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Super funds will invest in different types of assets to grow their members’ retirement savings, and unlisted assets can be an important part of their investment strategy.
But how do these differ from other assets in your portfolio? And what can you expect when it comes to risk and return?

The difference between listed and unlisted assets
You’re probably familiar with a number of listed assets, from shares to exchange traded funds.
These are bought and sold on regulated marketplaces (such as the ASX or New York Stock Exchange), with prices determined in real time based on how much investors are willing to pay.

Types of listed assets include:
• Shares
• Exchange Traded Funds (ETFs)
• Listed Investment Trusts and
Companies (LITs and LICs)
• Bonds
• Listed property
• Listed infrastructure funds

Unlisted assets, on the other hand, aren’t traded on a public market or exchange. Outside of owning them directly or investing with others through a trust, most Australians are invested in unlisted assets through their super fund. These days, unlisted assets can be considered an important part of a well-diversified portfolio, and your super fund can invest in a mix that includes infrastructure, property, private equity and private credit.

Assets that facilitate the movement of people and the provision of services in an economy (think roads, railways, communication networks and electrical grids) generally fall under the banner of infrastructure. These can be attractive long-term propositions for super funds, with high profile
investments including the Westconnex motorway network, Ausgrid, and Sydney Airport.

As you might expect, there are high capital requirements to building infrastructure, so companies are often able to stake out a monopoly (or duopoly) position. The relative lack of competition can result in more predictable cash flow for these companies.

The dividends they pay out to investors can be quite stable too. That’s because revenue is often determined by long-term contracts or by regulators who will offer varying degrees of protection against inflation.

Super funds invest in property often for the same reasons individuals do — to receive rental income and potentially benefit from increases in a property’s value over time. But they tend to set their sights on much larger properties, such as office buildings, warehouses and shopping centres.

Examples of property investments made by super funds include Moorebank Intermodal Precinct and the International Towers commercial skyscraper in Sydney.

Private equity
Private equity can take different forms, but it generally involves obtaining an interest in or taking ownership of a company that isn’t listed or publicly traded. Super funds will provide capital to these companies with the goal of driving growth and creating value for the fund’s members.

Private credit
Super funds can also issue non-investment grade loans to companies — typically with higher yields to account for the higher credit risk. These might be made to brownfield infrastructure assets (existing facilities that can be refurbished and repurposed) or to fund the construction of new commercial real estate.

What are the benefits?
There are often high barriers to entry when investing in unlisted assets (think of the large capital outlays and teams of experts required to purchase infrastructure). Investing through your super fund can be one way to overcome these barriers and diversify your holdings beyond equities, cash and bonds.

And because unlisted assets are harder to buy and usually long-term in nature, they might be able to command what’s known as an illiquidity premium. This is the higher rate of return expected by investors in return for tying up money in hard-totrade assets.

Are there any issues to be aware of?
Unlike listed assets, which are priced daily by investors on an exchange, the value of unlisted assets is often only captured a few times each year. For example, super funds typically price their unlisted assets quarterly, or semi-annually in the case of
lower weighted ones.

Some observers have pointed out a number of potential problems with this approach. For one, it could give the impression that a portfolio is performing better than it actually is, particularly during a bad market.

It also raises a number of considerations, for example, who bears any losses when funds pay out super to members before valuations are adjusted.

In recent years, regulators have called on super funds to improve the quality and frequency of their valuations. Funds have also been encouraged to introduce triggers for out-of-cycle valuations given the current volatile climate.

Super funds currently manage over $2.2 trillion of members’ money. As the funds they preside over grow, it’s in members’ best interests that the assets they’re invested in are valued fairly and any risks are carefully managed.