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How can a super fund hold no cash or bonds?

On 21 March 2019, Bloomberg reported:

"Australia’s best-performing superannuation fund is going against the grain by avoiding cash and bonds, betting the 30-year investment horizon of its youthful members means it can ride out looming economic shocks.

Hostplus, which represents swathes of the country’s baristas and restaurant waiters, had about 53 per cent of its $40 billion invested in the sharemarket, and the remainder in unlisted assets including airports and water-cleaning plants, chief investment officer Sam Sicilia said.

Hostplus beat local peers with a 10 percent return over three years ended January11 31, according to Lonsec Group. It’s also top ranked over five years, up 8.9 percent and outpacing the country’s largest pension fund AustralianSuper, the data show. Hostplus has held no cash since at least 2011 and bonds in its portfolios were effectively zero over the past three years, according to Hostplus. The firm prefers stakes in office buildings, pipelines and emerging technology.

Part of that success was due to the fund’s ability to stomach less liquid unlisted assets, Mr Sicilia said."

Risk and reward

There are different ways to read this.

An implication of the article is that the fund has done the best over the past five years because it shunned low-risk assets like cash and bonds and invested in higher-risk assets, and therefore the same strategy will work going forward. Which is why ASIC requires everyone to add a disclaimer “Past performance is not an indication of future performance.” You need to give Hostplus credit for taking on more risk over a period where stock markets performed well relative to other assets. If it were a conscious tactical decision to allocate more to risk assets (I don’t know if that was the case) then the decision was a good one.

However, the way the article is written implies that Hostplus is taking more risk because its members are younger, which is concerning. The implication would then be:

  • Hostplus will go up more when markets rise and down more when they fall as Hostplus has structurally higher risk.
  • You don’t want to be in this fund if you are older because they are tailoring the asset allocation for younger members.

Are unlisted assets less risky than listed ones?

Another implication of the article is that unlisted assets are similar to cash and bonds. They aren’t.

When comparing funds that invest in listed assets versus funds that invest in unlisted assets, there is no way of knowing the actual value of the unlisted assets. A good example is unlisted property funds during the financial crisis. Unlisted property funds invest in effectively the same assets as listed property funds and the underlying properties are worth the same, but the performance differs because of how the values are reported:

Do you really think that while listed property prices fell almost 60% over a year, unlisted property prices had increased slightly over the same year? Both types of funds owned buildings in the same markets, but unlisted assets are not revalued regularly and so the values reported were the values from prior years and did not reflect the actual market value.

By this stage, unlisted property funds were not trading anyway and unlisted assets could not be sold at the inflated prices. Who would want to buy unlisted property assets at last year’s prices when you could buy listed property assets at almost 60% off?

So, this is the trillion dollar question. Is an unlisted property trust less risky than listed property? There are a lot of people who say yes as the reported prices are less volatile but my emphasis is on the word 'reported'.

Preference for liquid versus illiquid

For me, if it is the choice between owning an asset:

  • in a listed vehicle where I can see what is happening, how much it is worth and buy or sell at any time; or
  • in an unlisted vehicle where I don’t know what is happening, the asset can only be sold at infrequent intervals and the valuation is a mix of prices from prior years and management estimates,

then I will take option 1 every time. Just because I can’t see the price move doesn’t mean that it hasn’t.

The other problem is that I can be diluted by other investors coming and going. To illustrate with an extreme example, let’s say:

  • You and I are the only investors in a fund having invested $100 each.
  • The fund owns 50% in an unlisted asset and 50% cash. So, the total value of the fund is $200 made up of $100 in the asset and $100 in cash.
  • The asset falls 60% ($60) in price, so our fund is now only worth $140 ($70 each for you and me) but the fund doesn’t revalue the asset and so reports the fund still being worth $200.
  • I decide to redeem my holding in the fund.
  • The unlisted asset can’t be easily sold, and so the fund pays me $100 cash being half of the $200 that the fund is still being officially valued at.
  • This leaves you with $40 of an unlisted asset – double the loss that you should have taken.

Is now the right time to have no cash and bonds?

Assets move in cycles. Ordinarily, towards the end of a 10-year bull market in risk assets, you would want to be increasing your holdings of cash and bonds, leaning into the cycle so that when the bull market in risk assets ends you can cushion the downside and you have a war chest to look for bargains. That is my strategy at the moment, but Hostplus has taken the opposite strategy. They are suggesting that now is the time to own more risk assets and to abandon cash and bonds.

Hostplus may be right. Recessions may be avoided, central banks might hit the printing presses, growth and inflation might return and risk assets might continue to go up.

I’m hoping the Bloomberg journalist has misrepresented the Hostplus investment process. I’m hopeful that Hostplus has a more nuanced view about the value of risk assets versus cash and bonds. They are a big fund with lots of investment managers and you would expect that to be the case.

The net effect is if you are looking to replicate the Hostplus asset allocation and abandon cash and bonds, do it because you genuinely think that risky assets will continue their streak, not because you think that unlisted assets have some magical ability to provide stability while their listed brethren fall.

Editor's footnote

In September 2018, Hostplus's CIO Sam Sicilia provided insights to its investment strategy in Investment Magazine.

"Our growing allocation to alternatives is to ensure we remain flexible and adaptive, given we have such a high allocation to unlisted assets."

"For us, having that strong cash flow, [about $7 billion worth of inflows a year], disposable cash if you like, means we can take advantage of not just opportunities that arise, but each opportunity that arises. If I were the CIO of another fund, where the outflows were around the same as the inflows, I would be having a very different conversation with you."

“They (the fund members, average age 34) are not retiring anytime soon, so there is a long investment horizon. The fund itself never gets older. Why? Because the hospitality industry is always a young person’s game."

“The assets themselves are very long-term assets. They have growth characteristics but, in particular, they also have defensive characteristics. They generate income, which is defensive, and capital gains, which is growth. When equity markets are volatile, our unlisted assets – such as real estate and infrastructure – provide downside protection. That is critical.  If you say, ‘How come everybody doesn’t do that?’ Well, you need to tolerate illiquidity. I’m pretty happy with the characteristics.”

“People say to us, ‘During the GFC, you must have taken action and moved things around.’ It was quite the opposite, we did nothing. We made no changes to our SAA, because we have the financial cash flow and means to see through all of that volatility. In fact, when equity markets dropped, we purchased equities at a cheaper price.”


Damien Klassen is Head of Investments at Nucleus Wealth. This article is for general information purposes only and does not consider the circumstances of any individual. A version of this article appeared in MacroBusiness.


April 05, 2020

This article has proven to show great insight and has aged remarkably well.

June 21, 2019

This is a great article. It amazes me how opaque the super industry is.

It is not only liquidity that is a risk with such investment strategies. Surely the temptation is too pluck a valuation for unlisted assets out of the sky to head the rankings on investment returns. A more conventional fund invested in listed liquid assets such as shares and bonds cannot fudge returns as they are revealed by prices in the market but super funds with unlisted assets can manufacture whatever value they like within reason.

April 01, 2019

Operates successfully for so long as new funds, in this case mandated funds are received every year you can ''puff'' up the unit price....but what happens when the actual value of all the assets of the fund are below the unit price of the fund?????

Or worst case like the MTAA during the GFC all funds are frozen from redemption. The MTAA went from the best performing Balanced super fund prior to the GFC due to its illiquid portfolio and 90% in growth assets to the worst ten year performer virtually simply redeeming your funds may not be possible.

March 31, 2019

I'm a trustee of my SMSF. It is in pension mode. I opened it 20 years ago and after some early years of poor results from a very large financial planning firm, I took over the investing decisions. Over the last decade plus I have been invested 50% in unlisted blue chip property, long wales and gearing of 50% or less. Most are buildings with triple net leases, good 'nabers' ratings and a constantly growing income stream. Valuations are done yearly by outside independent valuers. The income I get just from this more then compensates me for the illiquidity. Each 5 years most have to be put to a vote to sell. Most times the vote is to remain in the fund. Those that have been closed have always yielded a sales result close to or exceeding the valuation. I have 30% in the sharemarket in a couple of large LIC's and the rest in a managed fund that is in two areas. ASX and Global. They have all done OK, but volatility is an issue at times. However I don't trade so the income keeps on coming. The rest 20% is in Bonds and cash. Very little cash because my income from unlisted comes in like clock work on the day every month. I benchmark my performance against Australian Super which I match or exceed most years. This has been going on since prior GFC. A happy camper firmly in the unlisted sector ...just sayin!

March 31, 2019

The way it's going, you might see a 4 pillars policy put in place for superannuation, due to undue market concentration.

March 29, 2019

This is an area I have said before I wished the Royal Commission examined - how do super funds value unlisted assets?

Are they using related parties? Are there conflicts of interest and are they being managed well? How do they choose who they use and how are they remunerated? How often are they valued?

All is well and good while the tide is coming in but what happens when it goes out?

Dane Allen
March 29, 2019

Very interesting article Damien. I thought that example around the dilution to investors from delayed valuations of assets cleverly shows its shortcomings. I am not against illiquid investments. Their very nature, as Roger Ibbotson points out, means prices are lower and future returns are higher. This makes intuitive sense. Though there are arguments to suggest this premium is being eroded away as more investors stampede into these parts of the market (eg AQR).

You only have to look at the resi property market and the lack of true price discovery to have concerns around the temptations to manipulate valuations. Sellers often take considerable time to adjust expectations. Agents are incentivised to obfuscate transaction data. Take auction results, for example which is an exercise in futility for measuring the market's temperature. More carve-outs than a Sunday roast.

There is no reason to suggest that institutional investors who are charged with valuing illiquid assets in their portfolio will be able to resist temptation to apply generous discount rates, for example.

March 29, 2019

"The fund itself never gets older. Why? Because the hospitality industry is always a young person’s game.”

While this may be true for the fund as a whole, it certainly doesn't apply for the individual member. Elderly Hostplus are probably carrying far more risk than is appropriate, because the 'fund never gets older'.

March 28, 2019

The example given is false. You would not be able to take the money out. Majority of private equity funds are long term and closed ended ie you cannot take your money out until the fund assets are sold and proceeds are then distributed.
I am with HOSTPLUS and strongly support the strategy.

Damien Klassen
March 29, 2019

I thank you are helping my argument! The example is an investor leaving a fund that owns both unlisted and listed assets.

I agree (and say above) that unlisted assets are hard to sell, which is why when investors leave it is the liquid assets that get sold and the unlisted that get left behind with the remaining investors.

The larger point though is that your private equity investment may be a fantastic investment, but the fact that the price doesn't move much doesn't make it a low risk alternative to cash or bonds - if anything the illiquidity makes it higher risk.

I'm not having a go at Hostplus.

Richard ( in the comments below) makes the point better than I did that you shouldn't be comparing this Hostplus fund with other lower risk funds.

March 29, 2019

The example given is entirely correct. Hostplus might not be able to take the money out of private equity, but members are presumably allowed to transfer out of Hostplus to another fund. In which case there is a potential mismatch between the liquidity of Hostplus and the underlying investments, although there are a number of things that Hostplus could do to minimise this issue.

Richard Brannelly
March 28, 2019

Great article Damien and I don't disagree with the approach being taken by HostPlus - but who in their right mind thinks it is a fair comparison to rank the HostPlus default option against more conservative peers given its far more aggressive approach? $7 Billion per year in inflows is a huge head start and it is good to see HostPlus taking advantage on behalf of their members, but people are being let down by lazy Ratings Houses and investors deserve better disclosure.
Can we also push back against the sloppy analysis where volatility is substituted for risk. As Damien so clearly articulated with his comparisons of listed and unlisted property during the GFC - volatility is a reflection of liquidity and rarely a useful measure of risk. One doesn't need to think too hard to come up with a long list of high risk investments that cost investors everything, and yet displayed little or no volatility. Westpoint, City Pacific, ACR, Van Eyk Blueprint etc etc

April 03, 2019

Your point about unfair comparisons is a good one Richard. Research houses are not comparing "apples to apples". The supposedly "top performing" balanced funds have asset allocations which should put them in the high growth category. Using unlisted rather than listed growth assets doesn't magically make those assets defensive. They are still the same underlying assets.

This reflects poorly on the credibility of the research houses. However it shouldn't really surprise. When most of the researcher's revenue comes from "top performing" funds paying to use research house rankings in their marketing material, commercial flexibility is bound to trump professional rigour.

March 28, 2019

I can certainly see the appeal of investing primarily in shares and unlisted assets over the long term, in theory at least you should get a return premium for accepting the lower liquidity. To a large extent investing this way makes sense for younger investors given they can’t access their super for quite some time and should be seeking higher returns.

The caveat to this is that of course they can just transfer the money from HostPlus to another super fund. If the rest of the world is falling apart but your own super fund is blithely assuming that their unlisted assets are still worth the same or near enough to their previous (high) valuation then you may well be tempted to decide to transfer out.

By doing so you would get the benefit of selling assets which are being valued at more than they are likely worth, buying new assets at fair value, and those who remain in the super fund are left holding the bag. I don’t think most investors are actually engaged enough with their super fund to do this, but there is nothing stopping them doing so.

I would also take issue with the CIOs assertion that the fund will always have mostly younger members. Given that the average Australian seems to just throw any letters from their super fund or put them unopened in the trash, over time there will be plenty of much older members and eventually both the average age will rise, and perhaps more importantly the amount of money invested that belongs to those average investors will also rise.

This would lead to much more money invested which has a much shorter investment time frame, and a greater likelihood of being taken from the fund either through pension withdrawals or being transferred out to another super fund when the member retires and a financial planner advises them to switch out.

SMSF Trustee
March 28, 2019

I'd be just as concerned about the other direction - assets that are in reality worth more than their current valuation in the fund. With new cash flow coming into super all the time, those new units are acquiring part of the fund at a cheap rate, diluting the return of all the unit holders whose money enabled the asset to be bought.

That should be handled by having a fairly wide buy-sell spread on units. I'd be interested to know HostPlus's policy on that - it's either not on their website or not easy to find.


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