The conflict of industry super
As many of you will be aware we are currently doing the Intelligent Investor national tour (On that note, thanks for coming along. It has been great to have the chance to talk directly to some of you). Returning from Brisbane on the plane yesterday, I grabbed the Australian Financial Review and came across the page two article 'Union super leaders see assets sale conflict'.
Now I have to admit to having a bit of a gripe when it comes to industry super funds - the marketing of their outperformance over retail super funds. Not that I am wanting to defend the poor performance of many retail funds but:
1. I don't think it is an apples and apples comparison and, in any event, the timeframes covered are generally too short to be reliable. Industry funds make a big deal of the fact the asset allocations (between industry and retail) are different. This is the very reason why the comparison is inappropriate. Industry funds may well outperform their retail equivalents but the data that proves it has not been put in front of us yet.
2. More specifically, the performance of industry super funds in the post GFC period benefited from what investment bankers like to refer to as 'mark to guess' valuations.
What do I mean by 'mark to guess'?
Accountants use two broad means of reporting assets on a balance sheet - historical cost (the original price paid for an asset) and mark to market (the current market value). Funds will generally use mark to market to calculate both their assets and their performance for a year.
What is often forgotten is that 'Mark to Market (or MTM)' itself consists of two broad subcategories:
1. Actual mark to market - where you look at the price of a security on a public market (for instance the ASX) and use that price. So if I was marking BHP shares to market today I would use $34.
2. Mark to guess - where someone sits at their desk and comes up with a number. Now some 'mark to guess' valuations are very accurate (typically where the asset has a strong relationship to a listed security) but others are less so. For instance, if you've had a property valuation done, one of the first things they ask is whether it is a 'stamp duty valuation' (ie low) or 'sale/bank valuation' (ie high). Enron's energy traders were able to make massive profits (and bonuses) by doing their own mark to guess valuations of the positions they had on their books (nice work if you can get it). So, if BHP were to be de-listed, a mark to guess valuation might put it's price anywhere between $30 and $40, depending on what the purpose of the valuation was.
Now, in the period post GFC, many assets benefited from the use of 'mark to guess'. The 'stock or bond market is not functioning properly' was a popular excuse for why the market price of an asset wasn't an appropriate value. Unlisted assets (esp property and infrastructure) were beneficiaries of this phenomena. They were valued more highly than listed assets (similar property and infrastructure) simply because the unlisted asset owners hadn't been silly enough to have their shares quoted on a stock exchange.
What do industry super funds tend to hold more of than retail funds? Unlisted assets. So their performance benefited from the 'mark to guess' phenomena (and it has been a drag in the years since, as the gap between listed and unlisted has closed back up).
The ads were flying thick and fast, trumpeting their GFC performance, but the real message should have been 'how lucky was that?' Industry funds may well be better performers than retail funds but being able to use 'mark to guess' is not the factor that proves it.
So that's my gripe explained. Back to the AFR article. In this case some of those with dual hats (union official/industry super board member) have come out and criticized proposals to sell various logistics, energy and water assets.
Whether this is a good idea or not is not the point. What this case highlights is the huge conflict of interest involved in having union officials also sitting on industry super fund boards. A super fund's focus should be (and is required to be) the retirement savings of fund members - those working, those approaching retirement and those who have retired. The financial interests of industry super fund members may well be served by having the Government doing a poor job of privatizing these assets. Every dollar the Government misses out on is a dollar that can be made by the buyers of the assets (which could include industry super funds).
Clearly, employees of these businesses (and their union representatives) have a completely different perspective. Again, their interests may clash directly with the financial interests of potential buyers. A cheap (or botched) sale by the Government may be great for the buyer, but not so good for the employees (it may also not be in the national interest - but that's another point again).
Like a lawyer trying to act as both prosecution and defence, it's a bridge too far. Sitting on the board of an industry fund, or acting as a union official, are both reasonably lucrative gigs. No-one's going to starve choosing one or the other.
Of course, there may also be retail fund board members with similar conflicts. In either case I would say, in the interests of members, it's time to pick a side.
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