Todays Australian Financial Review (p3) carries an artile titled “Super funds warned” in which Jeremy Cooper (“chairman of the federal government’s review of the $1.2 trillion superannuation industry”) suggests that Australian super funds need to increase returns and gain greater scale to increase opportunities. The example given is “Two Canadian pension funds with a combined size of $C200 billion ($205 billion), are trying to acquire local roads company Transurban.
Forgive me for being massively cynical and critically despairing of the future for superannuation fund members should such things occur. Cynical because size does not always translate to better outcomes for super fund members and critical despair for any idealised situation in which Australia’s super landscape comes down to 6 superannuation funds looking to buy and operate entire businesses. If ever there was a system crying out for rampant cronyism – that would be it.
Let’s consider the proposition that a fund wants to buy an infrastructure company like Transurban. At around $7 billion that would mean even a $200 billion fund would be placing 3% of its funds into one single company. Let’s do the maths and look at what i will call a standard allocation of funds – 50% to defensive assets and 50% to growth (bearing in mind that “Industry Funds” will generally run at far higher levels of growth assets in the default options). Of those growth options, let’s assume that 60% is allocated to Australian companies (with the balance to property and overseas companies). If we start with a $200bn fund then $100bn is in growth areas and (in my example) $60bn of that is in Australian companies.
OK. So a senior decision-maker on superannuation thinks that it is a good idea for $7bn of a $60bn allocation goes to a single purchase? Again, please forgive me while i tear my remaining hair out and scream in frustration out of the non-opening office window….!!!!
Here is what that person is suggesting would be a good thing. A super fund Trustee identifies a company that it wants and then decides to buy it. To do so, it makes an offer CONSIDERABLY above the going price of a share reflected in the shares of the company. In Transurban’s case, that was $4.37 and the shares are now at $5.54 (with expectations of a revised bid from the Canadian pension funds if they want to be successful in their bid). My research suggests that in June 09 there were 1,281.4 m shares on issue, which means the price has risen $1.499bn.
Beginning to see my point? So the Trustees of the fund are going to spend and extra ~$1.5bn to gain exposure to the underlying assets. AND that does not count the cost of the bid itself – advisors to such bids so not come free. Nor do the break costs or failure costs of bids that don’t quite work.
And exactly what would the trustees of the fund be doing when they decide to spend $7bn on Transurban? Transurban’s shares make up 0.64% of the Australian Stock Exchange if you base it on the key index measure of the S&P/ASX 200 Index. In other words, in a portfolio that reflects the market as a whole, $384m out of the $60bn would be allocated to Transurban. BHP currently makes up 11.94% of the index, which would generally mean an exposure to BHP would be around $7.1bn. In other words, the Trustees would be allocating as much money towards those toll roads as it would to BHP. You may have an opinion on toll roads but what the trustees making a purchasing decision like this are doing is placing a very large bet.
If super funds aim to use scale to make purchases such as this then even the huge fund envisaged would only be able to make six or so such purchases. You can argue all you like about scale efficiencies, control and other side issues but you cannot escape the fact that such a portfolio would be taking risks that few members would agree to if they were given a choice.
Some would argue that taking a solid, long term income-earning investment such as toll roads off the sharemarket and setting it up as a private asset would enable various efficiencies of operation and pricing to be brought to play. Those same people were the ones that argued for loading up a bunch of Industry Funds with unlisted assets that had to mark those assets down severely recently. Trustees must gain greater understanding of the risks that they take with their members’ money – and be able to explain that risk in such a way that members who don’t want to partake are fully informed and can shift their money to other options (which is very easy now – most funds allow a range of options so such shifts should be very low cost).
There are rules in Australia that suggest a superannuation fund cannot run a business. That is a good thing. The role of the trustee is to prudently invest members’ funds or to offer them choices where they can tailor their portfolio to their risk aversion levels. Moving huge chunks of a super fund into a single investment that would be slow and painful to sell is so ridiculous that it begs the question of whether our decision makers really understand the areas that they are supposed to be making decisions about?
Let’s just hope that the article got it wrong ’cause if it didn’t then the future of superannuation in this country is not in safe hands.