Industry Super Funds and liquidity

I appreciate the irony of writing an article about individual choice and individual responsibility in an unprecedented time of government-imposed lockdowns and bailouts.

A lot has been written in the press, and rightly so, about the issues currently being faced by the industry super funds. However, to take a different tact what I would like to do is simply remind people that the government and other regulators or semi-government bodies should leave decision-making to the market and ultimately the individual. In the current world, people tend to wish to ban things that they disagree with. I believe this is a very dangerous practice and we need to stop it as it leads to a path of pain for society as a collective. I actually believe that industry super funds are an essential part of our superannuation system but in saying that they need to spend time in the naughty corner as some of their behaviour is reprehensible and needs to be called out.

For quite some time industry super funds have ridden a wave that has given them an exhilarating experience and they have confused ability with simply being a victim of circumstances and good fortune. The culmination of this hubris was arguably when the very same funds decided that from an ethical perspective they were no longer going to invest in many traditional mining/energy opportunities on behalf of their many millions of investors.

Probably the biggest oversight from the regulators and government in relation to industry funds is no better reflected than the Royal commission conducted by Justice Hayne. Of all the serious issues that many in the know have been discussing a lot of the industry funds for many years the only real thing that Hayne decided to pull them up on was entertaining at tennis matches. This is another example of the problem with modern society is that we are more interested in form over substance but that is a conversation for another day.

The liquidity aspect of industry super funds as indeed for all super funds is something that needs to be managed by the trustee as required by law. I’m actually a fan of including liquid assets in the portfolio and exposing investors to a range of opportunities that they themselves cannot access. However, as money managers, we are in the business of managing risk in accessing such opportunities involving unique risks that need to be managed and quite frankly coming up with excuses like the market went down or more people decided to pull money out than last year doesn’t cut it. The one thing we all know about financial markets is that you need to expect the unexpected and if you haven’t done that you haven’t done your job.

The biggest con however that is starting to unravel is the fact that industry super funds have moved investors up the risk curve in pursuit of higher returns. The fact that this wasn’t exposed by Hayne at the Royal Commission was a reflection of how this was effectively a staged event to get the outcome required. All the other things raised behind were pretty much known and whilst they needed addressing most were already in the process of getting addressed. Now that the market has corrected this practice has been exposed and now we have investors realising they were taking on way more risk than what they had ever envisaged. This pain could have been averted if the pain had Hayne exposed this practice. As a financial advisor if I provided such advice to a client I would rightly lose any complaint that was forwarded to AFCA and I would need to compensate the client. Investors of industry super funds who feel they have been duped will not have that luxury. I find it acceptable as a financial advisor to be having conversations with mum and dad investors about the need to balance risk and return especially in these low-interest-rate environment times. To have investment managers undertake such incompetence or criminal behaviour, you can decide, whilst managing billions of dollars entrusted to them by their investors Is incomprehensible. One clown in a particularly large fund was so overexposed to four stocks it beggars belief.

All of this shenanigans have happened at the same time that the ATO and ASIC were effectively waging a war on self-managed superannuation funds. Again, I go back to the main issue regarding government or government bodies getting involved as the chances of them having their finger across all issues is similar to a big fat man in a red suit getting caught in your chimney later in December. They have pushed the barrow of these industry super funds by saying that self-managed super funds were not appropriate for the main at a time that the Royal Commission had simply dismantled retail super funds as a viable solution. If it hasn’t been through design it’s definitely an unintended consequence which should have been thought about.

I fear that society has gone too far down the path that it cannot turn itself around and we are seeing this unfold on a daily basis and never so much more than now. However, no matter how naïve I would like to think that as a society we can get back towards individuals being charged with making their own decisions but also wearing the responsibility for their actions. Obviously, financial advisers would play a large role in that as they help consumers evaluate their options.

 

Article by:

Rob Coyte

CEO Shartru – shartru.com.au