Investment management industry must move away from a narrow focus on standard measures of risk and adopt new approaches to give superannuation fund members a clearer understanding of the risk their funds are taking when they invest in unlisted assets, according to Evergreen Consultants.

Kieran Rooney, a Senior Consultant at Evergreen Consultants, says standard risk measures, such as standard deviation, can be misleading when it comes to assessing the risk of unlisted assets. This is because assets that do not re-price or trade regularly exhibit low levels of perceived volatility and this may give investors a false sense of security.

Rooney says there is work underway to come up with new solutions. The biggest allocators to unlisted assets in Australia are retail and industry superannuation funds. Unlisted assets in fund portfolios include private equity, private debt, unlisted property and unlisted infrastructure. Some large funds allocate close to 50 per cent of their holdings to unlisted assets, saying unlisted assets diversify portfolios and boost risk-adjusted returns.

“During COVID-19, market draw-downs to the end of March 2020, the median growth super fund fell only 13%. This was despite global equities falling 27%. One major Australian super fund devalued its unlisted real estate and infrastructure assets by 7.5%, despite the listed equivalents falling by 40% and 30% respectively,” says Rooney.

“If that fund had to divest those assets in that environment, you could argue that the clearing market price at that time would be substantially less than the fund had accounted for.”

Many large superfunds characterise the risk of unlisted assets as being materially lower than their listed counterparts, even though they are very similar assets that face similar risk and return dynamics.

Fund members are not in a position to make their own judgments about this issue because there is limited disclosure of unlisted asset holdings. Views on industry best practice for measuring and presenting the risk of unlisted assets are mixed but there is work underway to come up with new solutions.

For its Heatmap evaluation of super funds, the Australian Prudential Regulation Authority uses a growth/defensive framework that adjusts for the “equity-like” exposure of defensive assets and focuses on long-term returns over multiple timeframes to assess the consistency and sustainability of investment performance.

The Future Fund uses standard volatility and Sharpe Ratio measures in its reporting but in recent times it has adopted a measure called Equivalent Equity Exposure, which also adjusts for the extra embedded risk in defensive assets.

Rooney says another approach into looking how measures can be standardised is to stress test portfolios by simulating various levels of draw-downs for each asset class. Evergreen’s internal data analytics software, GreenVue, can be used to assist with this, he says.

“There is no perfect way to account for and report on risk in a portfolio, particularly one containing high weights to unlisted assets. A combination of approaches can assist in monitoring and assessing risk in what can be unconventional portfolio.”