Super fund portfolio disclosure a step forward, despite drawbacks

Australians have been flying blind when it comes to knowing what is inside some of their investment vehicles.

Whether it is superannuation or managed funds, international studies have consistently marked Australia down as one of the worst in the world in terms of transparency of investment portfolios.

Long-awaited, recently finalised regulations that govern how super funds must disclose their holdings have received mixed reviews. They mean that investors who want their retirement savings managed ethically, for example, will be better able to see which investments their super fund holds – at least for most that are held directly.

Simon O’Connor, chief executive of the Responsible Investment Association Australasia, says the new portfolio disclosure regulations will make it harder for super funds to make claims concerning ESG issues without being able to substantiate them.Credit:

However, there are significant carve outs from disclosure for some types of directly held assets, and where a fund hires external fund managers.

Australia has been out of step with many countries that have laws and regulations that require funds to fully disclose their investments. While our new regulations relate to super funds, they do not apply to managed funds.

Under the regulations, super funds must disclose some – but far from all – the information concerning identity, value and weightings of their investments.

Funds must report their portfolio holdings by March 31 next year, then update them every six months.

Morningstar says the disclosure requirements do not go far enough and remain below global best-practice standards.

Grant Kennaway, head of manager selection at Morningstar Australasia, says the final set of regulations have been “meaningfully altered, compared with previous draft versions released to the market”.

He says the disclosure requirements of simple asset classes, such as bonds, is opaque, making them meaningless. “Simply listing the issuer of a bond tells investors nothing about its credit quality and interest-rate risk,” Kennaway says.

In analysis of the new rules, Morningstar identifies several more defects, the most glaring of which is that the underlying investments of some external fund managers hired by super funds do not have to be disclosed.

Large super funds are bringing more of their asset management “in house,” rather than paying fees to external fund managers. Most of those directly held investments will be disclosed.

However, Simon O’Connor, chief executive of the Responsible Investment Association Australasia, says the regulations have the potential to leave the door open for funds that employ external managers to conceal investments.

Even with their limitations, O’Connor says the regulations are welcome, as they will make it harder for super funds to make claims [concerning environmental, social and governance issues] “without being able to substantiate those claims by showing their portfolios”.

“It is really important that any claims are supported by the complete transparency and visibility of the portfolio,” O’Connor says.

Another problem highlighted by Morningstar is that disclosure of super funds’ “cash” investments is “opaque and does not allow any scrutiny of whether the holding is actual cash or cash-like – or not cash at all.”

That is important because during the global financial crisis some members switched from their fund’s “balanced” option to the relative safety of their fund’s “cash” option, only to find that the option still lost money as it was “cash-like” – not real cash.

It had been believed that, as a result of the GFC experience, funds with riskier “cash” options had reverted to “pure cash” offerings.

However, the Australian Prudential Regulation Authority in 2018 sent a letter to funds saying it had “identified examples in the industry where ‘cash’ investment options appear to include exposure to underlying investments that would not generally be considered cash or cash-like in nature”.