regulator) they resiled from investing in, say, hedge funds or private equity?
Jones and Venkatramani will no doubt argue that they are simply issuing words of caution and that, ultimately, the decision is that of the trustees. They will likely argue that all they were doing was insisting that trustees ensure they are fully aware of the risks that attach to various forms of investment.
The reality, however, is that their words will see many trustees steer clear of particular types of investments simply because they do not want to attract undue attention to themselves.
It is clearly appropriate for regulators to provide guidance with respect to markets, but it is equally clear that the regulators need to strike a balance between guidance and de facto prescription.
