Mark Austin, Trustee Chair, Northern Trust
The Afghan hound is an amazing looking dog but it has its downsides: it is very large, sheds copious amounts of hair all year long, lives for over 12 years and loves to hunt while ignoring your pleas to behave; not something to take on lightly. I mention the Afghan because in many ways owning one is not unlike trying to offer illiquid assets in a DC plan; it requires much thought, preparation and planning prior to taking the lead.
As a trustee we can see the clear benefit of giving our members exposure to illiquid and alternative assets with all their attendant positives such as yield and inflation protection, however, they have their own set of Afghanesque problems when trying to get them into a daily DC structure.
In our fund we currently have illiquid assets in the property fund and within the DGF which supports our default option, however they both have some unfortunate attributes which we have had to consider in owning them. In the DGF the holdings are in the main UK listed investment trusts which generally do not trade at NAV, and could trade at significant discounts as well as premiums, one fund we hold this way has traded at or around a 10% discount for 4 of the last 36 months, additionally as individual investments they have high TER’s. These assets only work for us as they are part of the overall DGF where the cost is absorbed, sufficient liquidity is provided at the investment trust and the fund level and the discount effect is diluted by the wider DGF holdings which trade at NAV.
The property fund has just been gated for the second time in three years due to illiquidity issues, Issues in part brought about by having both DC and institutional DB money in the same fund, but in the main as a result of our closer exposure to the underlying assets; only one layer of liquidity in this case. As a result after a lot of debate we have recently taken the decision to stop offering direct property exposure in the fund going forward but achieve exposure for our members through listed REITs.
We would love to offer our members greater access to these assets and will continue to review any potential solutions and offerings, but our experience thus far is that it’s just like Afghan Hound ownership; we are not quite ready for the numerous challenges and impacts on the fund and our members of such a demanding asset class despite its undoubted attractiveness.