Who's Been Swimming Naked?
Super funds caught out to be ‘a little over exposed’ during COVID-19
Legendary investor Warren Buffet once likened being caught out by an unpredictable market to skinny dipping in the ocean.
“Only when the tide goes out do you discover who’s been swimming naked” he said.
Well the markets have been unpredictable and the outgoing tide has shown up a lot of vulnerabilities.
Perhaps the ugliest of all have been in the Industry Super funds.
That’s right the Union/ALP money printing machines that have marketed themselves as having lower fees and superior returns, have been caught a little over-exposed.
Turns out, the 'superior performance' is assisted by juicing up investment valuations on illiquid assets.
In effect, they name the price they want the assets valued at, charge their fees on the new higher valuation and tell investors how well they have done.
Let me give you just one example.
Twenty six industry super funds own ME Bank which is not listed on any stock exchange. Their investment is revalued annually and if it’s like most banks, when profits go down so does the value of the investment.
However, in the parallel universe of industry super, even when profits go down the value of the illiquid asset goes up.
In 2017, ME Banks profit fell by 20% but the value the super funds placed on ME bank rose by 11%.
It happened again last year. Profits dropped around 30% but the revaluation increased by 5%
Now ME Bank isn’t some magical bank but the valuations by the super funds look to be pretty magical indeed.
And that’s just one of many illiquid investments industry super funds put your money into and it helps explain how they always seem to produce such good investment returns.
As long as you don’t peer too deeply into the smoke and mirrors, it’ll all be ok…until it’s not.
That’s why, when the government allowed early access to $10,000 of super due to Coronavirus, the industry funds have been caught a wee bit short.
They’ve been finding it a bit tough to give money back to it’s rightful owners.
My guess is they’ve been banking on a never ending stream of money coming into their funds driven by unions and slick marketing campaigns to pay out their obligations to existing super-annuants.
When Coronavirus suddenly reversed the flow of money, the tide went out on industry super and believe me it’s not a pretty site.