What is liquidity?
Liquidity is the proportion of an investment portfolio which is held in cash, or in investments that can readily be sold to raise cash. All of AustralianSuper’s PreMixed investment options invest in liquid assets. These include cash, and assets traded on public markets, such as listed shares and government bonds.
Together, these liquid assets make up over 70% of the Balanced investment option, which the majority of AustralianSuper members invest in.
What are illiquid assets and why does AustralianSuper invest in them?
Illiquid assets are assets which cannot be easily converted to cash. They take longer to trade or find buyers willing to transact at a given price. They comprise mostly unlisted assets.
Less than 30% of the Balanced Option’s investment portfolio is held in illiquid assets (as of 31 March 2020).
These assets include direct property (such as commercial buildings and shopping centres), infrastructure (including toll roads, airports, ports, electricity distribution networks), credit (such as direct loans to companies) and private equity investments.
Unlisted assets play an important role in a diversified portfolio. They often have an investment horizon of decades, rather than years. This makes them attractive for long-term investors, such as super funds, as they can provide stable and predictable cash flows and long-term growth across economic cycles. Importantly, in periods of strong economic growth, their values do not rise to the same extent as listed shares, and in downturns they do not typically fall to the same extent, offering some stability for portfolios.
As they are not publicly traded with a price determined on share markets or other exchanges where listed assets are sold, unlisted assets are valued by independent valuation experts on a regular basis.
AustralianSuper has a long-standing track record of investing in unlisted assets both in Australia and across the globe. These assets have contributed to AustralianSuper’s history of strong long-term performance for members.
Why do superannuation funds need to manage liquidity?
Superannuation funds use liquidity to meet day to day cashflow needs.
Every day super funds have money coming in and out.
|Money coming in can include||Money going out can include|
|Super contributions from existing members||Cash payments to members who are drawing off
for example in account based pensions such as Choice Income
|Transfers from new members who join the Fund||Transfers to people who leave the Fund|
|Dividends and other income from our investments||Taxes paid on contributions or income earned|
|Proceeds from the sale of investments||Cash purchases of new investments|
Money also moves between investment options when members change their investment choices.
The investment team ensures they have sufficient cash available to meet all these requirements. Many of these cash movements are known well in advance and can be planned for. Others can vary from day to day.
Rebalancing the portfolio
The AustralianSuper investment team monitors all of these cash movements closely. Every day, they invest money into the different asset classes to ensure that each investment option reflects the current investment strategy. We call this ‘rebalancing’ the portfolio.
This is important as the values of investments can change in line with daily market movements. When values change it can also cause the asset allocation (the proportion of the portfolio invested in each asset class) to shift. This means the investment team need to rebalance the portfolio – they do this using the Fund’s liquidity (liquid assets).
For example, if there are net cash inflows into a PreMixed investment option, the investment team will allocate these across cash, fixed income and listed shares to move the portfolio back towards its target asset allocation. If there are net cash outflows, the opposite will occur.
What is liquidity risk and how do we manage it at AustralianSuper?
Liquidity risk is the risk that an entity may not be able to meet its financial obligations as they fall due. It is a key investment risk managed by all superannuation funds in balancing short-term liquidity requirements with the long-term investment objectives of each investment option.
At AustralianSuper the management of liquidity risk is a key element of our investment process. Our approach to managing liquidity is outlined in a series of policies which are approved by the Board and implemented by the investment team.
The Fund’s approach is consistent with superannuation legislation and the prudential standards from the regulator, the Australian Prudential Regulation Authority (APRA).
AustralianSuper is required by law and APRA’s regulations to ensure we have enough liquidity at all times. This includes in extreme times of change such as the global financial crisis, and the current COVID-19 crisis.
We regularly ‘stress-test’ each investment option across a range of extreme scenarios. The main reason for carrying out a stress test is to protect members’ assets. But it also helps the investment team understand how to best access liquidity while maintaining our investment strategy, thereby minimising the impact on long-term investment returns.
This information guides the investment team in their decisions around how to construct the investment portfolios and the individual assets in which we invest.
How is AustralianSuper managing liquidity in the current COVID-19 environment?
Our investment team monitor and manage the liquidity of each investment option on a daily basis, ensuring the Fund’s liquidity requirements are met, and making sure each investment option remains aligned with its own strategy.
Recently, we’ve been increasing the amount of cash we have available to meet the liquidity requirements in each investment option. We’re also ensuring that we have cash available to take advantage of new opportunities, such as new investments in quality Australian companies. These investments will help to support these businesses through the COVID-19 pandemic, while contributing to long-term performance for members.
We have also made preparations to ensure we have adequate liquidity to always be able to pay benefits to members, This includes both Choice Income members (account based pension), and those who are suffering hardship resulting from the COVID-19 pandemic that may wish to gain access to some of their super balance through the Government’s early access to superannuation provisions.
A long-standing approach to managing liquidity
We’re focused on the effects of the global COVID-19 pandemic and are monitoring it as it unfolds. AustralianSuper has a long-standing approach to managing liquidity, which has not changed:
- we actively manage each Investment Option in line with its long-term investment strategy
- we continue to monitor and respond to global investment markets
- we manage the Fund’s cash flow on a daily basis
- we prepare for events that may affect our liquidity position
- we stress-test the portfolio for a range of possible scenarios
While short-term periods of volatility and uncertainty can be concerning, we encourage members to stick with their long-term investment strategy.
We encourage you to carefully consider your personal objectives, situation or needs before working out what is right for you. And if you need to you should seek professional advice.
Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.
This may include general financial advice which doesn’t take into account your personal objectives, financial situation or needs. Before making a decision consider if the information is right for you and read the relevant Product Disclosure Statement, available at australiansuper.com/pds or by calling 1300 300 273. A Target Market Determination (TMD) is a document that outlines the target market a product has been designed for. Find the TMDs at australiansuper.com/TMD.
AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898.