When it comes to investing it’s important to stick with the fundamentals.  And the most fundamental rule of investing is to make sure you understand what you’re invested in.

Even the world’s most successful investor, Warren Buffett, agrees.  He offers two pieces of advice to investors, “Never invest in a business you can’t understand” and “Keep things simple”.

Unfortunately, if you’re a member of an industry super fund, things are getting more complex and it’s getting harder to understand your investments.  

The shift to unlisted assets

It used to be simple.  Traditionally, super funds invested your money into a mix of the four assets classes: cash, fixed interest, shares and property.  And the shares and property were usually limited to those investments listed on the stock exchanges around the world.

But things have changed.  As more of your money flows into the industry funds, more of them have been investing your money into directly held, unlisted, ‘alternative’ investments.  Investments like airports, toll roads, utilities, start-up ventures and other private companies.

A time for everything

There are some good reasons for super funds to invest like this.  For starters, there are diversification benefits which can reduce risk.  At different stages of the economic cycle, these assets are likely to outperform or underperform traditional listed investments, smoothing the returns for investors.

There are also opportunities to invest in projects and businesses that that are only viable because of the scale of the industry mega funds.  Investment opportunities that just aren’t available to the general public.

But there are drawbacks too.  First, there’s the additional complexity.  Start-up ventures are different to established companies, and the ingredients for success are different.  The super fund requires additional expertise to manage these direct investments and hold management accountable for performance outcomes.

Unlisted assets are also illiquid and indivisible. This means that they can’t be sold quickly and easily when the super fund wants out.  They can’t even be sold in parts.  These assets require a significant sales process and the number of prospective buyers is limited.  

Unfortunately, there’s less transparency around unlisted assets as well.  Companies listed in the stock exchanges around the world have well-established reporting and disclosure requirements.  This makes it easy to understand what’s going on.  Privately held companies don’t have these obligations and neither do the super funds that invest in them.

It’s particularly challenging because unlisted alternative assets often have complex ownership structures with inter-related parties.  And it can be hard to know whether the asset is being priced fairly as well.  Sydney airport is listed on the stock exchange and has lost more than a third of its value in the past six months.  Have unlisted holdings in airports held by super funds been repriced to reflect this?  If not, members may not be treated fairly.

Start making sense

All of this can be overwhelming.  But Warren Buffett’s rules to investing need to be respected.  And if you don’t understand what your super fund is investing in, you should find out right now.

We can help.  

At When Financial Solutions we’re self-employed advisers who are not tied to any product providers or super funds.  

We know the risks and we know what questions to ask your super fund for you.  We can help you understand your investments and keep things simple, so that it’s not a matter of ‘if’ you have a satisfying retirement but ‘when’.

Michael Bowman and James McMaster are co-founders of When Financial Solutions.  This article is general and does not consider your personal circumstances.  If you would like advice specific to you please give us a call.