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Risk and Return of Illiquid Investments: A Trade‐off for Superannuation Funds Offering Transferable Accounts
Author(s) -
Cummings James R.,
Ellis Katrina
Publication year - 2015
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/1475-4932.12209
Subject(s) - closed end fund , fund of funds , business , finance , global assets under management , open end fund , assets under management , passive management , income fund , stable value fund , manager of managers fund , market liquidity , alternative investment , cash , fixed asset , economics , fund administration , institutional investor , microeconomics , corporate governance , production (economics)
This paper examines the pattern of investment by Australian defined‐contribution superannuation funds in illiquid assets, using a unique but confidential database. Not‐for‐profit funds allocate more of their portfolios to illiquid assets, on average, than retail funds. Their allocations reflect fund size, net cash inflows and member age – factors relevant to a fund's liquidity requirements. Furthermore, the allocations reflect the extent of the fund's in‐house investment management. In contrast, there is no clear relationship between these factors and allocations by retail funds. Funds with more illiquid investments experience investment returns that are commensurate with the non‐diversifiable risk these assets contribute to their overall portfolios.