How can funds mitigate the risk of illiquid assets?

11 April 2023
| By Laura Dew |
image
image
expand image

A possible way to mitigate the risk of investing in illiquid markets could be by limiting the ability of members to switch between investment options, according to State Street.

Speaking to the Australian Institute of Superannuation Trustees (AIST), David Grose, head of alternatives-Australia at State Street, said there were benefits to investing in private markets, but they came with liquidity risks. 

Therefore, he said, it was important to consider structural and governance changes that might arise for a fund and how they would affect those assets. 

“Ultimately, as long as there’s a mismatch between the liquidity of the underlying investments and the liquidity offered to members, some of these risks will inevitably continue to exist,” Grose said.

Two options suggested could be limiting members’ ability to switch between different investment options or implementing a delay, which would reduce problems with investors trading on outdated prices.

“Regulators could encourage super funds to limit the ability of members to freely transfer between different investment options. I’d question whether the majority of members have a real need to switch between investment options more than once or twice a year, which is permitted at the moment.

“If a limit was placed on this and on transferring between different funds, it would reduce the problems caused by investors trading on old prices for private market assets.”

The Australian Prudential Regulation Authority (APRA) introduced SPS 530 Investment Governance in Superannuation last year, and it was hoped this would resolve some challenges posed by illiquid assets and improve funds’ governance.

The paper covered issues such as stress testing, valuations and liquidity management.

Stress testing was likely to be more difficult, Grose said, if a fund held private market investments as they were less transparent than those in a public market. 

“SPS 530 really requires them to demonstrate that they’ve satisfied themselves in relation to appropriate valuations and considered any conflicts of interest that the manager may have faced,” he said.

Read more about:

AUTHOR

Add new comment

The content of this field is kept private and will not be shown publicly.

Recommended for you

sidebar subscription

Never miss the latest developments in Super Review! Anytime, Anywhere!

Grant Banner

From my perspective, 40- 50% of people are likely going to be deeply unhappy about how long they actually live. ...

3 months 4 weeks ago
Kevin Gorman

Super director remuneration ...

4 months ago
Anthony Asher

No doubt true, but most of it is still because over 45’s have been upgrading their houses with 30 year mortgages. Money ...

4 months ago

The Association of Superannuation Funds of Australia has appointed a new director representing industry funds, among a number of other appointments in recent months....

19 hours ago

The asset manager is bolstering its investments in the global energy transition and climate opportunities....

2 days 2 hours hence

The ethical investment manager has reported record FUM as its growth trajectory continues apace....

1 day 19 hours ago

TOP PERFORMING FUNDS

ACS FIXED INT - AUSTRALIA/GLOBAL BOND