When it comes to investing in super, not all assets are created equal, with some much more liquid than others. And that’s important now more than ever.
In light of government stimulus measures that allow eligible members temporary access to super, you may have heard the term ‘liquidity’ discussed in the news recently. But what does that mean? And what effect does that have on your super?
Liquidity is all about the amount of an investment which is held in cash – or other assets such as shares and bonds which can be sold pretty quickly and made into cash. Core Pool our MySuper authorised investment option, which 80 per cent of HESTA members are invested, has liquid assets of over 60 per cent.
Within Core Pool and our other pre-mixed investment options, we also invest in property and infrastructure. These includes things like office buildings, shopping centres, roads, airports and community assets like housing. These types of investments are much less liquid in that they can take time to sell, if needed. Our Core Pool option has an investment of just over 20 per cent in these types of illiquid assets.
Our property and infrastructure investments are made with a very long-term view in mind – we’re talking decades rather than years. When it comes to investing, diversification is important and these types of assets can be less volatile than shares, so provide some stability. Taking a holistic view, we invest in a range of different assets like shares, bonds, property and infrastructure to help manage investment risk for our members.
In a similar way to how you might manage your household budget, our investment team needs to ensure there’s enough cash available to meet day-to-day, as well as long-term, cashflow requirements.
At HESTA, we have money coming in and out every day. Money coming in includes contributions from members, investment returns, dividends and transfers of new member balances.
Money going out includes payments to members drawing from their income stream, balance transfers if members move to a different super fund, taxes and paying for new investments.
There’s also a two-way stream of money that moves between investment options when members change their investment choices.
Over time, various assets in our ready-made investment pools will deliver different returns, particularly as markets move and some assets outperform while others underperform. This will inevitably see the composition of your super investment choices drift away from their strategic allocation asset mix.
We use liquidity to periodically rebalance our ready-made investment pools, like Core Pool. We do this to manage our members’ exposure to risk so we don’t become increasingly concentrated on higher risk (and potentially overpriced) asset classes, like shares and underexposed to more conservative investments, like cash and bonds.
The graph below shows the percentage of different assets Core Pool is invested in and the strategic allocation percentage determined for each*. Rebalancing, by ensuring we have enough liquidity, means these allocations don’t drift outside of the allocation our members have chosen to invest in.
*1 April 2020 Product Disclosure Statement
At the heart of it, liquidity means available cash, right now, for members facing financial hardship. The reason this topic has been the forefront of news cycles is a fear of liquidity risk - the risk that a super fund, like HESTA, can’t sell assets quickly enough to make them liquid.
In these exceptional circumstances, having enough liquidity means all members who are eligible to access their super will be able to do so. All super funds need to balance short-term liquidity requirements with their long-term investment objectives. This is something we have always done and means we are ready to respond to members’ needs during these challenging times.
Our liquidity management program is well established over many years. It includes strong buffers designed to ensure members can continue to make choices about their super such as switching investments or accessing their super.
Our long-term modelling and planning mean we are well prepared to meet the needs of those members who apply to access their super while also protecting the long-term interests of all members.
Thinking long term
The economic effects of coronavirus are undoubtedly creating short-term volatility. And while uncertainty can be concerning, we encourage members to think long term.
Super is an investment designed to be made over a lifetime. We know that making the decision to withdraw your super is not something anyone takes lightly. We’re here to help if you need advice or want to learn more about early release of super via a live interactive webinar.