The road less travelled

MTAA Super isn’t like most other super funds. They don’t invest the way most funds do. Their performance doesn’t behave like most other funds. MTAA Super is an anomaly that many members have likely failed to understand.

For 10 years MTAA Super was one of the industry stars, regularly outperforming their peers and perennially earning a SuperRatings Platinum rating.

When the GFC hit, fund returns fell sharply - except for MTAA Super. Many financial commentators struggled to believe how MTAA Super could continue to perform well while the rest of the industry went south. Was MTAA Super immune to the GFC? Were they fudging the figures to achieve these results?

Within months, however, MTAA Super’s returns had plummeted and the fund slipped from the top of the heap to the bottom. At this stage, their members started to sit up and pay attention.

About March last year, the Australian economy rebounded from the GFC slump. Fund members breathed a sigh of relief as their super balances starting to recover some of the ground lost in the previous 18 months - that is, most fund members except MTAA Super members. Whilst other funds returned to positive results, MTAA Super’s members continued to lose money.

Here at Savvy we started to get emails and phone calls from members who had their super with MTAA Super. They wanted to know what was happening at the super fund. They wanted to know why MTAA Super was still struggling while other funds were recovering nicely.

So what is it that causes MTAA Super's investments to behave differently from other funds? Why do their investments seem to be the last to fall? More importantly for members, why are they the last to rebound?

The first things you need to know about MTAA Super is what the fund invests in.

Whilst shares play in important role in the investment mix for most funds, they play a less significant role in MTAA Super. MTAA Super has a lot of money invested in unlisted assets - airports, carparks, marine ports, commercial property. They’re all good businesses - but they’re not shares. Whilst the value of a share can fluctuate 10% in a month, the value of these properties doesn’t. When share markets fall - as they did spectacularly in the GFC - funds with a lot of money invested in equities naturally fall with them. Conversely, when share markets rise, share-heavy super products rise also.

Because the value of shares change daily, the value of portfolios dominated by shares also changes frequently. On the other hand, unlisted assets like the MTAA Super investments tend to get valued on a more leisurely agenda. (In recent years. MTAA Super’s assets have been valued 3.5 times a year.) The result of this is that it can take a while before any change in value is reflected in the investment’s value.

So, whilst the share-dominated products of most super funds started falling soon after the GFC commenced, the value of the MTAA Super, whilst also falling, didn’t have an immediate affect on members’ returns.

MTAA Super investments were always going to lose value in the GFC. They were just going to do it slower than other investments. The first to drop were bank shares. Especially US and European bank shares. Then, as money dried up, all sorts of businesses dependent on money (read ALL businesses) started to shrink. They stopped borrowing, stopped hiring and stopped investing. They went into preservation mode. As they did, and demand for their products shrank, their share value fell. Eventually MTAA Super’s investments also started to suffer. Less people flying meant less income for the airlines that lease the airports. Less goods being manufactured meant less cargo being transported and less income for ports.

The fund has a 2 portfolio strategy that sees roughly half of the money in its ‘Balanced’ option product invested in unlisted assets and half in shares. (A typical fund might have 60% - 70% in shares.) Naturally, the fall in share values had less immediate impact on MTAA Super than other funds, but as their unlisted assets were valued down, they too dipped into negative returns. As the share market rebounded post GFC, MTAA Super was disadvantaged by having less exposure to shares. And its recovery was being held back by its unlisted assets which weren’t regaining value as the share market was doing.

In the wake of the belated decline and belated recovery in MTAA Super’s fortunes, some members have wondered aloud if their fund’s investment strategy is a sound one.

We think it's likely. It just happens to differ from most funds and therefore behaves differently from most funds. But it’s a strategy that worked year after year. It delivered above average returns over 10 years for its members. We expect it will again in the future. How far in the future? Well, that’s an interesting question. (We can write that, because it’s our question.)

To a large extent, a fund like MTAA Super is at the mercy of the valuations of its assets. On an office building, for example, the income value of the property can fall as demand falls but at the end of the day, it is still a building that has value as a structure on a block of land, offering a fixed amount of income-generating space. Over the long term, the value of that building must rise.

AS MTAA Super’s Leeanne Turner says, “It’s got capital-like characteristics and because of that it isn’t going anywhere. Is that asset ever going to be written down for nothing? No, of course not. And when you are a long term investor, that’s what’s very important.”

“That’s what’s very important in terms of how the fund has chosen assets over time. They are the qualities that we look for.”

It’s obvious from talking to Leeanne that MTAA Super has no plans to change their strategy in the foreseeable future. That’s not to say they haven’t considered their options, but at the end of the day, they believe pretty strongly that they have the right strategy in place.

“In terms of the strategy, obviously the very first question was, have we got this wrong ... So the trustee sat down and we had extremely comprehensive strategic review done just last year. There’s an awful lot of data put into these things. But at the end of the day it was really, ‘OK have we got it right or have we absolutely got this thing wrong?’ And we went through it and we went okay this is what’s happened, we can see what’s happened here. So, number one, we’ve probably underestimated like anybody else that the correlation be tween the equity markets and the unlisted investments is perhaps smaller than we had ever envisaged before. That was the first point. So we have to think about what we want to do with that. We looked very much, as did a lot of funds, at what we were doing with currency and clearly we have a lot of offshore assets both in the direct sense and through international shares and the like as well. And up until the GFC the fund had been served pretty well by what I call a passive currency strategy. However, what we didn’t give enough consideration to, prior to this, was the impact or the risk associated with having a large number of offshore assets in terms of currency exchange. And the risk of that is fine, as long as you’ve got the dollars to pay for the contracts that are coming in. Now as I say, like a lot of funds, we got caught out there. Now the trustees answered that call very, very quickly in terms of the GFC. We realised, wow, this is a huge risk, it’s actually drawing on our cash flow, that is causing liquidity issues. We need to address this and they did. We now have a currency management in place that is not there designed to make money at all, it’s purely put there to manage the risk that’s associated with that currency exposure. And that got turned on pretty much immediately. So that was a very important.”

As for the future?

“So we come back to the correlation between the listed and the unlisted investments and what did we do about that. We looked carefully at what we were doing with our unlisteds being overweight. And of course the immediate reaction would be, Oh my God we’ve got to sell. Well, do we really have to sell? What if we do that now? We’re seen to be a distressed seller. We’re then going to be offloading these stellar assets at ridiculous prices simply because people are seeing a bargain. Is that in the best interest for the members and member equity? No, it’s not. So it was and is very much that we’ve got to manage this in
an appropriate way and not just in a knee jerk reaction to what’s going on. And that’s precisely what we’re doing.”

“So going forward, as I say, looking at the strategy, we looked long and hard at that and said is this the right strategy.”

“There’s one thing I find absolutely astounding with the share markets and that is just how the slightest bit of information that goes in the tabloid can split the market. And cause a flux in share prices. Well, with the unlisted assets and direct assets like ours that behaviour just doesn’t impact anything. It’s not there.”

Leeanne emphasises that the GFC was an event unlike any before it - and one that the world economic leaders are keen to ensure is never repeated.

“Up until now, until we have had these events that we have never seen before, we have been able to avoid it and I think the biggest issue about the GFC that stood it apart from anything else was that it really was an event that affected credit markets and that is why we have been impacted.”

After being accustomed to sitting at the top, MTAA Super’s decline isn’t something the fund’s managers enjoy - or its members understand.

“We recognise that where we are at at the moment it’s a very uncomfortable place, we don’t want to be there, we don’t want our members hurting. And you know, we are very, very conscious of that and how it is impacting members and particularly those members, those pension members, those other people who don’t have a long term horizon. Turning performance around is obviously something that’s uppermost on our minds. And I guess we come back to that lag effect that we see and we also come back to the fact that we remain confident, absolutely remain confident in the assets that we have.”

It is clear in talking to some MTAA Super members, as well as members of other funds, that many members just don’t know where there fund has invested their money. It isn’t helped by broad catch-all phrases like Balanced options, when those products can have wildly differing investment mixes - and wildly differing results. Some MTAA Super members haven’t understood the nature of MTAA Super’s investment strategy nor its behaviour.

If the GFC has had any positive influence, it has been to cause people to pay attention to their super. Now, for the first time, people are actually reading the communication from their funds.

For those interested, MTAA Super’s investment strategy and its assets are explained in various documents. The problem - and this is true of the whole industry - is that super just isn’t interesting and so very few bother to read the stuff available. Until it’s too late.

We say to ALL fund members, pay attention to where your super is invested. It’s too important to ignore.

MTAA Super’s strategy has served their members well. We expect it will again in the future.

WHAT WE LIKE

They have an investment strategy that has performed over the long term - and they see no reason to change it now.

They offer a real alternative to the majority of funds available.

WHAT WE’D CHANGE

If they have communicated the fund’s point of difference to their members, the message seems to have missed some members. A very simple explanation in plain English might go a long way to easing the nerves of anxious members.

Disclaimer: SuperRatings Pty Limited holds Australian Financial Services Licence No. 311880. This article has been prepared for the purpose of providing general advice only and has not considered the recipients objectives, financial situation or needs. The recipient should consider obtaining independent advice before making any decision about a financial product referred to in this report and should obtain and consider a copy of the relevant Product Disclosure Statement from the product issuer.