Many Australians are blind to how their money is being invested

Editor’s Note

What does the collapse of Silicon Valley Bank, the wipe-out of Credit Suisse’s hybrids, and the Russia-Ukraine war, all have in common?

Answer: Australian investors are largely in the dark about their investment exposure to these significant global events.

Why? Because Australia has the weakest portfolio disclosure laws in the developed world. Investment managers aren’t legally required to disclose what’s in their portfolio to the public, or their investors. And while superannuation funds have some disclosure obligations, the bar is very low.

This issue isn’t new, Morningstar and other media organisations have been reporting on this topic for years. Yet the appetite for change remains relatively low.

So, why should investors care?

Investing in super is compulsory

The issues surrounding transparency have been thrown back into the spotlight recently, as rising interest rates fuel doubts over the valuations of the private assets held by super funds.

Current rules – which came into effect last year – force superannuation funds to disclose the identity, value and weighting of the listed securities they hold every six months.

Outside of stocks, things become more murky, explains Morningstar Australia’s director of manager research Grant Kennaway.

“On the fixed income side, there's no obligation to disclose the individual holdings, just the asset manager that is managing the money,” he says.

For example, where a super fund hires external fund managers.

“So if you're in an Australian super fund, and they use a third party manager like Pimco, they’ll name Pimco, but you've got no idea what Pimco is investing in.”

And here is why it matters for investors.

Take the recent wipeout of the value of Credit Suisse hybrids as an example – did any Australian superannuation funds hold Credit Suisse hybrids? Investors may never know.

“You're never going to know if your fund had exposure to Credit Suisse hybrids because it's not disclosed, you’re just relying on the good graces of your super fund to tell you. But they wouldn't tell you.”

Disclosure obligations are even weaker for private assets. At the security level, super funds aren’t required to disclose their unlisted assets. It’s the same for unlisted property and infrastructure.

And there’s no doubt that many superannuation funds have embraced the use of unlisted assets. Data from the Association of Superannuation Funds of Australia shows, on average, MySuper funds hold over 20% of assets in unlisted property, infrastructure, and private equity.

“Australia has a compulsory superannuation system. So if the government is taking money out of your paycheck and allocating it to super, I think it's incumbent on them to enforce disclosure of what you're actually invested in,” Kennaway says.

If not just for the risks, investors should be able to know if their super fund is investing in private assets that align with their values.

“People have considerations about exposure to environmental issues or social issues, be it alcohol or tobacco, you should just be able to see where your money is,” he says.

“It's your money, you should know where it is.”

Investors should know their exposure to global events

Managed funds have even fewer obligations around disclosure. I.e., none.

In fact, a study undertaken by Morningstar ranked Australia last out of 26 countries on managed funds disclosures.

Investors in the United States, Canada, the United Kingdom can go on the websites of asset managers and see how their money is invested.

This chart shows just how far behind we rank. It shows an indication of how often portfolio data is provided to Morningstar in each country.

Morningstar receives portfolios for 42% of Australian funds on a monthly basis, and another 9% quarterly, but for 44% of funds, Morningstar receives no portfolio at all.

Why does it matter?

When big events happen – like the collapse of Adani’s share price following a scathing short-sellers report, or the downfall of China’s Evergrande – many investors are blind to their investment exposure.

We do our best to reveal the impact on Australian investors, but we can only show what we know.

“With most funds, asset managers will have the top 10 holdings on their website, but the top 10 holdings don't tell the whole story,” Kennaway says.

The reasons for not disclosing – administrative burdens and IP concerns – are not credible, Kennaway says.

“Every other market has obligations and they disclose their holdings with a lag, so what goes to market might be 2, 3, 6 months old.

“So the arguments about administrative burden and sharing IP just aren’t credible from a Morningstar perspective.”

The fact it’s done everywhere else without consequence makes it easy to draw another conclusion, and that is that the industry is deliberately trying to hide things like who and what they’re holding – and how they’re performing.

For investors genuinely concerned over this lack of transparency, Kennaway notes exchange-traded funds (ETFs) are a way to get around this.

“ETFs have, by far, the best disclosure in the marketplace, because they're daily traded and there needs to be price discovery.

“So I think the growth of ETFs – there's a number of reasons why they're growing – one is liquidity and ease of transaction costs, but I think that disclosure is also an element of strength of ETFs as well."