Liquid Assets

Why we only use Liquid Assets (listed securities and cash) for the Fiducian Funds

The Fiducian Funds are invested in fully liquid assets only (shares and other listed securities, such as bonds, as well as cash). For very good reasons, Fiducian avoids the use of unlisted and illiquid assets, including direct property and private equity (privately held, unlisted and illiquid companies) and unlisted infrastructure. Our reasons for investing only in listed securities and other liquid assets and for excluding unlisted assets include the following:

  • Listed assets are fully liquid and are priced by the market on an ongoing basis (stock markets, for example, provide up-to-the–minute market pricing), whereas unlisted assets may only be priced intermittently by valuers.
  • Listed assets and other liquid assets can be disposed of rapidly if required, whereas unlisted assets may be difficult to sell and, in the case of illiquid funds, could need to be closed to redemptions for a time (possibly, as in the case of the global financial crisis in 2008, for an extended period of time).
  • There is an ethical issue regarding the morality of investing in unlisted assets, such as private equity funds or direct property funds, at particular valuation and price levels that may not reflect real market values. For example, at the time of investment, it could be months or longer since a company or property was last valued (even assuming that such valuations were accurate at the time of valuation), whereas the actual market may have declined significantly in the time since. Making investments on behalf of clients in such circumstances could be regarded as, at best, dubious practice.
  • Listed assets at times can trade on markets at significant discounts to what is termed ‘net asset valuation’ (‘NAV’) (the intermittent valuation carried out by professional valuers of the underlying properties held by a fund less debt on these properties) and can therefore represent better buying opportunities.

This approach used by us for the Fiducian Funds is very different from the investment philosophy of most industry superannuation funds (industry funds), which often have a high proportion of unlisted investments. For example, a recent review of the asset allocation of ‘balanced’ fund options for 8 of the largest industry funds (as shown on their web sites) revealed that the average allocation to unlisted investments (including ‘private equity’, direct property and unlisted infrastructure) was around 30% of their total investment value.

In the current market environment, in which many assets have dropped in price due to rising interest rates and slowing economic growth, such industry fund holdings may appear to have held up better than their listed equivalents. As such, industry fund returns can appear to have out-performed for a time. However, over the longer-term, listed and unlisted security prices should approach parity and as such, at any given time, the advantages of liquidity and transparency provided by listed assets should outweigh any perceived short-term benefit provided by what could appear to be higher prices for unlisted investments (in some cases these being the same underlying assets).

As an example of the very large pricing differences that can occur between listed and unlisted assets, the following table shows recent estimated discounts provided by listed property securities (commercial, retail and industrial) compared with the net asset values of the same securities:

Source: Phoenix Portfolios, data as at 31 October 2023

Conclusion

In short, we believe there are significant advantages in holding liquid assets only. These advantages include:

  • Liquidity (the ability to offload assets at any given time)
  • Transparency (accurate assessments of underlying assets at all times)
  • Valuation ethics (the avoidance of having to invest in overvalued assets)
  • Potential at times to buy assets at significant discounts to net asset value

Despite the recent correction in global share markets, which appears to have been due to investor concerns about the current economic and geo-political outlook, in our view now is still a good time to invest. Most listed share markets currently appear to be fairly valued, especially so when compared with unlisted assets, which in many cases will not yet have adjusted for recent negative market forces.

While the performance of our diversified funds has been affected in recent months by weak share (and bond) markets, and while industry funds appear to have outperformed over the short-term (because of their large holdings of unlisted assets), a look at longer-term performance shows that our funds have a superior record.

Over the 10-years to 30 September 2023, our 4 diversified funds (The Fiducian Capital Stable, Balanced Growth and Ultra Growth Funds) ranked respectively 3rd, 1st, 3rd and 2nd against all other comparable funds surveyed by Zenith.

Disclaimer

Issued by Fiducian Investment Management Services Limited ABN 28 602 441 814 AFSL 468211 (FIMS). The information is provided for general information only and does not have regard to any investor objectives, financial situation or needs. It does not purport to be advice and should not be relied on as such. Investment and tax advice should be sought in respect of individual circumstances. Except to the extent that it cannot be excluded, FIMS accepts no liability for any loss or damage suffered by anyone who has acted on any information in this document. Past performance is not a reliable indicator of future performance and we do not guarantee the performance of the Funds or any specific rate of return. Potential investors should obtain and consider the relevant Target Market Determination (TMD) and Product Disclosure Statement (PDS) (available at fiducian.com.au) before making a decision about whether to acquire or continue to hold any financial product.